Debt Transparency in Developing Economies

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Debt Transparency in Developing Economies

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Debt in emerging markets and developing economies has surged to a record high since the outbreak of COVID-19, but new analysis from the World Bank Group shows that the global and country-by-country systems for tracking it are proving to be grossly inadequate.

High debt and inadequate debt transparency in poor economies are closely intertwined. Policymakers can no longer afford to be complacent about either. The World Bank report is the first comprehensive assessment of debt transparency in these economies—and it offers a roadmap for policymakers on how to close gaps in debt transparency.

See the list of speakers ˅

00:00 Welcome and introductory remarks
05:36 Panelist introductions and context for the discussion
08:20 Transparency and the private sector
10:45 Collateralized debt and implications
14:27 Debt disclosure gaps and sovereign ratings
18:08 Hidden debt
23:09 Challenges with addressing unsustainable debt at the global level
26:23 China’s role as a lender to emerging market and developing economies
32:33 Credit enhancement
41:55 Environmental, Social, and Governance (ESG) scoring and green bonds
48:05 The Common Framework and the challenges ahead
1:02:51 Audience Q&A
1:14:00 Closing remarks

Read the transcript


  • 00:11 [Indermit Gill]: Hello, everyone. Welcome to this discussion.  
  • 00:18 My name is Indermit Gill, and I work  in the growth finance and Institutions  
  • 00:22 Practice Group of the World Bank.  We have a real treat for you today,  
  • 00:26 our president David Malpass will lead  a discussion with a star studded panel.  
  • 00:30 And it's fitting that David leads this  discussion because he's been a tireless and vocal  
  • 00:35 leader on this issue of debt transparency, since  he became president two and a half years ago.
  • 00:42 [Indermit Gill]: It's fitting also  
  • 00:43 that we will have four top notch experts on the  panel and David will actually introduce them,  
  • 00:55 why this issue is so important. And this is an  easy job for me, because our macroeconomics Global  
  • 01:01 Practice has just published an excellent report  called Debt Transparency in Developing Economies.  
  • 01:06 And I can say it's excellent, because  I cannot take any credit for it,  
  • 01:10 the credit should go to David for championing the  cause. And to Marcello Estevão, Doerte Doemeland,  
  • 01:16 Diego Rivetti, and the team in the Macroeconomics  Global Practice for actually producing the report.
  • 01:22 [Indermit Gill]: And we released the report yesterday,  
  • 01:24 and you can easily find it if you just Google Debt  Transparency in Developing Economies. So what I  
  • 01:30 want to do now is to give you a three minute  summary of the report, both as an icebreaker  
  • 01:35 and as an appetizer, because we are hoping that  you will read that report. And like I said, it's  
  • 01:39 excellent and it's excellent for three reasons.  So first, it is excellent because it has some  
  • 01:44 startling statistics that will make you sit up and  pay attention. So I'm going to cite just a few.
  • 01:49 [Indermit Gill]: The first one is that 40%  
  • 01:52 of low income countries have not published any  sovereign debt data during the last two years.  
  • 01:58 The second one is that public debt data  when reconciled have sometimes shown  
  • 02:03 huge discrepancies of up to 30% of GDP. The  third one is that 15 low income countries  
  • 02:10 have collateralized debt, but no  details of the terms are published.
  • 02:14 [Indermit Gill]: And this can often lead really quickly  
  • 02:19 to debt distress. When some of this information  actually comes in view. So for example, in 2016,  
  • 02:30 loans totaling more than a billion dollars, or  some were suddenly revealed in Mozambique, that  
  • 02:36 was nearly 10% of the country's GDP, it plunged  the country into debt distress. So we have about  
  • 02:44 12 countries that are now in debt distress and  about 44 countries that are at high risk of it.
  • 02:50 [Indermit Gill]: We don't know how many of these  
  • 02:52 would actually be in distress if all of the  debts were revealed. Now, poor countries  
  • 02:58 have huge financing needs, and these will be  met mostly through debt. So by one measure,  
  • 03:03 these financing needs total nearly half  a trillion dollars between 2023 and 2025.  
  • 03:09 Without debt transparency, such big sums  mean big dangers. So that's the first reason.
  • 03:16 [Indermit Gill]: The second reason the report is excellent,  
  • 03:18 because it outlines a very practical way to  think about that transparency. It says that  
  • 03:23 transparency has three aspects. The first one is  transparency in operations. Second is transparency  
  • 03:29 in legal management. And the third one is  transparency in reporting. Especially the third  
  • 03:33 one is very important. And there are three parties  that can make debt transparent or keep it obscure.
  • 03:39 [Indermit Gill]: The first one, of course, are  
  • 03:41 borrower governments and state owned firms both  at the center and sub-national levels. The second  
  • 03:48 has to be the folks who actually give this debt,  these are the creditors both public and private.  
  • 03:54 And then the third one are international financial  institutions, like the World Bank, and the IMF.
  • 03:59 [Indermit Gill]: Now finally, the report is excellent,  
  • 04:03 because for the first, it proposes the high and  medium and low priority measures that borrowers,  
  • 04:10 governments and ISIs can take. So I will just  list the five or six high priority measures,  
  • 04:21 some to be taken by borrowers and three to be  taken by IFIs. So to increase transparency in debt  
  • 04:27 reporting, governments should publish core public  and publicly guaranteed debt statistics regularly.  
  • 04:34 They should also limit and define  the scope of confidentiality clauses.
  • 04:38 [Indermit Gill]: To increase transparency in debt operations  
  • 04:43 borrowers should adopt market based  issuing mechanisms for domestic debt,  
  • 04:48 and adopt strict criteria for approving resource  backed loans. To increase transparency in debt  
  • 04:55 management governments should define criteria for  authority to contract debt or to issue guarantees,  
  • 05:01 and specify responsibilities  of units in charge of executing  
  • 05:06 debt operations, and publish a list of allowed  instruments, transactions and funding sources.
  • 05:13 [Indermit Gill]: By the same token, what IFIs can do  
  • 05:16 is to consolidate that debt databases and support  the implementation of integrated debt recording  
  • 05:23 and management systems. It's a big agenda.  And I've talked for a long time, but because  
  • 05:29 it's a big agenda, I'm going to hand the mic  over to the big guys. So over to you, David.
  • 05:34 [David Malpass]: Thanks very much  
  • 05:36 Indermit. Good summary, and it's an important  report. We've got a panel, a great panel,  
  • 05:42 Carmen Reinhart, Chief Economist of the World Bank  Group, my colleague. Also Lee Buchheit, who is  
  • 05:48 one of the world's most experienced sovereign  debt restructuring experts. Joyce Chang,  
  • 05:53 Global Chair of research at JP Morgan and Paul  Gruenwald, Chief Economist at S&P Global Ratings.
  • 06:00 [David Malpass]: Just as a start in, I want to make the point that  
  • 06:04 the world actually is very challenging. I'm just  back from the G 20 Leaders Summit in Rome. And  
  • 06:10 I made the point as others did, that we face not  only the pandemic, but also rising inflation in a  
  • 06:17 lot of countries. The supply chain challenges, the  energy crisis in Europe, the rise in oil prices  
  • 06:24 and other energy prices that's putting inflation  into developing countries. Very challenging  
  • 06:30 from a depth standpoint in developing countries.  That's the focus of our conversation today.
  • 06:35 [David Malpass]: The World Bank is deeply engaged  
  • 06:38 in the issues of debt in developing countries,  with the purpose being to try to have more growth  
  • 06:45 rates in developing countries, faster growth, and  better connection between investments and the debt  
  • 06:52 that goes along with those investments. This is  made more challenging by the size of the debt. We  
  • 06:58 did a report a month or so ago that showed $860  billion of debt in the low income countries. So  
  • 07:07 even the poorest countries in the world have $860  billion of debt. External debt, not not counting  
  • 07:13 their bank debt that the government's take  out inside their own countries. This is giant.
  • 07:18 [David Malpass]: And the report that  
  • 07:19 just came out yesterday shows this that as  Intermit was describing, 30% hidden debt,  
  • 07:25 if we want to call it that, or debt that's not  really fully recorded in the various statistics  
  • 07:30 that are kept track of. This is at a time when  many of the countries and Joyce was telling our  
  • 07:36 group, just before we came on here that there  are rate hikes in quite a few of the developing  
  • 07:42 countries are ready. So this puts added strain  on the economic outlook. But it also means  
  • 07:49 that countries are able to begin adjusting to  the new inflation environment that's out there.
  • 07:56 [David Malpass]: So I hope what we can do today is focus on  
  • 08:01 debt transparency, whether it's important what the  aspects of that are, and how the debt challenge  
  • 08:09 can work its way through the system over the  next five years. We're all trying to avoid  
  • 08:14 a lost decade from the standpoint of debt. So with  that, let me go first to a question to Joyce. As  
  • 08:25 I mentioned, Joyce is global Chair of Research  at JP Morgan and a friend for a long time and  
  • 08:33 engaged daily and in markets. So how do you think  about transparency? Is it important as you analyze  
  • 08:40 the prospects for country and this idea that  there might be 30% more debt than is actually  
  • 08:46 being recorded? How does that affect your thinking  about various markets? Thanks for joining Joyce.
  • 08:51 Joyce Chang: No, thank you, David,  
  • 08:53 for having me. And it's great to be with just  so many experts who've looked at this topic.  
  • 08:57 I mean, the transparency is really important to  the private sector. And I think one of the issues  
  • 09:02 when the common framework was rolled out was that  there was a sense that there was a lot of stalling  
  • 09:08 and no information sharing. And  that made the whole discussion about  
  • 09:12 voluntary mechanisms, I think, very hard  for the private sector to understand.
  • 09:17 Joyce Chang: So look,  
  • 09:19 the private sector has obligations to its  shareholders, its investors on the transparency,  
  • 09:25 and a lot of the questions that we will get is how  do we aggregate the different categories of debt?  
  • 09:31 You have the bilateral creditor debt, the private  sector debt, the contingent liabilities. Where's  
  • 09:36 there an implicit government guarantee as opposed  to an explicit government guarantee? And then with  
  • 09:43 every sovereign crisis that usually emanates from  the banking system, so an understanding of that.
  • 09:48 Joyce Chang: There's also a whole focus on quasi-sovereign  
  • 09:52 debt, which is sometimes called corporate debt.  But there's an implicit government guarantee. And  
  • 09:58 we've seen these numbers Really balloon. We've  had record debt issuance from the sovereign and  
  • 10:06 on the emerging markets, corporate quasi-sovereign  side during this pandemic because of the low  
  • 10:11 interest rates. I mean, last year, you had  230 billion of EM sovereign debt issuance,  
  • 10:17 more than 500 billion of EM corporate debt  issuance with a good component of that that's  
  • 10:21 quasi-sovereign. So I think for a country  to be investible, you need the transparency,  
  • 10:27 and you need to have the ways in which you can  actually understand the different categories of  
  • 10:32 debt and what the government could be obligated  to, really implicitly, back at a time of crisis.
  • 10:39 [David Malpass]: Thanks. And I hope we can have  
  • 10:42 a round table kind of this panel, let me turn to  Lee and... Or I'll preface some of the terms that  
  • 10:50 I hope people will use are collateralized debt. So  that means if I lend to... If savers of the world  
  • 10:57 lend to a government or even to a, I guess,  quasi-sovereign debt and a state owned enterprise,  
  • 11:06 and requires that there be collateral set aside  in the form of actual products, it's hard to know  
  • 11:14 the relative price of the various items. And it's  also very hard to then restructure the debt if the  
  • 11:20 country runs into sustainability problems. And  that is exacerbated by non-disclosure clauses,  
  • 11:31 if people can't see inside the contract. So Lee,  will you give us a briefing on these and maybe  
  • 11:38 ask question to Joyce, if you want to however,  we want to work it as a panel. Thanks, Lee.
  • 11:44 Lee Buchheit: Yes, thank you, David,  
  • 11:46 and wonderful to be with you folks. One of the  extraordinary statistics in this report was that  
  • 11:54 10% of Sub-Saharan African debt incurred  recently has been of the type you described,  
  • 12:00 collateralized. And it very  often, is not what you would think  
  • 12:10 the connotation of the word collateral  brings. That is a pledge of an asset.
  • 12:14 Lee Buchheit: 
  • 12:15 These transactions can be and are structured, as,  for example, forward sales of a primary commodity.  
  • 12:26 So that the lender, quote unquote buyer will  argue that it isn't debt at all. It should not  
  • 12:35 therefore be restructured in connection with the  country's debt, maybe not even reported as debt.
  • 12:41 Lee Buchheit: And yet it has the practical effect of that.  
  • 12:45 Traditional repos are economically  the equivalent of secured borrowing.  
  • 12:53 It has several implications. To the extent that  the country has allocated a significant portion  
  • 13:04 of its future revenue toward the repayment of  one creditor, it follows that that revenue is  
  • 13:12 not going to be available for all the others. And  therefore anyone lending on an unsecured basis  
  • 13:19 to that sovereign is probably doing so without a  full understanding of the debt servicing capacity  
  • 13:30 of the sovereign in the future. That will result  in the very least in mispricing of the debt.
  • 13:36 Lee Buchheit: It also renders the restructuring  
  • 13:42 of that debt stock particularly difficult, because  the secured lender, or the buyer, the future buyer  
  • 13:53 of the commodities, may well argue they have a  security interest governed by the laws of England  
  • 14:01 or New York. And they can always go and foreclose  on that. And therefore, they must be exempted. So  
  • 14:11 this problem to the extent that it is  growing in significance, and it appears to be  
  • 14:16 growing in significance represents, I  think, a serious risk to the system.
  • 14:22 [David Malpass]: 
  • 14:24 Thanks. Yeah, so debt for the low income countries  is up 12%, even though there were two major  
  • 14:32 initiatives by the G20, to try to provide debt  relief. DSSI and the common framework. So DSSI is  
  • 14:43 Debt Service Suspension Initiative that  
  • 14:46 was invoked in 2020, but didn't have  as broad coverage as had been sought.
  • 14:51 [David Malpass]: And now the common framework,  
  • 14:52 which is being applied now to Chad, Ethiopia and  Zambia. We'll come back to those in a minute but  
  • 14:59 I want to pick up on the point that Lee just made  and ask Paul, S&P... I know your chief economist,  
  • 15:08 Paul, but S&P does ratings of countries and  bonds. I think that's the way I think about it.
  • 15:14 [David Malpass]: And how does it do that  
  • 15:17 if it's the case that as the report shows  there, for some countries, it might be 30%  
  • 15:24 more debt than has actually been disclosed.  And even for those that disclose debt,  
  • 15:28 which are not that many, I mean, which  are not all the countries, you there are  
  • 15:34 non-disclosure clauses on some of that debt. So  even of the amount of debt that are disclosed,  
  • 15:40 sometimes the terms and the covenants are not  disclosed. So how do you handle that in S&P?
  • 15:45 Paul Gruenwald: Well, first, Hi,  
  • 15:48 David, and everyone, thanks for inviting me to the  panel. Let me start off by saying that S&P Global  
  • 15:54 is 100% behind these initiatives to improve  the transparency of debt. But you're right,  
  • 16:00 we have a sovereign team, the sovereign team  currently has 137 sovereign ratings outstanding.
  • 16:07 Paul Gruenwald: So we're missing kind  
  • 16:08 of the lower end of the tail. So perhaps part of  this problem is not in the rated universe. But  
  • 16:14 just as a reminder to everyone, the idea behind  a credit rating is not to predict a default, it's  
  • 16:21 our opinion on the ability of the borrower to  repay their debts in full and on time. But you're  
  • 16:28 absolutely right about some countries not having  a full set of data, that would be the ideal state.
  • 16:35 Paul Gruenwald: But our sovereign team for the 137  
  • 16:39 countries that we do rates, they're comfortable  with the information that we have and they think  
  • 16:44 that's sufficient to determine a rating. When the  committees get together and do a sovereign rating,  
  • 16:50 they look at a number of factors. And if they  see that there are inconsistencies in the data,  
  • 16:55 the errors and omissions, large errors  and omissions is one or maybe there are  
  • 17:00 inconsistencies or historical patterns  that don't always make sense. These rating  
  • 17:05 committees are allowed to make an adjustment to  the ratings, downward in this particular case.
  • 17:11 Paul Gruenwald: So there are a few  
  • 17:12 channels through which they can  do that. There's a fiscal pillar,  
  • 17:15 there's a institutional pillar. And there's also  some discretion around the final determination of  
  • 17:21 the rating itself. It's not a totally mechanical  process. But the sovereign teams are aware of  
  • 17:28 the issue. And this lack of transparency  is embedded in the ratings and tends to be  
  • 17:34 correlated with the lower credits. The higher  rated credits tend to have not surprisingly,  
  • 17:40 a higher level of debt disclosure and a higher  level of comfort that we're getting a full story.
  • 17:46 Paul Gruenwald: And that deteriorates a bit as we go down the  
  • 17:49 spectrum. But again, all the initiatives  in the report and the things that we're  
  • 17:53 going to talk about today, that  would enhance debt transparency,  
  • 17:58 that will help us do our job better. And that will  help the markets as well. So back to you, David.
  • 18:04 [David Malpass]: A core problem I'll  
  • 18:06 mentioned and then I'll come to Carmen. A core  problem is in a lot of debt around the world,  
  • 18:12 there's a bankruptcy process that is legislated  within a country. And so when creditors or when  
  • 18:20 a debtor is unable to pay, there's a prescribed  process, that the creditors can go through to  
  • 18:27 both share information and then decide who's  going to take the losses and they fight about  
  • 18:32 it. But they assess the situation. Whereas in  sovereign lending, there's not the equivalent.
  • 18:39 [David Malpass]: And so one of the things that is complicating  
  • 18:43 this, I think, is that sovereigns are fully...  The people of the country are fully committed  
  • 18:50 to paying all of the debts that are incurred  by the government of that country forever,  
  • 18:54 with no process to restructure or force a  change. And so that creates... And that maybe  
  • 19:01 everyone can correct me in that perception. But  to me, then that means that if I'm a lender, and  
  • 19:08 I'm lending only a small amount to a country that  has big problems elsewhere, I'm pretty assured of  
  • 19:15 getting paid because I have the upper hand in the  legal structure. If I take it to court in London  
  • 19:21 or in New York, I'm going to win as a creditor,  because that's just the way the system works.  
  • 19:27 But that's a background. Let me turn to Carmen  for both comments and questions to the panel.
  • 19:40 Carmen Reinhart: Thank you. Thank you all for very  
  • 19:46 insightful discussion. And I want to follow up on  something Paul said. The issue of hidden deaths  
  • 19:58 is not new and, Paul, I would say it's not  entirely... It's certainly as this wonderful  
  • 20:04 report highlights, it's primarily an issue in  many of the emerging and lower income countries.  
  • 20:12 But it's not unique to them. I mean, certainly  
  • 20:16 the Greece Goldman case a few years back  on hidden debts was a major surprise.
  • 20:24 Carmen Reinhart: And over the last decade or so,  
  • 20:34 the issue of hidden debt has partially also grown  enormously, because non-Paris Club creditors,  
  • 20:44 the largest of these is China, increased in  importance. Now, that's official lending.  
  • 20:49 But nonetheless, it is adding to the debt  and debt servicing of a particular country.  
  • 21:00 And some of that debt has  been restructured repeatedly.
  • 21:05 Carmen Reinhart: How does S&P deal also with a higher incidence of  
  • 21:16 these restructurings, and as David mentioned,  since last year, the DSSI we learned that, for  
  • 21:24 example, the sovereign debt... I mean, the debt of  the China Development Bank is considered private  
  • 21:35 debt, which would be in the domain of credit  rating agencies. So there would be a private  
  • 21:40 creditor. So how would you say that ratings have  adjusted to deal with these changed landscape?
  • 21:50 Paul Gruenwald: Yeah, Carmen, I'm going to get out of  
  • 21:53 my paygrade pretty quickly here, because I run the  economics team and not the sovereign ratings team.  
  • 21:58 But yeah, you're right. This is a challenge. I  mean, we've got a lot of debt, that's quasi-public  
  • 22:03 debt and might be non-government organization  to a non-government organization,  
  • 22:08 or it might be a state enterprise to  another state enterprise across border.
  • 22:12 Paul Gruenwald: But it's something that our  
  • 22:15 sovereign team has to deal with. As I said, there  are ways to adjust the rating up or down, if we're  
  • 22:20 not happy with the transparency or the consistency  of data or anything else. We do rate, a large  
  • 22:27 number of the bigger EMs, not the tail, because  we're missing about 60 or 70 countries, globally.
  • 22:33 Paul Gruenwald: But that's something that we try to put into  
  • 22:36 our criteria. And the sovereign team tries to keep  up with that. I mean, for the details, I can maybe  
  • 22:42 get back to you on that. But the sovereign teams  are fully aware that a lot of this debt is not  
  • 22:46 directly on the sovereigns balance sheet, and it  may come from quasi-sovereign or other creditors.  
  • 22:52 But to the extent possible that is incorporated  into the rating that we're publishing.
  • 22:56 [David Malpass]: Thanks. And so I'll ask us to come  
  • 23:02 back in a little bit to the common framework,  and to China, the magnitude of the China debt.  
  • 23:08 I want to ask Lee if he has reflections  on what we've already been talking about,  
  • 23:12 and also any suggestions or corrections to  the way I described the sovereign process?
  • 23:21 [David Malpass]: So one of the things we're dealing with,  
  • 23:24 is this fundamental gap in the global system  for how do you deal with a country that has  
  • 23:30 unsustainable debt? There's not really  any process to do that. So we're always  
  • 23:35 ad hoc, one country at a time. And  that's a very expensive process.  
  • 23:39 So Lee, correct me in perception. And  also ask... Or let's go on from there.
  • 23:47 Lee Buchheit: Okay. I would amplify what you've said,  
  • 23:52 David, you described half of it. You said that  sovereigns are not subject to a bankruptcy code,  
  • 24:00 not their own, not anyone else's. And that is  true. It follows from that to the extent that  
  • 24:06 they have governed their debt instruments by  a foreign law like New York or England, if  
  • 24:13 those debt instruments aren't paid, the creditor  can get a judgment against them. That is true.
  • 24:18 Lee Buchheit: But at that point, the leverage  
  • 24:21 usually shifts back to the sovereign, because that  judgment will convey an emotional satisfaction to  
  • 24:29 the holder but not a financial satisfaction,  unless the sovereign pays it voluntarily.  
  • 24:36 Or the creditor can find an asset outside of the  debtor country that it can seize in order to pay  
  • 24:45 itself. And typically, there are few such assets  in the name of the sovereign itself, the Republic,  
  • 24:55 not state owned enterprises, outside  of the jurisdiction of the sovereign.
  • 25:00 Lee Buchheit: And we have seen this play out again  
  • 25:02 and again, David, perhaps most poignantly in  the 15 years of litigation that followed the  
  • 25:09 Argentine default in December of 2001, where you  had some of the most sophisticated and aggressive,  
  • 25:16 litigious, high testosterone hedge funds,  pursuing a sovereign around the world, looking for  
  • 25:24 assets in an effort to pay themselves. And that  effort was, to a very large extent, unavailing.
  • 25:32 Lee Buchheit: So there is leverage on both sides,  
  • 25:37 the creditors can get judgments, and there's very  little that the sovereign can do to stop it. But  
  • 25:42 once the judgment has been issued, satisfying that  judgment becomes a major problem for the creditor.  
  • 25:52 And, candidly, a recognition of this situation  
  • 25:58 is the chemistry, is the basis for consensual  sovereign debt workouts. Both sides are  
  • 26:07 vulnerable in the process, and therefore,  in truth, neither side has a good option  
  • 26:13 other than to negotiate their way out of their  problem, they cannot litigate their way out of it.
  • 26:18 [David Malpass]: Got it. Let's talk about that in the context  
  • 26:20 of the common framework in a minute. Let me  turn to Joyce on that point, that Lee is making,  
  • 26:31 that there's kind of a practicality and  I wonder if that's how you perceive it?  
  • 26:36 Are there any countries, I know you're  watching China very carefully for its own  
  • 26:41 internal debt. But what about Argentina that  is working its way through the recent crisis.  
  • 26:52 Do you think about... How do you think of  sovereign debt as far as the safety of it? Thanks.
  • 26:57 Joyce Chang: No, thanks very much, David.  
  • 26:59 And you just said a couple of comments on what Lee  had to say. And also on the collateralized debt,  
  • 27:04 as well. So look, I think that I often will hear  we're very disappointed in the private sector.  
  • 27:12 We want the private sector to do more.  And these are sort of empty statements.
  • 27:15 Joyce Chang: Look, I think  
  • 27:16 it's too much for the private sector to  ask to be in the negotiating room, but  
  • 27:20 they should be given the information upon  which bilateral creditors have constructed  
  • 27:25 their debt treatment. That you're going  to expect comparability of treatment work.  
  • 27:29 They don't necessarily have to be at the  table, because that makes a large political  
  • 27:35 statement. But they have to be given the  information and asked about their views.
  • 27:38 Joyce Chang: And I think this was some of the initial  
  • 27:40 problem with the common framework. But I wanted to  just say a few things on the collateralized debt,  
  • 27:48 and also on the China Development Bank that Carmen  had brought up. Look, I think there is room for  
  • 27:56 innovation. I mean, JP Morgan, now allows credit  enhanced bonds to be included in the EM bond  
  • 28:01 indexes. But Lee is absolutely right. When we  sort of conceived of credit enhanced bonds, we  
  • 28:07 really did sort of think back to the days of the  Brady bonds where it was Treasury collateralized.
  • 28:12 Joyce Chang: I mean, the whole issue was, is  
  • 28:14 there a way that you could actually use official  creditor resources and leverage that more,  
  • 28:19 because the official creditor resources are  still relatively small to EM sovereigns,  
  • 28:24 raising $230 billion in the international capital  markets? That's completely different than forward  
  • 28:30 sales of a commodity as collateral. So something  like that would not go into a JP Morgan index.
  • 28:36 Joyce Chang: But the question on collateralized  
  • 28:39 instruments was, is there a way that you could use  official credits? And even things like XM credits?  
  • 28:44 We have a development financing group that's  looked at that. And could you require certain  
  • 28:49 things like ESG, sustainability commitments  in return for credit guarantees? That's kind  
  • 28:54 of more of the way that I would conceive of the  collateral as I totally agree with Lee that some  
  • 28:58 of these other mechanisms that they're looking  at it to me, they raise real questions on just  
  • 29:08 who bears the responsibility and the transparency  and how you actually can enforce some of this.
  • 29:15 Joyce Chang: I hear, oftentimes,  
  • 29:17 also from official creditors, a lot of  discussion on these contingent instruments.  
  • 29:22 And I do think academics really love these  because it's theoretical economics, that makes  
  • 29:28 sense. And there's this automatic factor. And  in practice, I think that it's a lot harder to  
  • 29:34 actually put that into place. So the official  creditor enhancement is something that stands out.
  • 29:38 Joyce Chang: I think that Carmen  
  • 29:40 brings up kind of the elephant in the room on  the common framework. I mean, is this really all  
  • 29:44 about China as the largest creditor to many of the  emerging markets countries. And this whole debate  
  • 29:52 on whether China Development Bank is official  or commercial, that's kind of a travesty in a  
  • 29:57 lot of ways as a lender. And I mean, the common  framework was meant to overcome these issues.
  • 30:03 Joyce Chang: But in some  
  • 30:04 ways, the end of the question has been asked  does China really prefer bilateral negotiations,  
  • 30:11 when they are the largest creditor. Was  the lack of clarity, in some ways meant to  
  • 30:17 cajole China in this. We've just been going  through the numbers for China. And what they  
  • 30:23 call the private sector debt, there is 232% of GDP  now. So is that private? Is it quasi-sovereign? Is  
  • 30:30 it really government debt? So I think that  China's really the elephant in the room,  
  • 30:35 given the role that they have assumed for so many  of these low income countries as the biggest...  
  • 30:44 As being really... A lot of the step really  is something that China has a key role.
  • 30:51 [David Malpass]: You gave us a lot to chew on there. So,  
  • 30:57 one background for people is, we've been talking  about official debt. This is the debts of various  
  • 31:05 government entities around the world lending  into sovereign situations, or even private sector  
  • 31:13 situations in developing countries. Or that's the  way I'll use the term. And so that historically,  
  • 31:19 for I don't know, 40 years or 50 years, has  been rescheduled as a group by the Paris Club,  
  • 31:25 which is a group of official creditors, that  used to be the major creditors around the world.
  • 31:31 [David Malpass]: So in the Latin debt crisis,  
  • 31:33 the US and Germany and France and the UK and Japan  were the major creditors for the Latin countries,  
  • 31:40 and they could sit in a room and figure  out what to do to restructure the debt.  
  • 31:48 Over time, China has become a much bigger  creditor than all of those others combined.  
  • 31:56 World Bank did a report a year or year and a half  ago, that showed that 65% of the official credits  
  • 32:03 were from China, and all the rest of the  countries that were the remaining 35%,  
  • 32:10 of which Japan was one of the big  ones that at 15%, if I recall.
  • 32:15 [David Malpass]: And so what that means is that  
  • 32:17 the concept of the restructuring process has  changed dramatically over time, as China's role  
  • 32:24 became more important in that amount of debt.  So I wanted to... Sorry, that was kind of  
  • 32:31 background. So one of the challenges as  the world looks for a process to allow debt  
  • 32:39 relief, reduction of debt for countries that...  For poorer countries, or developing countries  
  • 32:46 in general, where the debt has become  unsustainable. Meaning the creditors  
  • 32:52 allowed too much debt and the countries took  on too much debt. And circumstances changed,  
  • 32:59 and the country can't pay it. There's not a  process. And so we're looking for that process.
  • 33:03 [David Malpass]: And that   G20 put forward the common framework that we've  been talking about. So I wanted to ask Joyce,  
  • 33:09 and then have others maybe ask questions. But  you mentioned the term credit enhanced bonds,  
  • 33:15 which is great. And so as  we talk about collateral,  
  • 33:18 my understanding of the problem of collateral  is it's very hard to value within the structure.
  • 33:25 [David Malpass]: Meaning the country gives collateral, meaning,  
  • 33:28 either a right to an asset or as Lee framed it,  this forward sale concept. It doesn't seem to cost  
  • 33:35 the government of a country much. But over the  years, and over the decades, sometimes these are  
  • 33:40 20 year commitments by a government that is  non-disclosed. So it's a secret commitment by  
  • 33:46 a poor country, the government of a poor country,  that locks the people of the country into payments  
  • 33:53 that are going to last 20 years. So why would the  world want credit enhanced bonds? Can I frame it  
  • 34:00 that way? And you may convince and then maybe I'll  bring Lee or Paul in on that. Go ahead, Joyce.
  • 34:06 Joyce Chang: No, that's why I'm trying to be clear that on the  
  • 34:09 credit enhanced bonds, I really looked at it more  conceptually as whether there's a way to leverage  
  • 34:16 official creditor resources in that process,  more so than making these forward commitments  
  • 34:21 for 20 years, 10 years, based on forward sales  of commodities or even yield some of these  
  • 34:29 GDP linked bonds. Where I feel like sometimes  that is really brought up in academic circles.
  • 34:34 Joyce Chang: I find that much harder to actually... I feel  
  • 34:39 like David, you're in this environment right now  where you can sell practically anything. I mean in  
  • 34:47 a zero yield world right now, given that you have  a 1% return on fixed income bonds, so on some of  
  • 34:54 these credit enhanced the bonds, I think there  is a moment right now that you can get some of  
  • 35:00 these done. But how does the private sector look  bad? Or how would you look at it conceptually?
  • 35:04 Joyce Chang: I look at much more  
  • 35:06 sort of the Brady plan that model where you  really did have a partnership more between  
  • 35:10 the official creditor community that provided the  incentive for the private sector to get involved,  
  • 35:15 and more of the certainty. So I think Lee  very well points out what the problem is  
  • 35:21 with the structure of some of these bonds and  the forward 20 years. And we see this with a  
  • 35:25 lot of like the GDP warrants. All of these  other mechanisms that were put into place.
  • 35:30 Joyce Chang: I mean, that's much   harder to sort of value going forward. It  is something that... I feel like sometimes  
  • 35:36 it is the economists who come up with these  kinds of structure because they like... For  
  • 35:43 theoretical economics, it makes sense. It injects  an automatic element into it. So there isn't as  
  • 35:49 much discretion. But I think that the official  creditor subsidy is actually something to me,  
  • 35:56 that makes the most sense. And then a way that  you can leverage the official creditor resources.
  • 36:01 [David Malpass]: Now, one small point, and then I'm  
  • 36:04 going to go, Lee, and then Paul, and then, Carmen.  One small point on that Joyce, is people look to  
  • 36:10 the World Bank to provide that creditor subsidy.  And the problem is we can't price it or value it.  
  • 36:17 So people are looking for first class guarantees  from the World Bank. The problem is, World Bank  
  • 36:23 is good is decidedly going to be less good at  evaluating the value of that credit enhancement,  
  • 36:29 then the private sector itself that's looking  for the enhancement. So we have not wanted to  
  • 36:35 go in that direction, in that it will end up  in a mispricing of credit or at least that's  
  • 36:42 the view that we have. But let me go to Lee  and then Paul and Carmen on any topic. Lee.
  • 36:48 Carmen Reinhart: If I may just I mean on something that Joyce said.  
  • 36:52 Joyce, I don't think it's just that economists  are enamored with state contingent contracts.  
  • 36:59 The reason they write state contingent contracts  is also to do risk sharing between debtors and  
  • 37:04 creditors. So that in bad states of nature,  debtor countries that are able to pay less can  
  • 37:13 under the contract pay less. So I think  clearly your vision is from the creditor side,  
  • 37:22 which is perfectly understandable, but it is about  risk sharing. A relevant example to COVID would be  
  • 37:31 something along the force majeure,  though I defer to Lee and that score.
  • 37:36 [David Malpass]: We'll go to the Lee and I'll make a  
  • 37:39 principled statement. I and the World Bank, are  on the side of the people in developing countries,  
  • 37:49 which is a different interest... Yeah, I mean,  we're trying to find a way to wed that interest  
  • 37:54 with creditors. I mean, the wonderful thing in  the world is that there are savers who want to  
  • 37:58 put money to work and Joyce named it. They're  not asking for a very high return, a risk return  
  • 38:07 is favorable from the standpoint of borrowers  right now, because the interest rates are so low.
  • 38:12 [David Malpass]: And so this is a... We're trying to  
  • 38:16 put both sides together. But with a recognition,  or at least our observation right now, is it's  
  • 38:24 not working very well at all for the people in  the poor countries. And so that's what we're  
  • 38:30 trying to look for ways to, and jointly to move  that forward. Lee, any thoughts? And then Paul.
  • 38:36 Lee Buchheit: 
  • 38:37 Yes, I think Joyce has raised the  issue of what the IFIs could do,  
  • 38:45 by way of credit enhancing sovereign obligations.  That is, in my mind, a very different subject.  
  • 38:54 From the one we talked about earlier, where the  sovereign or a state owned enterprise is pledging  
  • 39:02 assets or revenue streams or forward selling those  revenue streams. The issue David that you raised,  
  • 39:11 can the IFIs appropriately price or assess  the value of their credit enhancement.
  • 39:19 Lee Buchheit: You remember what happened in the Brady  
  • 39:21 transactions. There were not guarantees by  the official sector. What happened was the  
  • 39:29 IMF and the World Bank lent money to the debtor  countries and that money was used to buy zero  
  • 39:38 coupon US Treasury obligations that matured in  30 years and were pledged to secure the principal  
  • 39:44 repayment on the Brady bonds. The World Bank has  dipped its toe into this river, several times.
  • 39:53 Lee Buchheit: For example, it issued a  
  • 39:56 partial guarantee of a bond of Ghana, I think in  2012. The question that we've always had is what  
  • 40:08 is the best structure for putting partial credit  enhancement of an IFI on a debt instrument so that  
  • 40:19 we can predict how the market will value that. You  see it ought to be possible to sit down and say,  
  • 40:28 "These are the terms the sovereign could  borrow, unsecured or uncredit enhanced,  
  • 40:35 these are the terms that it will get if it has the  credit enhancement. And if it turns out that it is  
  • 40:43 valuable, appropriately valuable, then that  becomes a sensible thing for an IFI to do."
  • 40:49 Lee Buchheit: One other comment, there is rigidity  
  • 40:54 in at least the World Bank's approach to this.  The World Bank will treat a partial guarantee,  
  • 41:01 a contingent liability, they will score it as  though it were a direct loan. So to the extent  
  • 41:09 the country has a certain allocation, a certain  borrowing capacity from the World Bank, they'll  
  • 41:15 use it up by asking for a partial guarantee,  even though that guarantee may never be called.  
  • 41:29 I can't hear you David.
  • 41:30 [David Malpass]: 
  • 41:32 Without that there's the problem, or the  challenge. The World Bank and IFIs have preferred  
  • 41:40 creditor treatment. Meaning the whole world  has agreed to the idea that these are senior or  
  • 41:45 special creditors within the environment. And so  that makes it extra hard to do. And so that's how  
  • 41:53 we score the partial guarantees. Let me turn to  Paul, for comments on any and all of these topics.
  • 41:58 Paul Gruenwald: Yeah, a couple of comments,  
  • 42:00 David. First, while Lee was talking about  Brady bond restructurings. And I was having  
  • 42:05 a flashback to my IMF days with par bonds,  and discount bonds and [Flurbs 00:42:09], but  
  • 42:10 that sort of collateral is going to be expensive  now. Because interest rates are so low, and  
  • 42:14 rates were higher and prices were lower for those  bonds back in the 80s, when we were using those.
  • 42:19 Paul Gruenwald: And also comment on what Carmen said about state  
  • 42:22 contingent bet structures. And obviously  there are good and less good state contingent  
  • 42:30 specifications. So the idea there as she  correctly said was around risk sharing.  
  • 42:34 But I wanted to come back to  something that Joyce said earlier.  
  • 42:38 She touched very briefly on ESG. And the  term in sort of a larger context of debt.
  • 42:45 Paul Gruenwald: And just to point  
  • 42:46 out that ourselves at S&P and a  lot of other people on the market  
  • 42:50 are doing a lot of work toward ESG scoring. So  we have a legacy business, as everyone knows,  
  • 42:56 for providing credit ratings. But the newer  business, which is getting an enormous push,  
  • 43:02 is to put some sort of ESG score on entities as  well. The market is trying to converge toward  
  • 43:10 some sort of common framework aligned with public  sector as well, we're obviously not there yet.
  • 43:15 Paul Gruenwald: But I'm wondering just maybe for the panel  
  • 43:17 as a whole, does that figure into the sort of the  debt framework here. I've got my economist hat on,  
  • 43:24 I'm not going to pretend to be a rating  analyst. But if we've got some sort of  
  • 43:29 collateralization, loosely defined, and we know  that some of the natural capital is located in  
  • 43:35 some of the high debt countries, does that  figure into the mix going forward as we're  
  • 43:40 talking about securitization, or collateral  or other things? Or is that a separate issue  
  • 43:45 that we can always keep off to the side?  I would love to hear your views on that.
  • 43:48 [David Malpass]: Let's do that topic.  
  • 43:50 So green bonds are important. And then  the transparency of how they're evaluated  
  • 43:55 becomes very important in this meaning.  What did what describes a green bond? And  
  • 44:00 there's different views in the community of what  qualifies as a green bond? Colombia recently did  
  • 44:06 a bond that was I don't want to use the term  collateralized debt, but maybe I'm miss...  
  • 44:12 Paul, I think we should say bonds that have  extra value, let's say because of an ESG-
  • 44:19 Paul Gruenwald: Fair terminology, let's use that one.
  • 44:21 [David Malpass]: Yeah. Because I kind of want to reserve  
  • 44:25 the term collateral, and Lee did a good job for  dividing this up into credit enhanced that are  
  • 44:31 from the creditor side, and then a locking up  of assets or future sales as the use of the  
  • 44:38 term collateral. But what Columbia  did was said it would protect,  
  • 44:41 it's kind of like collateral, but let's  call it extra value. They issued a bond that  
  • 44:48 was attached to protecting some  huge amounts of land in Colombia.
  • 44:55 [David Malpass]: And one of the challenges for the world here  
  • 44:59 is it was only even basis points improvement in  the yield. So it was like a 7% bond that came in  
  • 45:06 at 693, or seven basis points, a small fraction  of the total premium, or I mean, the total yield  
  • 45:14 or coupon on the bond. So it wasn't much of a  premium. So let's talk about ESG, Joyce, comments.
  • 45:25 Joyce Chang: Yeah. So I mean, there are a couple of  
  • 45:28 transactions that have come out. The Belize blue  bond is another one that recently came out. And  
  • 45:34 there are different criteria. But if you look at  this B3W three W, the build back better world,  
  • 45:40 they are talking about the Development Finance  Corporation actually being able to take a first  
  • 45:45 loss, and being able to use more  sort of credit enhancement. So  
  • 45:49 that discussion is happening sort of at that  level. But the Belize blue bond is another  
  • 45:54 one. If you just take a look at the green bonds  this year. I mean, there's a tremendous amount  
  • 45:59 of investor demand. Year to date, there's  been 360 billion of issuance of green bonds.  
  • 46:04 For all of last year, it was 300 billion. So I  think there really is room for innovation here,  
  • 46:10 just given what the investor demand is some of  the requirements also to demonstrate that you're  
  • 46:15 in these instruments and looking at creative  ways in which you this could be structured.
  • 46:20 [David Malpass]: How do you do  
  • 46:22 transparency? I saw the article in the front  page, big one in the Washington Post yesterday  
  • 46:28 saying that data is all... Well, I forget  the headline, but it was that there are huge  
  • 46:35 problems in the data collection. The World Bank,  climate change action plan that we did in April,  
  • 46:40 a central point of that is the need for  diagnostics, as far as what the actual  
  • 46:46 greenhouse gas emissions are from a given  activity, or what the size of the problem  
  • 46:52 is, in various parts of the climate space. But  the Washington Post article yesterday took note  
  • 47:01 that it's very difficult to do transparency  in this field. Joyce, any thought on that?
  • 47:06 Joyce Chang: I mean,  
  • 47:07 the transparency and I and that's why I really  do applaud the World Bank's Debt Transparency  
  • 47:13 Report. And also just all the work that Carmen  has done for just decades about this topic,  
  • 47:17 and also trying to look at something really  complicated, like China's debt transparency,  
  • 47:21 and how we look at the hidden  debt. It is really difficult.
  • 47:25 Joyce Chang: I mean, look, a lot of the ESG  
  • 47:28 issues that we work on are just very hard  to quantify, period. I mean, whether we're  
  • 47:33 talking about the issues related to debt, or  we're even trying to make forecast out about  
  • 47:40 government programs, and what the realistic way is  to measure pricing, the cost of decarbonization,  
  • 47:46 and other metrics. So I think this problem is  not going to go away, it kind of identifies the  
  • 47:53 biggest risk you have with ESG is there,  it's been very hard to standardize anything,  
  • 47:57 and put this into sort of a standardized contract.
  • 48:00 [David Malpass]: We want to save this topic for  
  • 48:04 another panel. And I want to kind of gradually  bring us to the common framework and the actual  
  • 48:10 challenge at hand. A huge amount of debt on the  developing countries, and especially the poor  
  • 48:15 countries, and how do we restructure it. Common  thoughts at large or questions to either one?
  • 48:22 Carmen Reinhart: 
  • 48:26 Let me start with the transparency and the  common framework. I think, one area where the  
  • 48:40 multilaterals can play a big role also is actually  on the setup of transparency. Transparency  
  • 48:48 is not going to bring about automatically  creditor agreement, that's pie in the sky.  
  • 48:56 But for creditor committees to actually  come in with more a cohesive view of  
  • 49:06 what the actual liabilities are, and what  the contracts look like, is at a minimum.
  • 49:13 Carmen Reinhart: And here I will defer  
  • 49:15 to Lee, who has infinitely the authority on  this. But I think as a minimum starting point,  
  • 49:24 starting the discussions from a common ground  on who is owed what and what the terms are  
  • 49:31 in sort of a minimum [inaudible 00:49:35]. But  let me say that on the common framework, I think  
  • 49:40 it's a necessary first step. It's necessary in two  ways. One is it is a recognition that the problem  
  • 49:49 for many low income countries and indeed for not  an unsubstantial number of middle income countries  
  • 50:00 has to do less with liquidity  but more also with solvency.
  • 50:04 Carmen Reinhart: So you have to move from the DSSI COVID Emergency  
  • 50:14 to something that actually  delivers some debt relief.  
  • 50:20 Having said that, and what I think  the common framework has done  
  • 50:25 is basically transferred the Paris Club to  the G20. So that the non-Paris Club members  
  • 50:35 China, Saudi Arabia, UAE and other non-Paris  Club creditors are part of the discussion.
  • 50:46 Carmen Reinhart: But let me... Perhaps I'm being  
  • 50:51 overly pessimistic. But let me say that I recently  did a study called Sovereign Bond Since Waterloo.  
  • 50:59 And the chronic common theme, is creditors want  to be repaid in full, debtors want a haircut,  
  • 51:11 because they perceive their ability to pay as  impaired. And so getting those two sides together,  
  • 51:19 which is the task we have ahead of us, getting  those two sides together, has historically taken  
  • 51:26 a long time. And things like the Brady plan  that Joyce mentioned, and has been mentioned,  
  • 51:35 that came a lot later. That came years after  the onset of crisis. So I think our main  
  • 51:43 task would be to try to expedite what has been  usually a very long process. Let me stop there.
  • 51:50 [David Malpass]: I'll come to Lee for an answer to that. But  
  • 51:53 I want to pick up on one thing you said that the  inconsistency or I think there's a third problem,  
  • 52:00 it's the creditors want to be paid in full, the  debtors would like a haircut. But the people of  
  • 52:07 the developing country need the advancement. And  so I want to kind of make it more of a triangle,  
  • 52:14 there's the interest of the governments of the  borrowing country, the interests of the creditors,  
  • 52:21 and then it's a little bit separate, the people  love the country. Because if I'm the government of  
  • 52:26 a poor country, I'm happy to sign away the rights  to oil or to cobalt or other things for 20 years,  
  • 52:33 because I won't be around for 20 years, I just  want things to go well, over the next four years.
  • 52:38 [David Malpass]: And if someone comes in and says they'll build  
  • 52:41 roads, and they'll pay people a stipend for  the four years, then I'm willing to sign away  
  • 52:47 a lot of future value in order to get that. So  I really think we have to take into account the  
  • 52:55 different interests of the people of the poor  countries, as their government sign contracts.  
  • 53:02 And that's really the core of why we need  full transparency. Unless you know what's in  
  • 53:07 the contract no one is in a position to actually  evaluate that people's interest of the country.
  • 53:13 [David Malpass]: I want to come to Joyce. Joyce  
  • 53:18 raised at one point, the need for the  private creditors to see the information  
  • 53:26 from the official analysis that's done.  And this is a practical issue in Chad,  
  • 53:33 for example. Because Chad asked for common  framework treatment. So the common framework  
  • 53:40 is something offered by the G20. They wrote it  down. It's in the communique. It says that private  
  • 53:48 sector creditors should and I guess, are urged  to participate in the debt reduction for Chad,  
  • 53:59 on the IMF and World Bank view that Chad  is and has an unsustainable amount of debt.
  • 54:04 [David Malpass]: It was taken up by previous governments,  
  • 54:07 and it's very large. So the idea is how do you  provide debt relief on a comparable treatment  
  • 54:13 basis. And I think Joyce was saying that the  official sector needs to share the information  
  • 54:19 with the private sector. Maybe not in Chad, but in  the general case. So I want to ask Lee about that.
  • 54:26 [David Malpass]: And then some of the things we're pushing for  
  • 54:29 in the common framework are one that it operate  faster, which goes to Carmen's point, there  
  • 54:35 needs to be some kind of speed to it. Two that  there'd be comparable treatment among the various  
  • 54:40 creditors. Three that we consider a standstill on  payments to creditors in order to expedite or to  
  • 54:48 facilitate the process of restructuring or of debt  relief within the country. And four that there be  
  • 54:55 clarity on while it's called the urging to the  private sector to participate. And to China's  
  • 55:02 various entities to participate. So  Lee, can you unpack all of this for us?
  • 55:07 Lee Buchheit: A little bit of it, David. Look  
  • 55:13 the common framework to the extent that it  brings into the tent, traditionally non-Paris  
  • 55:20 Club. Creditor countries like China and India and  Saudi Arabia, I think is an altogether commendable  
  • 55:26 thing. In the past, a sovereign debtor had to  negotiate with the Paris Club, with non-Paris  
  • 55:34 Club bilaterals and with commercial creditors  separately, this is an effort to streamline that.
  • 55:40 Lee Buchheit: 
  • 55:43 It was one year ago that the G20 announced the  common framework, three countries signed up,  
  • 55:51 pretty quickly in the early part of this  year. To my knowledge, we've not seen the  
  • 55:58 bilateral creditor committees for any of these  countries come out with debt restructuring terms.  
  • 56:04 Now that to my mind is absolutely  inexplicable. It isn't that hard.
  • 56:10 Lee Buchheit: Now, you might say,  
  • 56:12 "Well, we've had this extraordinary  boom in commodity prices." And  
  • 56:19 oil in the case of Chad, copper, in the case of  Zambia that have some might say have rendered the  
  • 56:26 debt sustainability analysis that were prepared  earlier this year by the IMF obsolete. Okay, okay.
  • 56:32 Lee Buchheit: But  
  • 56:35 we've not seen an announcement of debt  restructuring terms. And therefore, the issue  
  • 56:41 that Carmen raised, the so called comparable  treatment on the part of private sector,  
  • 56:49 we haven't actually had an opportunity to pursue  that. One or more of these countries are going to  
  • 56:57 have to announce debt restructuring terms, and  then we will see whether the private creditors  
  • 57:03 are prepared to provide comparable debt relief.  And I don't want to prejudge where that comes out.
  • 57:12 Lee Buchheit: But the disappointment with the common framework,  
  • 57:18 I think, is principally the fact that it has not  produced, yet, a single debt restructuring. And  
  • 57:31 to the extent that many people put a great deal  of significance in the common framework, and the  
  • 57:42 collection of bilateral creditors  into a single negotiating forum.  
  • 57:48 The fact that it's not produced  anything really is a disappointment.
  • 57:51 Lee Buchheit: On your point,  
  • 57:54 David, what you have proposed a debt suspension  during the common framework, negotiations,  
  • 58:02 I think, is a very good idea. What effectively  does is extend the DSSI for those countries that  
  • 58:13 ask for a common framework, debt restructuring  
  • 58:16 during that period. It will both  motivate the creditors and the debtor.  
  • 58:24 It motivates the debtor, because you do extend the  DSSI suspension. And that will, I think, induce  
  • 58:35 more countries to ask for a common framework  debt restructuring rather than put it off.
  • 58:40 Lee Buchheit: It also motivates the  
  • 58:42 creditors because they will not be receiving debt  service payments during the negotiation period,  
  • 58:50 and therefore they will want to get on with  the negotiation. So that is all that good.  
  • 58:55 One final comment. But you've said it a couple of  times, David, you use the phrase debt reduction.  
  • 59:05 Remember that the common framework had a  sentence which said that debt reduction,  
  • 59:12 debt cancellation, debt write offs are to be  considered only in the most extreme cases.
  • 59:17 Lee Buchheit: And so it is not clear to  
  • 59:21 me whether these bilateral creditor committees  will be proposing principal haircuts as part  
  • 59:27 of these debt restructurings or whether  it will simply be a maturity extension,  
  • 59:33 maybe some interest rate relief, but I fear  it will be the latter. And for many countries,  
  • 59:40 as Carmen says, It is not a liquidity  issue. It will be a solvency issue.
  • 59:46 [David Malpass]: Yeah, I think there's a real world consequence  
  • 59:49 to this, that people should be aware of that in  the midst of the pandemic, that even the poorest  
  • 59:55 countries are basically paying every month or  every quarter to creditors in wealthier countries,  
  • 01:00:02 generally in much wealthier countries, with no  actual prospect of that changing. We, World Bank,  
  • 01:00:10 works very closely with the IMF, we discuss  this jointly with the G7 and with the G20. And  
  • 01:00:17 I explained to the G20 leaders just over the last  two weeks, that the process is fully stalled.  
  • 01:00:24 And we've made suggestions on ways that it  could be reignited or made more effective.
  • 01:00:29 [David Malpass]: President Biden was in both Glasgow and Rome  
  • 01:00:34 and I say him in meetings there and the US  has been strongly supporting the idea of  
  • 01:00:40 transparency. So I really welcome that.  I think that's a critical part of this,  
  • 01:00:44 in order to move it along, because then you  can take into account the fuller value of  
  • 01:00:50 the debt and you're working with better  information. As a by the way for people,  
  • 01:00:56 for Chad, it took almost a year  to reconcile the amounts of debt.
  • 01:01:00 [David Malpass]: Meaning normally in  
  • 01:01:02 a bankruptcy committee process for private  sector creditors, they share information  
  • 01:01:07 and can quickly figure out who is owed money  in which kinds of forms. But for Chad, it's  
  • 01:01:14 a very poor country going through difficult  circumstances, it took the creditors  
  • 01:01:21 a year to figure out how much they thought  each were owed. And it's Joyce maybe indicating  
  • 01:01:27 this information is not always shared very  fast with the private sector creditors.  
  • 01:01:32 So it makes it difficult to actually get to an  end point in some kind of Debt Relief process.
  • 01:01:40 [David Malpass]: So my input on this is  
  • 01:01:43 the real world consequence is, so speaking of  the low income countries, $160 billion of debt  
  • 01:01:54 in the midst of the pandemic, almost all of  which, or the vast majority of which is getting  
  • 01:02:00 serviced regularly by the poor country. So  the World Bank puts in huge amounts of grants  
  • 01:02:05 and zero interest rate loans to the countries  and the money turns around, and goes to creditors  
  • 01:02:11 in a lot of cases. And so we're facing that and  we're just strongly encouraging the world towards  
  • 01:02:17 some kind of process to break the spiral that's  occurring. Okay, so any other comments? And then  
  • 01:02:27 I'm going to read questions from the audience.  Does anyone have one to intervene right now?
  • 01:02:33 [David Malpass]: 
  • 01:02:40 Okay, then I'm going to ask a question. Let's  talk about the debt itself. The amount, so the  
  • 01:02:56 World Bank has a report out and let me put this to  Carmen. Which parts of the world are responsible  
  • 01:03:04 for publishing information about debt? And is  that process working pretty well? I bet S&P,  
  • 01:03:11 maybe Paul will comment on  that. But who publishes data?  
  • 01:03:14 And who arbitrates that publication? I  know you're famous in this field, Carmen.
  • 01:03:21 Carmen Reinhart: So David historically on external debt the World  
  • 01:03:31 Bank in the debt reporting system has had the  longest, most established history. And I don't say  
  • 01:03:41 that, because this is a World Bank conferences.  This has been the norm for four decades easily.  
  • 01:03:50 However, I think, a big challenge on... But there  are also series that the governments themselves  
  • 01:04:01 publish. There are also alternative series that  academic studies and other agencies publish.
  • 01:04:10 Carmen Reinhart: I'm going to speak to that in  
  • 01:04:11 a minute because I think it's very relevant to  the transparency discussion we've been having.  
  • 01:04:19 But one of the elements of the more recent  challenge is that as borrowing becomes more  
  • 01:04:37 complex, more borrowing of governments is state  owned enterprises, more borrowing of governments  
  • 01:04:42 are special purpose vehicles. It include also  more and more borrowing of governments is domestic  
  • 01:04:50 debt. It's really important for governments  to have consolidated public sector accounts.
  • 01:04:58 Carmen Reinhart: In a recent a survey we did  
  • 01:05:00 at the bank it shows that 54% of the respondents  do not have consolidated a fiscal accounts. And  
  • 01:05:11 so what I'm saying is getting an overall public  sector indebtedness picture that also includes  
  • 01:05:21 new types of debts, like from central  banks, swap lines, or government deposits  
  • 01:05:29 or repos and other instruments that have become  part of the new public debt universe, that's  
  • 01:05:40 become increasingly important. But at the same  time, many, many governments don't provide it.
  • 01:05:44 Carmen Reinhart: So in answer to this question, I would say that  
  • 01:05:50 we are at a critical juncture and very much this  is also in the spirit of the report, which gives  
  • 01:05:56 a list of recommendations of what to do to improve  transparency. I think the multilaterals also have  
  • 01:06:05 to go beyond just... Much, much, much beyond going  receiving data from the governments themselves,  
  • 01:06:16 which may be imperfect, either because  they don't have consolidated accounts,  
  • 01:06:20 or because of this disclosure requirements that  they do not disclose the debt to go to other  
  • 01:06:29 sources. Sources from the market sources from  academia. So I think a big push forward on the  
  • 01:06:36 getting better debt data than the one,  say, historically there is the World Bank,  
  • 01:06:46 BIS, IMF, Data Hub, going beyond that, to draw  on other sources is going to be increasingly  
  • 01:06:56 important because of all these other types  of borrowing that are comparatively newer.
  • 01:07:01 [David Malpass]: Paul-
  • 01:07:03 Lee Buchheit: 
  • 01:07:04 David, let me second the... Yeah. So the S&P  sovereign team doesn't have a crystal ball. So  
  • 01:07:10 we use the same data sources as anyone  else. And when we go visit a country,  
  • 01:07:15 it's almost like a mini-IMF article IV mission. We  send a team out there, we get the official data,  
  • 01:07:21 we talk about macro policies, we look at the debt.  And as Carmen says, sometimes due to capacity  
  • 01:07:26 constraints, or other reasons that debt is not  complete. And then we go to alternative sources.
  • 01:07:32 Lee Buchheit: But I think we would definitely  
  • 01:07:34 support any effort to increase debt transparency,  and let the sovereign teams do their job. And the  
  • 01:07:41 world's moving quickly, not just with some of  the contingent liabilities and off balance sheet  
  • 01:07:45 stuff that Carmen talked about. We've got these  global digital actors now. And we're going to be  
  • 01:07:51 increasingly in a world where we've got a lot of  digital debt, with smart contracts and a lot of  
  • 01:07:56 things that are going to be customized, and not  homogeneous and tough to aggregate and tough to  
  • 01:08:03 do under surveillance regimes. So I think  staying ahead of that game is going to be  
  • 01:08:08 increasingly difficult. But again, we're  using the same toolkit as the IFIs,  
  • 01:08:14 and I think we would definitely support all  the improvements that we're discussing today.
  • 01:08:19 [David Malpass]: Super, we've got about  
  • 01:08:20 five minutes left, I wonder if we can focus on,  historically, there were... So the question is  
  • 01:08:26 on collective action clauses, did they work? Are  they working? And are there ways to extend them?  
  • 01:08:31 And are there other ways to improve the system?  So this is kind of a forward leaning question.  
  • 01:08:39 And not wanted to ask, I guess, Lee and Joyce on  that? Well, Joyce first, did collective action  
  • 01:08:46 clauses work? And are there ways that those  could extend into other kinds of contracts?
  • 01:08:52 Joyce Chang: I think the collective action  
  • 01:08:54 clauses were a real success. And we can talk  more about this. And I will just say the fix for  
  • 01:09:02 contractual loopholes is not to tinker  further with the bond contracts,  
  • 01:09:07 because there are always very clever lawyers on  the other side. I think it is really to simplify  
  • 01:09:13 and try to standardize bond contracts  rather than to make them more complicated.
  • 01:09:18 Joyce Chang: But I also just  
  • 01:09:19 wanted to add the point on the debt transparency.  I mean, look, the role that the official creditors  
  • 01:09:25 really have just been sort of a stalwart at  has been a lot of the technical assistance.  
  • 01:09:30 You whether it's from the IMF or the World  Bank. So I think on this whole issue of  
  • 01:09:34 debt transparency and consolidation of debt,  accounts and reporting of the... It seems to  
  • 01:09:39 me like we've had these discussions. Well, what  exactly can the official creditors do? There's  
  • 01:09:44 a line on how you can use guarantees.  And all of that is understandable.
  • 01:09:48 Joyce Chang: To me, the technical  
  • 01:09:49 assistance piece of it has always been critical  to the private sector in the debt restructuring,  
  • 01:09:55 whether it was the lowest income  countries or whether it was the Eurozone.  
  • 01:10:00 And in the IMF examples with Greece. So I  think the technical assistance, I wouldn't  
  • 01:10:08 downplay just the credibility that the official  creditors have, the way that they can sort of  
  • 01:10:13 access this and put all the brainpower together  is something that is really unique and valuable,  
  • 01:10:20 and I think can really help in these discussions,  in making sure that people are using this uncommon  
  • 01:10:26 information that's transparent. But I would  just say collective action clause is a success,  
  • 01:10:30 but simplifying consistency in the bond, contract  standardizing... Standardization, I think is key.
  • 01:10:37 [David Malpass]: So, we have... There has been mentioned today the  
  • 01:10:45 Greece issue and the central bank swaps. So DRS  is trying to comprehend the effect of options and  
  • 01:10:55 the central bank swaps have been included in the  World Bank's DRS as a form of debt, and so that  
  • 01:11:04 our reports now use the concept of debt-like  instruments in order to get broader view. Lee any  
  • 01:11:13 final thoughts on not either on the simplification  of the bond contracts, as Joyce mentioned,  
  • 01:11:18 or on collective action clauses or on what  governments could do to make this process  
  • 01:11:24 work better? Maybe the UK Government or the  US government, any thoughts in that area?
  • 01:11:30 Lee Buchheit: 
  • 01:11:33 Entirely with Joyce, collective  action clauses have been  
  • 01:11:38 a considerable advance, and they have helped  achieve orderly sovereign debt workouts  
  • 01:11:45 over the last 10 years, most recently, a few weeks  ago, in Belize. Where Belize used its collective  
  • 01:11:54 action clause in its international bonds in  order to achieve a retirement of those bonds.
  • 01:12:00 Lee Buchheit: But only up to a point. Collective action  
  • 01:12:05 clauses are only in bond contracts, you don't even  find them in syndicated loan agreements. They are  
  • 01:12:14 not a panacea as we saw in Greece in 2012, Greece  had 35 English law bonds, each with a collective  
  • 01:12:23 action clause, only 17 of those series of bonds  joined the restructuring. They're not a panacea.  
  • 01:12:30 And the market has adapted to them so that  the determined hold out creditors can get  
  • 01:12:36 blocking positions in the bonds and thereby  stymie the use of a collective action clause.
  • 01:12:43 Lee Buchheit: The question is,  
  • 01:12:46 do we do anything more? There are those who are  arguing, David, as you have just alluded to,  
  • 01:12:54 that we should resurrect the idea of a statutory  sovereign debt restructuring mechanism,  
  • 01:13:02 perhaps not as aggressive as the sovereign debt  restructuring mechanism the IMF proposed in 2002.  
  • 01:13:12 But some statutory intervention, at least in the  jurisdictions like the United States and the UK,  
  • 01:13:21 where most of the cross border emerging market  sovereign debt obligations are governed.  
  • 01:13:29 Difficult, because it obviously is a political  decision, but not impossible. And the UK did  
  • 01:13:37 something like this, a modest measure back in  2010, in the context of the HIPC initiative. I  
  • 01:13:46 think there are other things that one could  do, but probably that's another phone call.
  • 01:13:53 [David Malpass]: Lee that was great.  
  • 01:13:57 We have the hook to close. This was a really  great panel, raised a lot of issues that we can  
  • 01:14:04 focus on. Just to close, I think, because we don't  have a fix for all of this. And there is a joint  
  • 01:14:15 interest between creditors between the governments  of the debtor countries, and between the people of  
  • 01:14:20 the debtor countries in getting new investment.  Everyone has to, in a way, work together on this  
  • 01:14:26 to make it better going forward. So that's the  point of our transparency report. It's called debt  
  • 01:14:32 transparency, and it's on the World Bank website.  And I want to greatly thank Carmen Reinhart,  
  • 01:14:39 my colleague at the World Bank and Chief  Economist here, Lee Buccheit, Joyce Chang  
  • 01:14:43 and Paul Gruenwald for the great panel. Thank  you everybody. I'll say goodbye. Thanks, all.
  • 01:14:52 Paul Gruenwald: Thanks, everyone.

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Senior Debt Specialist, Macroeconomics Trade and Investment, World Bank
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