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This event took place on November 11, 2021

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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 practice
00:22 group for The World Bank. Well, we have a real treat for you today. Our president, David Malpass,
00:27 will lead a discussion with a star-studded panel. And it's fitting that David leads
00:32 this discussion because he's been a tireless and vocal leader on this issue of debt transparency
00:40 since he became president two and a half years ago. It's fitting also that we'll have
00:44 four top notch experts on the panel, and that 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 is excellent because I cannot take any credit for it.
01:10 The credit should go to David for championing the calls and to Marcello Estevão, Dorcha Domelin,
01:16 Diego de Verti, and the team in the macroeconomics global practice for actually producing the report.
01:22 And we released the report yesterday and you can easily find it if you just Google, "Debt
01:27 Transparency in Developing Economies." So what I want to do now is to give you a three-minute
01:32 summary of the report, both as an ice breaker and as an appetizer, because we are hoping that
01:37 you will read that report. And like I said, it's excellent, and it's excellent for three reasons.
01:42 So first it is excellent because it has some startling statistics that'll
01:46 make you sit up and pay attention. So I'm going to cite just a few.
01:50 The first one is that 40% of low income countries have not published any sovereign debt data during
01:56 the last two years. 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. And this can often
02:17 lead really quickly to debt distress when some of this information actually comes in view.
02:26 So for example, in 2016, when loans totaling more than a billion dollars was suddenly revealed in
02:34 Mozambique, that was nearly 10% of the country's GDP, it plunged the country into debt distress.
02:43 So we have about 12 countries that are now in debt distress, and about 44 countries that are
02:49 at high risk of it. We don't know how many of these would actually be in distress if all
02:54 of their debts were revealed, right? Now, poor countries have huge financing needs,
02:59 and these will be met mostly through debt. So by one measure, these financing needs total nearly
03:04 half a trillion dollars between 2023 and 2025. Without debt transparency, such big sums mean
03:13 big dangers, so that's the first reason. The second reason the report is excellent because
03:18 it outlines a very practical way to think about debt transparency. It says that debt transparency
03:24 has three aspects. The first one is transparency in operations. Second is transparency in legal
03:30 management. And the third one is transparency in reporting, especially the third one is very
03:34 important. And there are three parties that can make debt transparent or keep it obscure.
03:40 The first one, of course, are borrow governments and state own firms, both at the center
03:44 and subnational levels. The second has to be the folks who actually give this debt. These are the
03:51 creditors, both public and private. And then the third one are international financial institutions
03:57 like The World Bank and the IMF. Now finally, the report is excellent because,
04:04 for the first time, it proposes the high and medium and low priority measures that borrowers,
04:10 governments, and IFIs 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 IFI.
04:25 So to increase transparency in debt reporting, governments should publish core public and
04:31 publicly guaranteed debt statistics regularly. They should also limit and
04:36 define the scope of confidentiality clauses. 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 By the same token, what IFIs can do is to consolidate that debt databases and support
05:20 the implementation of integrated debt recording and management systems. It's a big agenda,
05:27 and I've talked for a long time. But because it's a big agenda, I'm going to hand the mic over to
05:32 the big guys. So over to you, David. [David Malpass]
05:35 Thanks very much, Indermit. Good summary, and it's an important report. We've got a panel,
05:41 a great panel. Carmen Reinhart, chief economist to The World Bank group, my colleague. Also,
05:46 Lee Buchheit, who is one of the world's most experienced sovereign debt restructuring experts.
05:52 Joyce Chang, global chair of research at JP Morgan. And Paul Gruenwald, chief economist at S&P
05:59 Global Ratings. Just as a start in, I want to make the point that the world actually
06:05 is very challenging. I'm just back from the G20 Leaders' Summit in Rome. And I made the point,
06:11 as others did, that we faced not only the pandemic, but also rising inflation in a lot
06:18 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 debt standpoint in developing countries. That's the focus of our conversation today.
06:35 The World Bank is deeply engaged in the issues of debt in developing countries
06:41 with the purpose being to try to have more growth rates in developing countries, faster growth
06:48 and better connection between investments and the debt that goes along with those investments. This
06:55 is made more challenging by the size of the debt. We did a report a month or so ago that showed $860
07:03 billion of debt in the low income countries. So even the poorest countries in the world have $860
07:10 billion of debt, external debt, not counting their bank debt that the governments take out
07:16 inside their own countries. This is giant. And the report that just came out yesterday shows this,
07:22 as Indermit was describing, 30% hidden debt, if we want to call it that. Or debt that's not really
07:28 fully recorded in the various statistics that are kept track of. This is at a time when the world,
07:34 many of the countries, and Joyce was telling our group just before
07:38 we came on here, that there are rate hikes in quite a few of the developing countries already.
07:43 So this puts added strain on the economic outlook, but it also means that countries are able to begin
07:51 adjusting to the new inflation environment that's out there. So I hope what we can do
07:58 to today is focus on debt transparency, whether it's important, what the aspects of that are, and
08:07 how the debt challenge can work its way through the system over the next five years. We're all
08:13 trying to avoid a lost decade from the standpoint of debt. So with that, let me
08:20 go first to a question to Joyce. As I mentioned, Joyce is Global Chair of Research at JP Morgan,
08:28 and a friend for a long time, and engaged daily in markets. So how do you think about transparency?
08:37 Is it important as you analyze the prospects for a country? And this idea that there might be 30%
08:44 more debt than is actually being recorded? How does that affect your thinking about various
08:49 markets? Thanks for joining, Joyce. [Joyce Chang]
08:52 No. Thank you, David, for having me. And it's great to be with just so many experts who've
08:56 looked at this topic. I mean, the transparency is really important to the private sector. And
09:01 I think one of the issues when the common framework was rolled out was that there was
09:06 a sense that there was a lot of stalling and no information sharing. And that made the whole
09:11 discussion about voluntary mechanisms, I think, very hard for the private sector to understand.
09:17 So look, 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
09:30 debt? The bilateral creditor debt, the private sector debt, the contingent liabilities,
09:36 where is there an implicit government guarantee as opposed to an explicit government guarantee?
09:42 And then, with every sovereign crisis, it usually emanates from the banking system,
09:47 so an understanding of that. There's also a whole focus on quasi sovereign debt, which is sometimes
09:55 corporate debt. But there's an implicit government guarantee. And we've seen these numbers really
10:00 balloon. We've had record debt issuance from the sovereign and on the emerging markets, corporate
10:08 quasi sovereign side, during this pandemic because of the low interest rates. I mean, last
10:13 year you had 230 billion of EM sovereign and debt issuance, more than 500 billion of EM corporate
10:19 debt issuance with a good component of that that's quasi sovereign. So I think, for a country to be
10:25 investible, you need the transparency and you need to have the ways in which you can actually
10:30 understand the different categories of debt and what the government could be obligated to
10:36 really implicitly back at a time of crisis. [David Malpass]
10:40 Thanks. And I hope we can have a round table kind of this panel. Let me turn to Lee, or
10:47 I'll preface. Some of the terms that I hope people will use are collateralized debt. So that means,
10:53 if savers of the world lend to a government or even to a, I guess, quasi sovereign debt and a
11:04 state owned enterprise, and requires that there be collateral set aside in the form of actual
11:10 products, it's hard to know the relative price of the various items. And it's also very hard to
11:18 then restructure the debt if the country runs into sustainability problems. And that is exacerbated
11:29 by nondisclosure clauses if people can't see inside the contract. So, Lee, will you give us a
11:36 briefing on these? And maybe ask a question to Joyce, if you want to. However we want to work
11:42 it as a panel. Thanks, Lee. [Lee Buchheit]
11:44 Yes. Thank you, David. And wonderful to be with you folks. One of the extraordinary statistics
11:51 in this report was that 10% of Sub-Saharan African debt incurred recently has been of
11:59 the type you described, 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.
12:15 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
12:40 as debt. And yet it has the practical effect of that.
12:45 Traditional repos are economically the equivalent of secured borrowing. It has several implications
12:56 to the extent that the country has allocated a significant portion of its future revenue
13:06 toward the repayment of one creditor. It follows that that revenue is not
13:12 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, at the very least, in mispricing of the debt.
13:38 It also renders the restructuring of that debt stock particularly difficult because the
13:48 secured lender, or the buyer, the future buyer of the commodities, may well argue.
13:56 They have a security interest governed by the laws of England or New York. And they can always go and
14:04 foreclose on that. And therefore, they must be exempted. So this problem, to the extent that
14:12 it is growing in significance, and it appears to be growing in significance, represents, I think,
14:20 a serious risk to the system. [David Malpass]
14:24 Thanks. Yeah. So debt for the low income countries is up 12%, even though
14:31 there were two major initiatives by the G20 to try to provide debt relief, the DSSI
14:37 and the common framework. So DSSI is debt service suspension initiative that was invoked in 2020,
14:48 but didn't have as broad a coverage as had been sought. And now the common framework, which
14:53 is being applied now to Chad, Ethiopia, and Zambia, we'll come back to those in a minute,
14:58 but I want to pick up on the point that Lee just made and ask Paul,
15:05 S&P, I know you're chief economist, Paul. But S&P does ratings of countries and of bonds.
15:13 That's the way I think about it. And how does it do that if it's the case that,
15:20 as the report shows, that for some countries it might be 30% more debt than has actually been
15:25 disclosed? And even for those that disclose debt, which are not that many or, I mean, which are not
15:31 all the countries, there are nondisclosure clauses on some of that debt. So even of the
15:38 amounts of debt that are disclosed, sometimes the terms and the covenants are not disclosed. So how
15:44 do you handle that in S&P? [David Gruenwald]
15:46 Well, first, hi, David and everyone. Thanks for inviting me to the panel. Let me start
15:52 out by saying that S&P Global is 100% behind these initiatives to improve the transparency of debt,
16:00 but you're right. We have a sovereign team. The sovereign team currently has 137 sovereign
16:06 ratings outstanding. So we're missing kind of the lower end of the tail. So perhaps part of
16:10 this problem is not in the rated universe. But just as a reminder to everyone, the idea behind
16:18 a credit rating is not to predict a default. It's our opinion on the ability of the borrower
16:24 to repay their debts in full and on time. But you're absolutely right about some countries
16:31 not having a full set of data, that would be the ideal state. 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
16:48 and do a sovereign rating, they look at a number of factors. And if they see that they are
16:53 inconsistencies in the data, the errors and omissions. Large errors and omissions is one,
16:59 or maybe there are inconsistencies or historical patterns that don't always make sense.
17:05 These rating committees are allowed to make an adjustment to the ratings,
17:09 downward in this particular case. So there are a few channels through which they can do that.
17:14 There's a fiscal pillar, there's an institutional pillar, and there's also some discretion around
17:20 the final determination of the rating itself. It's not a totally mechanical process, but the
17:26 sovereign teams are aware of the issue. And this lack of transparency is embedded in the ratings.
17:34 And it tends to be correlated with the lower credits. The higher rated credits tend to have,
17:38 not surprisingly, a higher level of debt disclosure and a higher level of comfort that
17:45 we're getting a full story. And that deteriorates a bit as we go down the spectrum. But again,
17:51 all the initiatives in the report and the things that we're going to talk about today
17:55 that would enhance debt transparency, that will help us do 0ur job better. And that will help the
18:01 markets as well. So back to you, David. [David Malpass]
18:05 A core problem I'll mention, and then I'll come to Carmen. A core problem is, in a lot of debt
18:12 around the world, there's a bankruptcy process that is legislated within a country. And so 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 it, but
18:32 they assess the situation. Whereas in sovereign lending, there's not the equivalent. And so
18:41 one of the things that is complicating this, I think, is that sovereigns are fully... the people
18:48 of the country are fully committed to paying all of the debts that are incurred by the government
18:53 of that country forever with no process to restructure it or force a change. 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 a very
19:46 insightful discussion. And I want to follow up on something Paul said. The issue of hidden debts
19:58 is not new and, Paul, I would say it's certainly, as this wonderful report highlights, it's
20:06 primarily an issue for many of the emerging and lower income countries. But it's not
20:13 unique to them. I mean, certainly the Greece Goldman case a few years back on hidden debts
20:23 was a major surprise. And over the last decade or so, the issue of hidden debt has partially also
20:37 grown enormously because non-Paris Club creditors, the largest of these is China,
20:46 increased in importance. Now that's official lending, but nonetheless it is adding to the
20:52 debt servicing ... To the debt and debt servicing of a particular country.
21:00 And some of that debt has been restructured repeatedly. How does
21:08 S & P deal also with a higher incidence of these restructurings? And, as David mentioned, since
21:20 last year the DSSI, we learned that, for example, the sovereign debt... I mean the debt of the China
21:33 Development Bank is considered private debt, which would be in the domain of credit rating agencies,
21:38 so there would be a private creditor. So how would you say that ratings have adjusted to deal these
21:49 change landscape? [David Gruenwald]
21:51 Yeah, Carmen, I'm going to get out of my pay grade pretty quickly here because I run the economics
21:56 team and not the sovereign ratings team. But yeah, you're right, this is a challenge. I mean,
22:00 we've got a lot of debt that's quasi-public debt, it might be a non-government organization to a
22:06 non-government organization, or it might be a state enterprise to another state enterprise
22:11 across border. But it's something that our sovereign team has to deal with. As I said,
22:17 there are ways to adjust the rating up or down if we're not happy with the transparency
22:22 or the consistency of data or anything else. We do rate a large number of the bigger EMs,
22:28 not the tail, because we're missing about 60 or 70 countries globally. But that's something
22:34 that we try to put into our criteria and the sovereign team tries to keep up with that. I mean,
22:40 for the details I can maybe get back to you on that, but the sovereign teams are fully aware
22:45 that a lot of this debt is not directly on the sovereigns balance sheet and it may come from
22:51 quasi-sovereign or other creditors. But to the extent possible, that is incorporated into the
22:55 rating that we're publishing. [David Malpass]
22:59 Thanks, and so, I'll ask us to come back in a little bit to the Common Framework and to China,
23:06 the magnitude of the China debt. I want to ask Lee if he has reflections on what we've already
23:11 been talking about and also any suggestions or corrections to the way I described the sovereign
23:20 process. So one of the things we're dealing with is this fundamental gap in the global
23:26 system for how do you deal with a country that has unsustainable debt. There's not really any
23:33 process to do that so we're always ad hoc, one country at a time, and that's a very expensive
23:39 process. 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.
24:12 If those debt instruments aren't paid, the creditor can get a judgment against them.
24:17 That is true. But at that point, the leverage usually shifts back to the sovereign
24:24 because that judgment will convey an emotional satisfaction to the holder, but not a financial
24:31 satisfaction, unless the sovereign pays it voluntarily or the creditor can find an asset
24:40 outside of the debtor country that it can seize in order to pay itself. And typically, there
24:48 are few such assets in the name of the sovereign itself, the republic, not state owned enterprises,
24:57 outside of the jurisdiction of the sovereign. And we have seen this play out again and again,
25:03 David, perhaps most poignantly in the 15 years of litigation that followed the Argentine default in
25:10 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,
25:23 looking for assets in an effort to pay themselves. And that effort was, to a very large extent,
25:31 unavailing. So there is leverage on both sides. The creditors can get judgements and there's very
25:39 little that the sovereign can do to stop it. But once the judgment has been issued, satisfying that
25:47 judgment becomes a major problem for the creditor. And candidly, a recognition of this situation
25:58 is the chemistry, is the basis for consensual sovereign debt workouts.
26:06 Both sides are vulnerable in the process, and therefore in truth, neither side has a good option
26:13 other than to negotiate their way out of the problem. They cannot litigate their way out.
26:18 [David Malpass] Got it. Let's talk about that in the
26:20 context of the Common Framework in a minute. Let me turn to Joyce on that point that Lee is making,
26:31 that there's 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 internal debt,
26:41 but what about Argentina that is working its way through a recent crisis. How do you think of
26:54 sovereign debt as far as the safety of it? Thanks. [Joyce Chang]
26:57 No, no, thanks very much, David. And just a couple comments on what Lee had to say and also on
27:02 the collateralized debt as well. So look, I often will hear, we're very disappointed
27:09 in the private sector, we want the private sector to do more, and these are empty statements. Look,
27:15 I think 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 if you're going to expect comparability of treatment to work. They don't
27:30 necessarily have to be at the table because that makes a large political statement, but they have
27:35 to be given the information and asked about their views. And I think this was some of the
27:40 initial problem with the Common Framework, but I wanted to just say a few things on
27:47 the collateralized debt and also on the China Development Bank that Carmen had brought up.
27:54 Look, I think there is room for innovation. I mean, JP Morgan now allows credit enhanced bonds
27:59 to be included in the EM bond indexes. But Lee is absolutely right. When we conceived of credit
28:06 enhanced bonds, we really did think back to the days of the Brady bonds, where it was treasury
28:11 collateralized. I mean, the whole issue was, is there a way that you could actually use
28:16 official creditor resources and leverage that more? Because the official creditor resources
28:21 are still relatively small to EM sovereigns raising 230 billion dollars in the international
28:27 capital markets. Now that's completely different than forward sales of a commodity
28:32 as collateral. So something like that would not go into a JP Morgan index, but the question on
28:38 collateralized instruments was, is there a way that you could use official credits,
28:43 and even things like XM credits, we have a development financing group that's looked at that.
28:47 And could you require certain things, like ESG sustainability commitments,
28:52 in return for credit guarantees? That's more the way that I would conceive of the collateral, as I
28:57 totally agree with Lee, that some of these other mechanisms that they're looking at.
29:01 To me, they raise real questions on who bears the responsibility and the transparency and how
29:12 you actually can enforce some of this. And then, I hear oftentimes also from official creditors, a
29:19 lot of discussion on these contingent instruments. And I do think academics really love these because
29:26 it's theoretical economics, it makes sense, and there's this automatic factor in it. In practice,
29:31 I think that it's a lot harder to actually put that into place. So the official creditor
29:36 enhancements is something that stands out. Look, I think that Carmen brings up the elephant in the
29:41 room on the Common Framework. I mean, is this really all about China as the largest creditor
29:48 to many of the emerging markets countries? And this will debate on whether China Development
29:53 Bank is official or commercial. That's kind of a travesty, in a lot of ways, as a lender. And
30:00 I mean, the Common Framework was meant to overcome these issues, but in some ways the question has
30:06 been asked, does China really prefer bilateral negotiations when they are the largest creditor?
30:12 Was the lack of clarity, in some ways, meant to cajole China in this? We've just been going
30:20 through the numbers for China and what they call the private sector debt there is 232% of GDP now.
30:28 So is that private? Is it quasi-sovereign? Is it really government debt? So I think that China's
30:34 really the elephant in the room, given the role that they have assumed for so many of these low
30:39 income countries as the biggest ... As being really, a lot of this debt really is something
30:49 that China has a key role in. [David Malpass]
30:54 You gave us a lot to chew on there. Okay, so one background for people is, we've been talking
31:00 about official debt. This is the debts of various government entities around the world lending into
31:08 sovereign situations, or even private situations, in developing countries. Or that's the way I'll
31:16 use the term. And so that, historically, for I don't know, 40 years or 50 years, has been
31:22 rescheduled as a group by the Paris Club, which is a group of official creditors that used to be
31:29 the major creditors around the world. So in the Latin debt crisis, the US and Germany and France
31:36 and the UK and Japan were the major creditors for the Latin countries. And they could sit in a room
31:44 and figure out what to do to restructure the debt. Over time, China has become a much
31:51 bigger creditor than all of those others combined. World Bank did a report a year or a year and a
31:58 half ago that showed that 65% of the official credits were from China and all the rest
32:06 of the countries were the remaining 35%, of which Japan was one of the big ones at 15%,
32:14 if I recall. And so what that means is that the concept of the restructuring process has changed
32:21 dramatically over time as China's role became more important in that amount of debt. So that
32:30 was kind of background. So one of the challenges as the world looks for a process to allow debt
32:39 relief, reduction of debt for poorer countries or developing countries in general,
32:48 where the debt has become unsustainable. Meaning the creditors allowed too much
32:53 debt and the countries took on too much debt and circumstances changed and the country can't pay
33:00 it. There's not a process and so we're looking for that process. And the G20 put forward the
33:05 Common Framework that we've been talking about. So I wanted to ask Joyce, and then have others
33:11 maybe ask questions, but you mentioned the term credit enhanced bonds, which is great. And so,
33:16 as we talk about collateral, my understanding of the problem of collateral is it's very hard to
33:23 value within the structure. Meaning the country gives collateral, meaning either a right to an
33:29 asset, or as Lee framed it, this forward sale concept. It doesn't seem to cost the government
33:35 of a country much, but over the years and over the decades, sometimes these are 20 year commitments
33:41 by a government that is non-disclosed. So it's a secret commitment by a poor country,
33:47 the government of a poor country, that locks the people of the country into payments that
33:53 are going to last 20 years. So why would the world want credit enhanced bonds? Can I frame it that
34:00 way? And you make a defense and then maybe I'll bring Lee or Paul in on that. Go ahead, Joyce.
34:07 [Joyce Chang] That's why I'm trying to be clear that
34:09 on the credit enhanced bonds, I really looked at it more conceptually as whether there's a way to
34:15 leverage official creditor resources in that process, more so than making these forward
34:21 commitments for 20 years, 10 years, based on forward sales of commodities. Or even like some of
34:29 these GDP linked bonds where I feel like sometimes that is really brought up in academic circles.
34:34 I find that much harder to actually... Look, I feel like, David, you're in this environment
34:41 right now where you can sell practically anything. I mean, in a zero yield world right now, given
34:50 that you have a 1% return on fixed income bonds. So on some of these credit enhanced bonds, I think
34:57 there is a moment right now that you can get some of these done. How does the private sector look at
35:02 that? Or how would you look at it conceptually? I look at much more the Brady plan model
35:08 where you really did have a partnership more between the official creditor community that
35:12 provided the incentive for the private sector to get involved and more of the certainty.
35:17 So I think Lee very well points out what the problem is with the structure of some of these
35:22 bonds and the forward 20 years. And we see this with a lot of the GDP warrants, all of these
35:27 other mechanisms that were put into place. I mean, that's much harder to value going forward. It is
35:33 something that ... I feel like sometimes it is the economists who come up with these kinds of
35:40 structure because they like the theoretical economics. It makes sense. It injects an automatic
35:47 element into it so there isn't as much discretion, but I think that the official creditor subsidy is
35:55 actually something, to me, that makes the most sense. And then a way that you can leverage the
36:00 official creditor resources. [David Malpass]
36:02 Got it. Now one small point, and then I'm going to go Lee and then Paul then Carmen. One small point
36:08 on that, Joyce, is people look to the World Bank to provide that creditor Subsidy. And the problem
36:15 is, we can't price it or value it. So people are looking for first loss guarantees from the World
36:20 Bank. The problem is, World Bank is decidedly going to be less good at evaluating the value
36:27 of that credit enhancement than the private sector itself that's looking for the enhancement. So we
36:34 have not wanted to go in that direction in that it will end up in a mispricing of creditor. At least
36:42 that's 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 comment
36:50 on something that Joyce said. Joyce, I don't think it's just that economists are enamored
36:56 with state contingent contracts. The reason they write state contingent contracts is also to do
37:02 risk sharing between debtors and creditors, so that in bad states of nature, debtor countries
37:10 that are able to pay less can, under the contract, pay less. So I think, clearly your vision is
37:20 from the creditor side, which is perfectly understandable, but it is about risk sharing.
37:28 And a relevant example to COVID would be something along the force majeure, though I defer to Lee
37:35 on that score. [David Malpass]
37:37 We'll go to Lee and I'll make a principle statement. I, and the World Bank, are on the side
37:46 of the people in developing countries. Which is a different interest... Yeah, I mean, we're trying
37:51 to find a way to wed that interest with creditors. I mean, the wonderful thing in the world is that
37:57 there are savers who want to put money to work. And Joyce named it. They're not asking for a very
38:02 high return. A risk return is favorable from the standpoint of borrowers right now because
38:10 the interest rates are so low. We're trying to put both sides together, but with a recognition,
38:21 or at least our observation right now is it's not working very well at all for the people in
38:27 the poorer countries. And so we're trying to look for ways, and jointly, to move that forward. Lee,
38:34 any thoughts? And then Paul. [Lee Buchheit]
38:37 Yes. I think Joyce has raised the issue of what the IFIs could do by way of credit enhancing
38:48 sovereign obligations. That is, in my mind, a very different subject from the one we talked about
38:56 earlier, where the sovereign or a state owned enterprise is pledging assets or revenue streams
39:04 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? You
39:19 remember what happened in the Brady transactions. There were no guarantees by the official sector.
39:28 What happened was the IMF and the World Bank lent money to the debtor countries, and that money was
39:34 used to buy zero coupon US Treasury obligations that matured in 30 years and were pledged to
39:43 secure the principle repayment on the Brady bonds. The World Bank has dipped its toe into this river
39:52 several times. For example, it issued a partial guarantee of a bond of Ghana, I think in 2012.
40:02 The question that we've always had is, what is the best structure for putting partial credit
40:12 enhancement of an IFI on a dead instrument so that we can predict how the market will value that? You
40:23 see, it ought to be possible to sit down and say, these are the terms the sovereign could borrow
40:31 unsecured or un-credit enhanced. These are the terms that it will get if it has
40:38 the credit enhancement. And if it turns out that it is appropriately valuable, then that
40:46 becomes a sensible thing for an IFI to do. One other comment. There is a 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. [David Malpass]
41:32 Without that, there's the problem or the challenge.
41:36 The World Bank and other IFIs have preferred creditor treatment, meaning the whole world has
41:42 agreed to the idea that these are senior or special creditors within the environment,
41:48 and so that makes it extra hard to do, and so that's how we score the partial
41:54 guarantees. Let me turn to Paul for comments on any and all of these topics.
41:59 [David Gruenwald] A couple of comments, David. First, while
42:01 Lee was talking about Brady bond restructurings and I was having a flashback to my IMF days with
42:07 par bonds and discount bonds and Flurbs. That sort of collateral is going to be expensive now,
42:12 right? Because interest rates are so low. Rates were higher and prices were lower for those bonds
42:17 back in the '80s when we were using those. And also comment on what Carmen said about state
42:22 contingent debt structures. Obviously, there are good and less good state contingent
42:30 specifications. So the idea there, 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 a larger context of debt. Just to point out that
42:47 ourselves at S&P and a lot of other people in the market are doing a lot of work toward ESG
42:53 scoring. We have a legacy business, as everyone knows, for providing credit ratings. But the newer
43:00 business, which is getting an enormous push, is to put some sort of ESG score on entities as
43:07 well. The market is trying to converge toward some sort of common framework aligned with the public
43:13 sector as well. We're obviously not there yet. But I'm wondering just maybe for the panel as
43:17 a whole, does that figure into the debt framework here? I've got my economist hat on. I'm not going
43:25 to pretend to be a rating analyst. If we've got some sort of collateralization loosely defined
43:31 and we know that some of the natural capital is located in some of the high debt countries,
43:37 does that figure into the mix going forward as we're talking about securitization or collateral
43:43 or other things? Or is that a separate issue that we can always keep off to the side?
43:47 I would love to hear views on that. [David Malpass]
43:49 Let's do that topic. So green bonds are important, and then the transparency of how they're evaluated
43:55 becomes very important in this meaning. What describes a green bond? There's different views
44:01 in the community of what qualifies as a green bond. Columbia recently did a bond that was,
44:08 I don't want to use the term collateralized, but Paul, I think we should say bonds that have
44:16 extra value, let's say, because of an ESG. [David Gruenwald]
44:20 Better terminology. Let's use that one. [David Malpass]
44:22 Because I want to reserve the term collateral. Lee did a good job for dividing this up into credit
44:30 enhanced debt that are from the creditor side, and then a locking up of assets or future sales as the
44:37 use of the term collateral. But what Columbia did was said it would protect, it's like collateral,
44:43 but let's call it extra value. They issued a bond that was attached to protecting some
44:53 huge amounts of land in Columbia. One of the challenges for the world here is it was only
45:00 seven basis points improvement in the yield. So it was a 7% bond that came in at 6.93%. Seven basis
45:09 points is a small fraction of the total yield or coupon on the bond. So it wasn't much of a
45:20 premium. So let's talk about ESG. Joyce, comments? [Joyce Chang]
45:27 There were a couple of transactions that have come out. The Belize Blue Bond
45:31 is another one that recently came out. There are different criteria, but if you look at this B3W,
45:38 the Build Back Better World, they are talking about the development finance corporation actually
45:44 being able to take a first loss and being able to use more credit enhancement. So that discussion is
45:50 happening at that level. But the Belize Blue Bond is another level. If you just take a look at the
45:56 green bonds this year, there's a tremendous amount of investor demand. Year to date,
46:01 there's been $360 billion of issuance of green bonds. For all of last year, it was $300 billion.
46:07 So I think there really is room for innovation here, just given what the investor demand is,
46:12 some of the requirements also to demonstrate that you're in these instruments, and looking at
46:17 creative ways in which this could be structured. [David Malpass]
46:22 How do you do transparency? I saw the article in the front page, big one,
46:26 in the Washington Post yesterday saying the data is all... Well, I forget the headline,
46:33 but it was that there are huge problems in the data collection. The World Bank Climate Change
46:39 Action Plan that we did in April, a central point of that is the need for diagnostics as far as what
46:45 the actual 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] No. The transparency,
47:09 that's why I really do applaud the World Bank's debt transparency report, and also just all the
47:14 work that Carmen has done for just decades about this topic. And also trying to look at something
47:18 really complicated, like China's debt transparency and how we look at the hidden debt. It is really
47:25 difficult. A lot of the ESG issues that we work on are just very hard to quantify, period.
47:33 Whether we're talking about the issues related to debt, or we're even trying to 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 identifies the
47:53 biggest risk you have with the ESG is that it's been very hard to standardize anything
47:57 and put this into a standardized contract. [David Malpass]
48:01 We may want to save this topic for another panel. I want to gradually bring us to
48:08 the Common Framework and the actual challenge at hand, this huge amount of debt on the developing
48:14 countries and especially the poorer countries, and how do we restructure it. Carmen, thoughts
48:19 at large or questions, either one? [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 is
48:48 not going to bring about automatically creditor agreement. That's pie in the sky. But for creditor
48:58 committees to actually come in with more a cohesive view of what the actual liabilities are,
49:08 what the contracts look like, is at a minimum. And here, I will defer to Lee, who is infinitely the
49:18 authority on this. But I think as a minimum starting point, starting the discussions
49:26 from a common ground on who is owed what and what the terms are is a minimum minimorum core.
49:34 But let me say that on the Common Framework, I think it's a necessary first step. It's necessary
49:44 in two ways. One is, it is a recognition that the problem for many low income countries, and indeed
49:54 for not an unsubstantial number of middle income countries, has to do less with liquidity,
50:02 but more also with solvency. 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, what I think the Common Framework has done
50:25 is basically transfer 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. Perhaps I'm
50:50 being overly pessimistic, but let me say that I recently did a study called Sovereign Bonds Since
50:58 Waterloo. 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
51:24 has historically taken a long time. Things like the Brady Plan that Joyce 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] Great. I'll come to Lee for an answer to that,
51:53 but I want to pick up on one thing you said. The inconsistency, or I think there's a third problem,
52:00 it's that the creditors want to be paid in full, the debtors would like a haircut. But the people
52:07 of the developing country need the advancement, and so I want to make it more of a triangle.
52:14 There's the interest of the governments of the borrowing country, the entrance of the creditors,
52:21 and then it's a little bit separate, the people of the country. Because if I'm the government
52:26 of a poorer country, I'm happy to sign away the rights to oil or to cobalt or other things for
52:32 20 years because I won't be around for 20 years. I just want things to go well over the next four
52:38 years. And if someone comes in and says they'll build roads and they'll pay people a stipend
52:45 for the four years, then I'm willing to sign away a lot of future value in order to get that. So I
52:51 really think we have to take into account the different interests of the people of the poorer
52:58 countries as their governments sign contracts. That's really the core of why we need full
53:04 transparency. Unless you know what's in the contract, no one is in a position to actually
53:10 evaluate the people's interest of the country. I want to come to Joyce. Joyce raised, at one
53:19 point, the need for the private creditors to see the information from the official analysis that's
53:29 done. This is a practical issue in Chad, for example, because Chad asked for Common Framework
53:37 treatment. The Common Framework is something offered by the G20. They wrote it down. It's in
53:46 the communiqué. It says that private sector creditors should, and I guess are urged,
53:55 to participate in the debt reduction for Chad on the IMF and World Bank view that Chad is
54:02 has an unsustainable amount of debt. It was taken on by previous governments and it's very large. So
54:09 the idea is how do you provide debt relief on a comparable treatment basis?
54:14 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.
54:27 And then some of the things we're pushing for in the Common Framework are one, that it operates
54:33 faster, which goes to Carmen's point. There needs to be some kind of speed to it. Two, that
54:38 there'd be comparable treatment among the various creditors. Three, that we consider a standstill
54:44 on payments to creditors in order to expedite or to facilitate the process of restructuring or of
54:51 debt relief within the country. And four, that there be clarity on, it's called the
54:59 urging to the private sector to participate and to China's various entities to participate. So Lee,
55:05 can you unpack all of this for us? [Lee Buchheit]
55:10 A little bit of it, David. Look, the Common Framework, to the extent that
55:16 it brings into the tent traditionally non-Paris Club creditor countries like
55:22 China and India and Saudi Arabia, I think is an altogether commendable thing. In the past,
55:28 a sovereign debtor had to negotiate with the Paris Club, with non-Paris Club bilaterals,
55:35 and with commercial creditors separately. This is an effort to streamline that.
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 bilateral
55:59 creditor committees for any of these countries come out with debt restructuring terms. Now that,
56:05 to my mind, is absolutely inexplicable. It isn't that hard. Now, you might say,
56:12 well, we've had this extraordinary boom in commodity prices. And so
56:19 in oil in the case of Chad, copper and the case of Zambia, that some might say have rendered the debt
56:26 sustainability analysis that were prepared earlier this year by the IMF obsolete. Okay, okay. 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, but
57:15 the disappointment with the common framework, I think,
57:19 is principally the fact that it has not produced, yet, a single debt restructuring.
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, the fact that it's not
57:49 produced anything really is a disappointment. On your point, David, what you have proposed,
57:58 a debt suspension during the common framework negotiations, I think is a very good idea. What
58:04 it effectively does is extend the DSSI for those countries that ask for a common framework debt
58:14 restructuring 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.
58:41 It also motivates the creditors because they will not be receiving debt service payments during the
58:48 negotiation period and therefore they will want to get on with the negotiation, so that is all good.
58:55 One final comment, but you've said it a couple of times, David, you used 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
59:19 and so it is not clear to me whether these bilateral creditor committees will be proposing
59:25 principle haircuts as part of these debt restructurings or whether it will simply
59:31 be a maturity extension, maybe some interest rate relief, but I fear it will be the latter
59:38 and for many countries, as Carmen says, it is not a liquidity issue, it will be a solvency issue.
59:46 [David Malpass] Yeah, there's a real world consequence to
59:50 this, that people should be aware of, that in the midst of the pandemic, even the poorest countries
59:55 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.
01:00:10 World Bank works very closely with the IMF. We've discussed this jointly with the G7 and with the
01:00:16 G20 and I explained to the G20 leaders just over the last two weeks, that the process is fully
01:00:23 stalled and we've made suggestions on ways that it could be reignited or made more effective.
01:00:31 President Biden was in both Glasgow and Rome and so meetings there in the us has been strongly
01:00:38 supporting the idea of transparency, so I really welcome that. I think that's a critical part of
01:00:44 this in order to move it along because then you can take into account the fuller value of the debt
01:00:51 and you're working with better information. As a by the way for people, for Chad, it took almost a
01:00:58 year to reconcile the amounts of debt. Meaning normally in a bankruptcy committee process for
01:01:04 private sector creditors, they share information and can quickly figure out who has owed money in
01:01:09 which kinds of forms, but for Chad, a very poor country, going through difficult circumstances.
01:01:19 It took the creditors a year to figure out how much they thought each were owed. As Joyce maybe
01:01:27 indicating, 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.
01:01:41 My endpoint on this is, the real world consequence is, just speaking of the low income countries,
01:01:50 $860 billion of debt in the midst of the pandemic, almost all of which or the vast majority of which,
01:01:59 is getting serviced regularly by the poorer country. The World Bank puts in huge amounts
01:02:04 of grants and zero interest rate loans to the countries and the money turns around
01:02:10 and goes to creditors in a lot of cases. We're facing that and we're just strongly
01:02:15 encouraging the world towards some kind of process to break the spiral that's occurring.
01:02:25 Any other comments and then I'm going to read questions from the audience.
01:02:31 Does anyone have want to intervene right now?
01:02:40 Okay then, I'm going to ask a question. Let's talk about the debt itself, the amount. 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 that and is that process working pretty well? I bet S&P,
01:03:11 maybe Paul will comment on that, but who publishes data and who arbitrates that publication? I know
01:03:17 you're famous in this field, Carmen. [Carmen Reinhart]
01:03:22 David, historically on external debt, the World Bank, in the debt reporting system, has had
01:03:36 the longest, most established history and I don't say that because this is a World Bank conference.
01:03:43 This has been the norm for decades. However, I think a big challenge on… There are also series
01:03:59 that the governments themselves publish, there are also alternative series, that academic studies and
01:04:08 other agencies publish. I'm going to speak to that in a minute because I think it's very relevant to
01:04:17 the transparency to discussion we've been having, but one of the elements of the more
01:04:30 recent challenge, is that as borrowing becomes more complex, more borrowing of governments is
01:04:39 state owned enterprises, more borrowing of governments are special purpose vehicles.
01:04:48 Also more borrowing of governments is domestic debt. It's really important for governments to
01:04:54 have consolidated public sector accounts. In a recent survey we did at the Bank,
01:05:02 it shows that 54% of the respondents do not have consolidated fiscal accounts and so
01:05:13 what I'm saying is, getting an overall public sector indebtedness picture that also includes
01:05:21 new types of debts, 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 increasing important, but at the same time, many, many governments don't provide it.
01:05:46 In answer to this question, I would say that we are at a critical juncture and
01:05:52 very much this is also in the spirit of the report, which gives a list of recommendations
01:05:59 of what to do to improve transparency. I think the multilaterals also have to go
01:06:07 beyond, 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 disclosure requirements that they do not disclose the debt to go to other sources,
01:06:30 sources from the market sources from academia. I think a big push forward on the getting better
01:06:39 debt data than the one say, historically, there is the World Bank, BIS, IMF, data hub, going beyond
01:06:51 that to draw on other sources, is going to be increasingly important because of all these other
01:06:58 types of borrowing that are comparatively newer. [David Gruenwald]
01:07:03 Yeah, David, let me second that. 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 but I think we would definitely support any effort to increase debt transparency
01:07:37 and let the sovereign teams do their job. The world's moving quickly, not just with
01:07:43 some of the contingent liabilities and off balance sheet stuff that Carmen talked about. We've got
01:07:48 these global digital actors now and we're going to be increasingly in a world where we've got a
01:07:52 lot of digital debt with smart contracts and a lot of things that are going to be customized and not
01:07:59 homogeneous and tough to aggregate and tough to do under surveillance regimes. I think staying ahead
01:08:07 of that game's going to be increasingly difficult, but again, we're using the same tool kit as the
01:08:13 IFI's 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 five minutes
01:08:21 left. I wonder if we can focus on... The question is on collective action clauses. Did they work?
01:08:28 Are they working and are there ways to extend them and are there other ways to improve the system?
01:08:36 This is kind of a forward leaning question. I want to ask, I guess, Lee and Joyce on that. Well,
01:08:42 Joyce first. Did collective action clauses work and are there ways that those could extend into
01:08:50 other kinds of contracts? [Joyce Chang]
01:08:53 I think the collective action clauses were a real success and we can talk more about this. I would
01:08:59 just say, the fix for 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 but I also just wanted to add the point on the debt transparency. The world that the official
01:09:24 creditors really have just been stalwart at, has been a lot of the technical assistance,
01:09:30 whether it's from the IMF or the World Bank. I think on this whole issue of
01:09:34 debt transparency and consolidation of debt, accounts and reporting of it,
01:09:39 it seems to me like we've had these discussions, well, what exactly can the official creditors do?
01:09:43 There's a line on how you can use guarantees and all of that is understandable. To me the
01:09:48 technical assistance piece of it has always been critical to the private sector in the
01:09:54 debt restructuring, whether it was the lowest income countries or whether it was the Eurozone,
01:10:02 in the IMF examples with Greece. I think that the technical assistance,
01:10:07 I wouldn't downplay just the credibility that the official creditors have and the way that
01:10:12 they can access this and put all of the brain power to is something that is really unique
01:10:19 and valuable and I think can really help in these discussions, in making sure that people are using
01:10:25 this uncommon information that's transparent. I would just say collective action clause is a
01:10:30 success, but simplifying consistency in the bond contracts. Standardization, I think, is key.
01:10:41 [David Malpass] There has been mention today the
01:10:45 Greece issue and the central bank swaps. DRS is trying to comprehend the effective options and
01:10:55 the central bank swaps have been included in the World Bank's DRS as a form of debt.
01:11:04 Our reports now use the concept of debt-like instruments in order to get broader view. Lee,
01:11:11 any final thoughts on either, on the simplification of the bond contracts,
01:11:17 as Joyce mentioned or on collective action clauses or on what governments could do to make
01:11:23 this process work better? Maybe the UK government or the US government. Any thoughts in that area?
01:11:30 [Lee Buchheit] I'm entirely with Joyce. Collective action clauses
01:11:36 have been 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,
01:12:01 but only up to a point. The collective action clauses are only in bond contracts. You don't
01:12:09 even find them in syndicated loan agreements. They are not a panacea,
01:12:15 as we saw in Greece in 2012. Greece had 35 English law bonds, each with a collective action clause.
01:12:24 Only 17 of those series of bonds joined the restructuring. They are not a panacea
01:12:30 and the market has adapted to them so that determined holdout creditors can
01:12:36 get blocking positions in the bonds and thereby stymie the use of a collective action clause.
01:12:44 The question is, do we do anything more? There are those who are arguing, David, as you have just
01:12:53 alluded to, 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 markets 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 that was great.
01:13:57 We have the hook too 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
01:14:14 a joint interest between creditors, between the governments of the debtor countries and
01:14:19 between the people of the debtor countries in getting new investment, everyone has, in a way,
01:14:25 worked together on this to make it better going forward, so that's the point of our transparency
01:14:30 report. It's called Debt Transparency and it's on the World Bank web site. I want to greatly thank
01:14:38 Carmen Reinhart, my colleague at the World Bank and chief economist here, Lee Buchheit, Joyce
01:14:43 Chang and Paul Gruenwald for the great panel. Thank you everybody. I'll say goodbye. Thanks all.
01:14:52 [Lee Buchheit] Thanks everyone.

Debt Transparency in Developing Economies

Follow the event on Twitter #Debt4Dev

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 practice
00:22 group for The World Bank. Well, we have a real treat for you today. Our president, David Malpass,
00:27 will lead a discussion with a star-studded panel. And it's fitting that David leads
00:32 this discussion because he's been a tireless and vocal leader on this issue of debt transparency
00:40 since he became president two and a half years ago. It's fitting also that we'll have
00:44 four top notch experts on the panel, and that 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 is excellent because I cannot take any credit for it.
01:10 The credit should go to David for championing the calls and to Marcello Estevão, Dorcha Domelin,
01:16 Diego de Verti, and the team in the macroeconomics global practice for actually producing the report.
01:22 And we released the report yesterday and you can easily find it if you just Google, "Debt
01:27 Transparency in Developing Economies." So what I want to do now is to give you a three-minute
01:32 summary of the report, both as an ice breaker and as an appetizer, because we are hoping that
01:37 you will read that report. And like I said, it's excellent, and it's excellent for three reasons.
01:42 So first it is excellent because it has some startling statistics that'll
01:46 make you sit up and pay attention. So I'm going to cite just a few.
01:50 The first one is that 40% of low income countries have not published any sovereign debt data during
01:56 the last two years. 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. And this can often
02:17 lead really quickly to debt distress when some of this information actually comes in view.
02:26 So for example, in 2016, when loans totaling more than a billion dollars was suddenly revealed in
02:34 Mozambique, that was nearly 10% of the country's GDP, it plunged the country into debt distress.
02:43 So we have about 12 countries that are now in debt distress, and about 44 countries that are
02:49 at high risk of it. We don't know how many of these would actually be in distress if all
02:54 of their debts were revealed, right? Now, poor countries have huge financing needs,
02:59 and these will be met mostly through debt. So by one measure, these financing needs total nearly
03:04 half a trillion dollars between 2023 and 2025. Without debt transparency, such big sums mean
03:13 big dangers, so that's the first reason. The second reason the report is excellent because
03:18 it outlines a very practical way to think about debt transparency. It says that debt transparency
03:24 has three aspects. The first one is transparency in operations. Second is transparency in legal
03:30 management. And the third one is transparency in reporting, especially the third one is very
03:34 important. And there are three parties that can make debt transparent or keep it obscure.
03:40 The first one, of course, are borrow governments and state own firms, both at the center
03:44 and subnational levels. The second has to be the folks who actually give this debt. These are the
03:51 creditors, both public and private. And then the third one are international financial institutions
03:57 like The World Bank and the IMF. Now finally, the report is excellent because,
04:04 for the first time, it proposes the high and medium and low priority measures that borrowers,
04:10 governments, and IFIs 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 IFI.
04:25 So to increase transparency in debt reporting, governments should publish core public and
04:31 publicly guaranteed debt statistics regularly. They should also limit and
04:36 define the scope of confidentiality clauses. 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 By the same token, what IFIs can do is to consolidate that debt databases and support
05:20 the implementation of integrated debt recording and management systems. It's a big agenda,
05:27 and I've talked for a long time. But because it's a big agenda, I'm going to hand the mic over to
05:32 the big guys. So over to you, David. [David Malpass]
05:35 Thanks very much, Indermit. Good summary, and it's an important report. We've got a panel,
05:41 a great panel. Carmen Reinhart, chief economist to The World Bank group, my colleague. Also,
05:46 Lee Buchheit, who is one of the world's most experienced sovereign debt restructuring experts.
05:52 Joyce Chang, global chair of research at JP Morgan. And Paul Gruenwald, chief economist at S&P
05:59 Global Ratings. Just as a start in, I want to make the point that the world actually
06:05 is very challenging. I'm just back from the G20 Leaders' Summit in Rome. And I made the point,
06:11 as others did, that we faced not only the pandemic, but also rising inflation in a lot
06:18 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 debt standpoint in developing countries. That's the focus of our conversation today.
06:35 The World Bank is deeply engaged in the issues of debt in developing countries
06:41 with the purpose being to try to have more growth rates in developing countries, faster growth
06:48 and better connection between investments and the debt that goes along with those investments. This
06:55 is made more challenging by the size of the debt. We did a report a month or so ago that showed $860
07:03 billion of debt in the low income countries. So even the poorest countries in the world have $860
07:10 billion of debt, external debt, not counting their bank debt that the governments take out
07:16 inside their own countries. This is giant. And the report that just came out yesterday shows this,
07:22 as Indermit was describing, 30% hidden debt, if we want to call it that. Or debt that's not really
07:28 fully recorded in the various statistics that are kept track of. This is at a time when the world,
07:34 many of the countries, and Joyce was telling our group just before
07:38 we came on here, that there are rate hikes in quite a few of the developing countries already.
07:43 So this puts added strain on the economic outlook, but it also means that countries are able to begin
07:51 adjusting to the new inflation environment that's out there. So I hope what we can do
07:58 to today is focus on debt transparency, whether it's important, what the aspects of that are, and
08:07 how the debt challenge can work its way through the system over the next five years. We're all
08:13 trying to avoid a lost decade from the standpoint of debt. So with that, let me
08:20 go first to a question to Joyce. As I mentioned, Joyce is Global Chair of Research at JP Morgan,
08:28 and a friend for a long time, and engaged daily in markets. So how do you think about transparency?
08:37 Is it important as you analyze the prospects for a country? And this idea that there might be 30%
08:44 more debt than is actually being recorded? How does that affect your thinking about various
08:49 markets? Thanks for joining, Joyce. [Joyce Chang]
08:52 No. Thank you, David, for having me. And it's great to be with just so many experts who've
08:56 looked at this topic. I mean, the transparency is really important to the private sector. And
09:01 I think one of the issues when the common framework was rolled out was that there was
09:06 a sense that there was a lot of stalling and no information sharing. And that made the whole
09:11 discussion about voluntary mechanisms, I think, very hard for the private sector to understand.
09:17 So look, 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
09:30 debt? The bilateral creditor debt, the private sector debt, the contingent liabilities,
09:36 where is there an implicit government guarantee as opposed to an explicit government guarantee?
09:42 And then, with every sovereign crisis, it usually emanates from the banking system,
09:47 so an understanding of that. There's also a whole focus on quasi sovereign debt, which is sometimes
09:55 corporate debt. But there's an implicit government guarantee. And we've seen these numbers really
10:00 balloon. We've had record debt issuance from the sovereign and on the emerging markets, corporate
10:08 quasi sovereign side, during this pandemic because of the low interest rates. I mean, last
10:13 year you had 230 billion of EM sovereign and debt issuance, more than 500 billion of EM corporate
10:19 debt issuance with a good component of that that's quasi sovereign. So I think, for a country to be
10:25 investible, you need the transparency and you need to have the ways in which you can actually
10:30 understand the different categories of debt and what the government could be obligated to
10:36 really implicitly back at a time of crisis. [David Malpass]
10:40 Thanks. And I hope we can have a round table kind of this panel. Let me turn to Lee, or
10:47 I'll preface. Some of the terms that I hope people will use are collateralized debt. So that means,
10:53 if savers of the world lend to a government or even to a, I guess, quasi sovereign debt and a
11:04 state owned enterprise, and requires that there be collateral set aside in the form of actual
11:10 products, it's hard to know the relative price of the various items. And it's also very hard to
11:18 then restructure the debt if the country runs into sustainability problems. And that is exacerbated
11:29 by nondisclosure clauses if people can't see inside the contract. So, Lee, will you give us a
11:36 briefing on these? And maybe ask a question to Joyce, if you want to. However we want to work
11:42 it as a panel. Thanks, Lee. [Lee Buchheit]
11:44 Yes. Thank you, David. And wonderful to be with you folks. One of the extraordinary statistics
11:51 in this report was that 10% of Sub-Saharan African debt incurred recently has been of
11:59 the type you described, 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.
12:15 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
12:40 as debt. And yet it has the practical effect of that.
12:45 Traditional repos are economically the equivalent of secured borrowing. It has several implications
12:56 to the extent that the country has allocated a significant portion of its future revenue
13:06 toward the repayment of one creditor. It follows that that revenue is not
13:12 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, at the very least, in mispricing of the debt.
13:38 It also renders the restructuring of that debt stock particularly difficult because the
13:48 secured lender, or the buyer, the future buyer of the commodities, may well argue.
13:56 They have a security interest governed by the laws of England or New York. And they can always go and
14:04 foreclose on that. And therefore, they must be exempted. So this problem, to the extent that
14:12 it is growing in significance, and it appears to be growing in significance, represents, I think,
14:20 a serious risk to the system. [David Malpass]
14:24 Thanks. Yeah. So debt for the low income countries is up 12%, even though
14:31 there were two major initiatives by the G20 to try to provide debt relief, the DSSI
14:37 and the common framework. So DSSI is debt service suspension initiative that was invoked in 2020,
14:48 but didn't have as broad a coverage as had been sought. And now the common framework, which
14:53 is being applied now to Chad, Ethiopia, and Zambia, we'll come back to those in a minute,
14:58 but I want to pick up on the point that Lee just made and ask Paul,
15:05 S&P, I know you're chief economist, Paul. But S&P does ratings of countries and of bonds.
15:13 That's the way I think about it. And how does it do that if it's the case that,
15:20 as the report shows, that for some countries it might be 30% more debt than has actually been
15:25 disclosed? And even for those that disclose debt, which are not that many or, I mean, which are not
15:31 all the countries, there are nondisclosure clauses on some of that debt. So even of the
15:38 amounts of debt that are disclosed, sometimes the terms and the covenants are not disclosed. So how
15:44 do you handle that in S&P? [David Gruenwald]
15:46 Well, first, hi, David and everyone. Thanks for inviting me to the panel. Let me start
15:52 out by saying that S&P Global is 100% behind these initiatives to improve the transparency of debt,
16:00 but you're right. We have a sovereign team. The sovereign team currently has 137 sovereign
16:06 ratings outstanding. So we're missing kind of the lower end of the tail. So perhaps part of
16:10 this problem is not in the rated universe. But just as a reminder to everyone, the idea behind
16:18 a credit rating is not to predict a default. It's our opinion on the ability of the borrower
16:24 to repay their debts in full and on time. But you're absolutely right about some countries
16:31 not having a full set of data, that would be the ideal state. 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
16:48 and do a sovereign rating, they look at a number of factors. And if they see that they are
16:53 inconsistencies in the data, the errors and omissions. Large errors and omissions is one,
16:59 or maybe there are inconsistencies or historical patterns that don't always make sense.
17:05 These rating committees are allowed to make an adjustment to the ratings,
17:09 downward in this particular case. So there are a few channels through which they can do that.
17:14 There's a fiscal pillar, there's an institutional pillar, and there's also some discretion around
17:20 the final determination of the rating itself. It's not a totally mechanical process, but the
17:26 sovereign teams are aware of the issue. And this lack of transparency is embedded in the ratings.
17:34 And it tends to be correlated with the lower credits. The higher rated credits tend to have,
17:38 not surprisingly, a higher level of debt disclosure and a higher level of comfort that
17:45 we're getting a full story. And that deteriorates a bit as we go down the spectrum. But again,
17:51 all the initiatives in the report and the things that we're going to talk about today
17:55 that would enhance debt transparency, that will help us do 0ur job better. And that will help the
18:01 markets as well. So back to you, David. [David Malpass]
18:05 A core problem I'll mention, and then I'll come to Carmen. A core problem is, in a lot of debt
18:12 around the world, there's a bankruptcy process that is legislated within a country. And so 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 it, but
18:32 they assess the situation. Whereas in sovereign lending, there's not the equivalent. And so
18:41 one of the things that is complicating this, I think, is that sovereigns are fully... the people
18:48 of the country are fully committed to paying all of the debts that are incurred by the government
18:53 of that country forever with no process to restructure it or force a change. 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 a very
19:46 insightful discussion. And I want to follow up on something Paul said. The issue of hidden debts
19:58 is not new and, Paul, I would say it's certainly, as this wonderful report highlights, it's
20:06 primarily an issue for many of the emerging and lower income countries. But it's not
20:13 unique to them. I mean, certainly the Greece Goldman case a few years back on hidden debts
20:23 was a major surprise. And over the last decade or so, the issue of hidden debt has partially also
20:37 grown enormously because non-Paris Club creditors, the largest of these is China,
20:46 increased in importance. Now that's official lending, but nonetheless it is adding to the
20:52 debt servicing ... To the debt and debt servicing of a particular country.
21:00 And some of that debt has been restructured repeatedly. How does
21:08 S & P deal also with a higher incidence of these restructurings? And, as David mentioned, since
21:20 last year the DSSI, we learned that, for example, the sovereign debt... I mean the debt of the China
21:33 Development Bank is considered private debt, which would be in the domain of credit rating agencies,
21:38 so there would be a private creditor. So how would you say that ratings have adjusted to deal these
21:49 change landscape? [David Gruenwald]
21:51 Yeah, Carmen, I'm going to get out of my pay grade pretty quickly here because I run the economics
21:56 team and not the sovereign ratings team. But yeah, you're right, this is a challenge. I mean,
22:00 we've got a lot of debt that's quasi-public debt, it might be a non-government organization to a
22:06 non-government organization, or it might be a state enterprise to another state enterprise
22:11 across border. But it's something that our sovereign team has to deal with. As I said,
22:17 there are ways to adjust the rating up or down if we're not happy with the transparency
22:22 or the consistency of data or anything else. We do rate a large number of the bigger EMs,
22:28 not the tail, because we're missing about 60 or 70 countries globally. But that's something
22:34 that we try to put into our criteria and the sovereign team tries to keep up with that. I mean,
22:40 for the details I can maybe get back to you on that, but the sovereign teams are fully aware
22:45 that a lot of this debt is not directly on the sovereigns balance sheet and it may come from
22:51 quasi-sovereign or other creditors. But to the extent possible, that is incorporated into the
22:55 rating that we're publishing. [David Malpass]
22:59 Thanks, and so, I'll ask us to come back in a little bit to the Common Framework and to China,
23:06 the magnitude of the China debt. I want to ask Lee if he has reflections on what we've already
23:11 been talking about and also any suggestions or corrections to the way I described the sovereign
23:20 process. So one of the things we're dealing with is this fundamental gap in the global
23:26 system for how do you deal with a country that has unsustainable debt. There's not really any
23:33 process to do that so we're always ad hoc, one country at a time, and that's a very expensive
23:39 process. 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.
24:12 If those debt instruments aren't paid, the creditor can get a judgment against them.
24:17 That is true. But at that point, the leverage usually shifts back to the sovereign
24:24 because that judgment will convey an emotional satisfaction to the holder, but not a financial
24:31 satisfaction, unless the sovereign pays it voluntarily or the creditor can find an asset
24:40 outside of the debtor country that it can seize in order to pay itself. And typically, there
24:48 are few such assets in the name of the sovereign itself, the republic, not state owned enterprises,
24:57 outside of the jurisdiction of the sovereign. And we have seen this play out again and again,
25:03 David, perhaps most poignantly in the 15 years of litigation that followed the Argentine default in
25:10 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,
25:23 looking for assets in an effort to pay themselves. And that effort was, to a very large extent,
25:31 unavailing. So there is leverage on both sides. The creditors can get judgements and there's very
25:39 little that the sovereign can do to stop it. But once the judgment has been issued, satisfying that
25:47 judgment becomes a major problem for the creditor. And candidly, a recognition of this situation
25:58 is the chemistry, is the basis for consensual sovereign debt workouts.
26:06 Both sides are vulnerable in the process, and therefore in truth, neither side has a good option
26:13 other than to negotiate their way out of the problem. They cannot litigate their way out.
26:18 [David Malpass] Got it. Let's talk about that in the
26:20 context of the Common Framework in a minute. Let me turn to Joyce on that point that Lee is making,
26:31 that there's 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 internal debt,
26:41 but what about Argentina that is working its way through a recent crisis. How do you think of
26:54 sovereign debt as far as the safety of it? Thanks. [Joyce Chang]
26:57 No, no, thanks very much, David. And just a couple comments on what Lee had to say and also on
27:02 the collateralized debt as well. So look, I often will hear, we're very disappointed
27:09 in the private sector, we want the private sector to do more, and these are empty statements. Look,
27:15 I think 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 if you're going to expect comparability of treatment to work. They don't
27:30 necessarily have to be at the table because that makes a large political statement, but they have
27:35 to be given the information and asked about their views. And I think this was some of the
27:40 initial problem with the Common Framework, but I wanted to just say a few things on
27:47 the collateralized debt and also on the China Development Bank that Carmen had brought up.
27:54 Look, I think there is room for innovation. I mean, JP Morgan now allows credit enhanced bonds
27:59 to be included in the EM bond indexes. But Lee is absolutely right. When we conceived of credit
28:06 enhanced bonds, we really did think back to the days of the Brady bonds, where it was treasury
28:11 collateralized. I mean, the whole issue was, is there a way that you could actually use
28:16 official creditor resources and leverage that more? Because the official creditor resources
28:21 are still relatively small to EM sovereigns raising 230 billion dollars in the international
28:27 capital markets. Now that's completely different than forward sales of a commodity
28:32 as collateral. So something like that would not go into a JP Morgan index, but the question on
28:38 collateralized instruments was, is there a way that you could use official credits,
28:43 and even things like XM credits, we have a development financing group that's looked at that.
28:47 And could you require certain things, like ESG sustainability commitments,
28:52 in return for credit guarantees? That's more the way that I would conceive of the collateral, as I
28:57 totally agree with Lee, that some of these other mechanisms that they're looking at.
29:01 To me, they raise real questions on who bears the responsibility and the transparency and how
29:12 you actually can enforce some of this. And then, I hear oftentimes also from official creditors, a
29:19 lot of discussion on these contingent instruments. And I do think academics really love these because
29:26 it's theoretical economics, it makes sense, and there's this automatic factor in it. In practice,
29:31 I think that it's a lot harder to actually put that into place. So the official creditor
29:36 enhancements is something that stands out. Look, I think that Carmen brings up the elephant in the
29:41 room on the Common Framework. I mean, is this really all about China as the largest creditor
29:48 to many of the emerging markets countries? And this will debate on whether China Development
29:53 Bank is official or commercial. That's kind of a travesty, in a lot of ways, as a lender. And
30:00 I mean, the Common Framework was meant to overcome these issues, but in some ways the question has
30:06 been asked, does China really prefer bilateral negotiations when they are the largest creditor?
30:12 Was the lack of clarity, in some ways, meant to cajole China in this? We've just been going
30:20 through the numbers for China and what they call the private sector debt there is 232% of GDP now.
30:28 So is that private? Is it quasi-sovereign? Is it really government debt? So I think that China's
30:34 really the elephant in the room, given the role that they have assumed for so many of these low
30:39 income countries as the biggest ... As being really, a lot of this debt really is something
30:49 that China has a key role in. [David Malpass]
30:54 You gave us a lot to chew on there. Okay, so one background for people is, we've been talking
31:00 about official debt. This is the debts of various government entities around the world lending into
31:08 sovereign situations, or even private situations, in developing countries. Or that's the way I'll
31:16 use the term. And so that, historically, for I don't know, 40 years or 50 years, has been
31:22 rescheduled as a group by the Paris Club, which is a group of official creditors that used to be
31:29 the major creditors around the world. So in the Latin debt crisis, the US and Germany and France
31:36 and the UK and Japan were the major creditors for the Latin countries. And they could sit in a room
31:44 and figure out what to do to restructure the debt. Over time, China has become a much
31:51 bigger creditor than all of those others combined. World Bank did a report a year or a year and a
31:58 half ago that showed that 65% of the official credits were from China and all the rest
32:06 of the countries were the remaining 35%, of which Japan was one of the big ones at 15%,
32:14 if I recall. And so what that means is that the concept of the restructuring process has changed
32:21 dramatically over time as China's role became more important in that amount of debt. So that
32:30 was kind of background. So one of the challenges as the world looks for a process to allow debt
32:39 relief, reduction of debt for poorer countries or developing countries in general,
32:48 where the debt has become unsustainable. Meaning the creditors allowed too much
32:53 debt and the countries took on too much debt and circumstances changed and the country can't pay
33:00 it. There's not a process and so we're looking for that process. And the G20 put forward the
33:05 Common Framework that we've been talking about. So I wanted to ask Joyce, and then have others
33:11 maybe ask questions, but you mentioned the term credit enhanced bonds, which is great. And so,
33:16 as we talk about collateral, my understanding of the problem of collateral is it's very hard to
33:23 value within the structure. Meaning the country gives collateral, meaning either a right to an
33:29 asset, or as Lee framed it, this forward sale concept. It doesn't seem to cost the government
33:35 of a country much, but over the years and over the decades, sometimes these are 20 year commitments
33:41 by a government that is non-disclosed. So it's a secret commitment by a poor country,
33:47 the government of a poor country, that locks the people of the country into payments that
33:53 are going to last 20 years. So why would the world want credit enhanced bonds? Can I frame it that
34:00 way? And you make a defense and then maybe I'll bring Lee or Paul in on that. Go ahead, Joyce.
34:07 [Joyce Chang] That's why I'm trying to be clear that
34:09 on the credit enhanced bonds, I really looked at it more conceptually as whether there's a way to
34:15 leverage official creditor resources in that process, more so than making these forward
34:21 commitments for 20 years, 10 years, based on forward sales of commodities. Or even like some of
34:29 these GDP linked bonds where I feel like sometimes that is really brought up in academic circles.
34:34 I find that much harder to actually... Look, I feel like, David, you're in this environment
34:41 right now where you can sell practically anything. I mean, in a zero yield world right now, given
34:50 that you have a 1% return on fixed income bonds. So on some of these credit enhanced bonds, I think
34:57 there is a moment right now that you can get some of these done. How does the private sector look at
35:02 that? Or how would you look at it conceptually? I look at much more the Brady plan model
35:08 where you really did have a partnership more between the official creditor community that
35:12 provided the incentive for the private sector to get involved and more of the certainty.
35:17 So I think Lee very well points out what the problem is with the structure of some of these
35:22 bonds and the forward 20 years. And we see this with a lot of the GDP warrants, all of these
35:27 other mechanisms that were put into place. I mean, that's much harder to value going forward. It is
35:33 something that ... I feel like sometimes it is the economists who come up with these kinds of
35:40 structure because they like the theoretical economics. It makes sense. It injects an automatic
35:47 element into it so there isn't as much discretion, but I think that the official creditor subsidy is
35:55 actually something, to me, that makes the most sense. And then a way that you can leverage the
36:00 official creditor resources. [David Malpass]
36:02 Got it. Now one small point, and then I'm going to go Lee and then Paul then Carmen. One small point
36:08 on that, Joyce, is people look to the World Bank to provide that creditor Subsidy. And the problem
36:15 is, we can't price it or value it. So people are looking for first loss guarantees from the World
36:20 Bank. The problem is, World Bank is decidedly going to be less good at evaluating the value
36:27 of that credit enhancement than the private sector itself that's looking for the enhancement. So we
36:34 have not wanted to go in that direction in that it will end up in a mispricing of creditor. At least
36:42 that's 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 comment
36:50 on something that Joyce said. Joyce, I don't think it's just that economists are enamored
36:56 with state contingent contracts. The reason they write state contingent contracts is also to do
37:02 risk sharing between debtors and creditors, so that in bad states of nature, debtor countries
37:10 that are able to pay less can, under the contract, pay less. So I think, clearly your vision is
37:20 from the creditor side, which is perfectly understandable, but it is about risk sharing.
37:28 And a relevant example to COVID would be something along the force majeure, though I defer to Lee
37:35 on that score. [David Malpass]
37:37 We'll go to Lee and I'll make a principle statement. I, and the World Bank, are on the side
37:46 of the people in developing countries. Which is a different interest... Yeah, I mean, we're trying
37:51 to find a way to wed that interest with creditors. I mean, the wonderful thing in the world is that
37:57 there are savers who want to put money to work. And Joyce named it. They're not asking for a very
38:02 high return. A risk return is favorable from the standpoint of borrowers right now because
38:10 the interest rates are so low. We're trying to put both sides together, but with a recognition,
38:21 or at least our observation right now is it's not working very well at all for the people in
38:27 the poorer countries. And so we're trying to look for ways, and jointly, to move that forward. Lee,
38:34 any thoughts? And then Paul. [Lee Buchheit]
38:37 Yes. I think Joyce has raised the issue of what the IFIs could do by way of credit enhancing
38:48 sovereign obligations. That is, in my mind, a very different subject from the one we talked about
38:56 earlier, where the sovereign or a state owned enterprise is pledging assets or revenue streams
39:04 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? You
39:19 remember what happened in the Brady transactions. There were no guarantees by the official sector.
39:28 What happened was the IMF and the World Bank lent money to the debtor countries, and that money was
39:34 used to buy zero coupon US Treasury obligations that matured in 30 years and were pledged to
39:43 secure the principle repayment on the Brady bonds. The World Bank has dipped its toe into this river
39:52 several times. For example, it issued a partial guarantee of a bond of Ghana, I think in 2012.
40:02 The question that we've always had is, what is the best structure for putting partial credit
40:12 enhancement of an IFI on a dead instrument so that we can predict how the market will value that? You
40:23 see, it ought to be possible to sit down and say, these are the terms the sovereign could borrow
40:31 unsecured or un-credit enhanced. These are the terms that it will get if it has
40:38 the credit enhancement. And if it turns out that it is appropriately valuable, then that
40:46 becomes a sensible thing for an IFI to do. One other comment. There is a 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. [David Malpass]
41:32 Without that, there's the problem or the challenge.
41:36 The World Bank and other IFIs have preferred creditor treatment, meaning the whole world has
41:42 agreed to the idea that these are senior or special creditors within the environment,
41:48 and so that makes it extra hard to do, and so that's how we score the partial
41:54 guarantees. Let me turn to Paul for comments on any and all of these topics.
41:59 [David Gruenwald] A couple of comments, David. First, while
42:01 Lee was talking about Brady bond restructurings and I was having a flashback to my IMF days with
42:07 par bonds and discount bonds and Flurbs. That sort of collateral is going to be expensive now,
42:12 right? Because interest rates are so low. Rates were higher and prices were lower for those bonds
42:17 back in the '80s when we were using those. And also comment on what Carmen said about state
42:22 contingent debt structures. Obviously, there are good and less good state contingent
42:30 specifications. So the idea there, 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 a larger context of debt. Just to point out that
42:47 ourselves at S&P and a lot of other people in the market are doing a lot of work toward ESG
42:53 scoring. We have a legacy business, as everyone knows, for providing credit ratings. But the newer
43:00 business, which is getting an enormous push, is to put some sort of ESG score on entities as
43:07 well. The market is trying to converge toward some sort of common framework aligned with the public
43:13 sector as well. We're obviously not there yet. But I'm wondering just maybe for the panel as
43:17 a whole, does that figure into the debt framework here? I've got my economist hat on. I'm not going
43:25 to pretend to be a rating analyst. If we've got some sort of collateralization loosely defined
43:31 and we know that some of the natural capital is located in some of the high debt countries,
43:37 does that figure into the mix going forward as we're talking about securitization or collateral
43:43 or other things? Or is that a separate issue that we can always keep off to the side?
43:47 I would love to hear views on that. [David Malpass]
43:49 Let's do that topic. So green bonds are important, and then the transparency of how they're evaluated
43:55 becomes very important in this meaning. What describes a green bond? There's different views
44:01 in the community of what qualifies as a green bond. Columbia recently did a bond that was,
44:08 I don't want to use the term collateralized, but Paul, I think we should say bonds that have
44:16 extra value, let's say, because of an ESG. [David Gruenwald]
44:20 Better terminology. Let's use that one. [David Malpass]
44:22 Because I want to reserve the term collateral. Lee did a good job for dividing this up into credit
44:30 enhanced debt that are from the creditor side, and then a locking up of assets or future sales as the
44:37 use of the term collateral. But what Columbia did was said it would protect, it's like collateral,
44:43 but let's call it extra value. They issued a bond that was attached to protecting some
44:53 huge amounts of land in Columbia. One of the challenges for the world here is it was only
45:00 seven basis points improvement in the yield. So it was a 7% bond that came in at 6.93%. Seven basis
45:09 points is a small fraction of the total yield or coupon on the bond. So it wasn't much of a
45:20 premium. So let's talk about ESG. Joyce, comments? [Joyce Chang]
45:27 There were a couple of transactions that have come out. The Belize Blue Bond
45:31 is another one that recently came out. There are different criteria, but if you look at this B3W,
45:38 the Build Back Better World, they are talking about the development finance corporation actually
45:44 being able to take a first loss and being able to use more credit enhancement. So that discussion is
45:50 happening at that level. But the Belize Blue Bond is another level. If you just take a look at the
45:56 green bonds this year, there's a tremendous amount of investor demand. Year to date,
46:01 there's been $360 billion of issuance of green bonds. For all of last year, it was $300 billion.
46:07 So I think there really is room for innovation here, just given what the investor demand is,
46:12 some of the requirements also to demonstrate that you're in these instruments, and looking at
46:17 creative ways in which this could be structured. [David Malpass]
46:22 How do you do transparency? I saw the article in the front page, big one,
46:26 in the Washington Post yesterday saying the data is all... Well, I forget the headline,
46:33 but it was that there are huge problems in the data collection. The World Bank Climate Change
46:39 Action Plan that we did in April, a central point of that is the need for diagnostics as far as what
46:45 the actual 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] No. The transparency,
47:09 that's why I really do applaud the World Bank's debt transparency report, and also just all the
47:14 work that Carmen has done for just decades about this topic. And also trying to look at something
47:18 really complicated, like China's debt transparency and how we look at the hidden debt. It is really
47:25 difficult. A lot of the ESG issues that we work on are just very hard to quantify, period.
47:33 Whether we're talking about the issues related to debt, or we're even trying to 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 identifies the
47:53 biggest risk you have with the ESG is that it's been very hard to standardize anything
47:57 and put this into a standardized contract. [David Malpass]
48:01 We may want to save this topic for another panel. I want to gradually bring us to
48:08 the Common Framework and the actual challenge at hand, this huge amount of debt on the developing
48:14 countries and especially the poorer countries, and how do we restructure it. Carmen, thoughts
48:19 at large or questions, either one? [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 is
48:48 not going to bring about automatically creditor agreement. That's pie in the sky. But for creditor
48:58 committees to actually come in with more a cohesive view of what the actual liabilities are,
49:08 what the contracts look like, is at a minimum. And here, I will defer to Lee, who is infinitely the
49:18 authority on this. But I think as a minimum starting point, starting the discussions
49:26 from a common ground on who is owed what and what the terms are is a minimum minimorum core.
49:34 But let me say that on the Common Framework, I think it's a necessary first step. It's necessary
49:44 in two ways. One is, it is a recognition that the problem for many low income countries, and indeed
49:54 for not an unsubstantial number of middle income countries, has to do less with liquidity,
50:02 but more also with solvency. 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, what I think the Common Framework has done
50:25 is basically transfer 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. Perhaps I'm
50:50 being overly pessimistic, but let me say that I recently did a study called Sovereign Bonds Since
50:58 Waterloo. 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
51:24 has historically taken a long time. Things like the Brady Plan that Joyce 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] Great. I'll come to Lee for an answer to that,
51:53 but I want to pick up on one thing you said. The inconsistency, or I think there's a third problem,
52:00 it's that the creditors want to be paid in full, the debtors would like a haircut. But the people
52:07 of the developing country need the advancement, and so I want to make it more of a triangle.
52:14 There's the interest of the governments of the borrowing country, the entrance of the creditors,
52:21 and then it's a little bit separate, the people of the country. Because if I'm the government
52:26 of a poorer country, I'm happy to sign away the rights to oil or to cobalt or other things for
52:32 20 years because I won't be around for 20 years. I just want things to go well over the next four
52:38 years. And if someone comes in and says they'll build roads and they'll pay people a stipend
52:45 for the four years, then I'm willing to sign away a lot of future value in order to get that. So I
52:51 really think we have to take into account the different interests of the people of the poorer
52:58 countries as their governments sign contracts. That's really the core of why we need full
53:04 transparency. Unless you know what's in the contract, no one is in a position to actually
53:10 evaluate the people's interest of the country. I want to come to Joyce. Joyce raised, at one
53:19 point, the need for the private creditors to see the information from the official analysis that's
53:29 done. This is a practical issue in Chad, for example, because Chad asked for Common Framework
53:37 treatment. The Common Framework is something offered by the G20. They wrote it down. It's in
53:46 the communiqué. It says that private sector creditors should, and I guess are urged,
53:55 to participate in the debt reduction for Chad on the IMF and World Bank view that Chad is
54:02 has an unsustainable amount of debt. It was taken on by previous governments and it's very large. So
54:09 the idea is how do you provide debt relief on a comparable treatment basis?
54:14 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.
54:27 And then some of the things we're pushing for in the Common Framework are one, that it operates
54:33 faster, which goes to Carmen's point. There needs to be some kind of speed to it. Two, that
54:38 there'd be comparable treatment among the various creditors. Three, that we consider a standstill
54:44 on payments to creditors in order to expedite or to facilitate the process of restructuring or of
54:51 debt relief within the country. And four, that there be clarity on, it's called the
54:59 urging to the private sector to participate and to China's various entities to participate. So Lee,
55:05 can you unpack all of this for us? [Lee Buchheit]
55:10 A little bit of it, David. Look, the Common Framework, to the extent that
55:16 it brings into the tent traditionally non-Paris Club creditor countries like
55:22 China and India and Saudi Arabia, I think is an altogether commendable thing. In the past,
55:28 a sovereign debtor had to negotiate with the Paris Club, with non-Paris Club bilaterals,
55:35 and with commercial creditors separately. This is an effort to streamline that.
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 bilateral
55:59 creditor committees for any of these countries come out with debt restructuring terms. Now that,
56:05 to my mind, is absolutely inexplicable. It isn't that hard. Now, you might say,
56:12 well, we've had this extraordinary boom in commodity prices. And so
56:19 in oil in the case of Chad, copper and the case of Zambia, that some might say have rendered the debt
56:26 sustainability analysis that were prepared earlier this year by the IMF obsolete. Okay, okay. 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, but
57:15 the disappointment with the common framework, I think,
57:19 is principally the fact that it has not produced, yet, a single debt restructuring.
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, the fact that it's not
57:49 produced anything really is a disappointment. On your point, David, what you have proposed,
57:58 a debt suspension during the common framework negotiations, I think is a very good idea. What
58:04 it effectively does is extend the DSSI for those countries that ask for a common framework debt
58:14 restructuring 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.
58:41 It also motivates the creditors because they will not be receiving debt service payments during the
58:48 negotiation period and therefore they will want to get on with the negotiation, so that is all good.
58:55 One final comment, but you've said it a couple of times, David, you used 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
59:19 and so it is not clear to me whether these bilateral creditor committees will be proposing
59:25 principle haircuts as part of these debt restructurings or whether it will simply
59:31 be a maturity extension, maybe some interest rate relief, but I fear it will be the latter
59:38 and for many countries, as Carmen says, it is not a liquidity issue, it will be a solvency issue.
59:46 [David Malpass] Yeah, there's a real world consequence to
59:50 this, that people should be aware of, that in the midst of the pandemic, even the poorest countries
59:55 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.
01:00:10 World Bank works very closely with the IMF. We've discussed this jointly with the G7 and with the
01:00:16 G20 and I explained to the G20 leaders just over the last two weeks, that the process is fully
01:00:23 stalled and we've made suggestions on ways that it could be reignited or made more effective.
01:00:31 President Biden was in both Glasgow and Rome and so meetings there in the us has been strongly
01:00:38 supporting the idea of transparency, so I really welcome that. I think that's a critical part of
01:00:44 this in order to move it along because then you can take into account the fuller value of the debt
01:00:51 and you're working with better information. As a by the way for people, for Chad, it took almost a
01:00:58 year to reconcile the amounts of debt. Meaning normally in a bankruptcy committee process for
01:01:04 private sector creditors, they share information and can quickly figure out who has owed money in
01:01:09 which kinds of forms, but for Chad, a very poor country, going through difficult circumstances.
01:01:19 It took the creditors a year to figure out how much they thought each were owed. As Joyce maybe
01:01:27 indicating, 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.
01:01:41 My endpoint on this is, the real world consequence is, just speaking of the low income countries,
01:01:50 $860 billion of debt in the midst of the pandemic, almost all of which or the vast majority of which,
01:01:59 is getting serviced regularly by the poorer country. The World Bank puts in huge amounts
01:02:04 of grants and zero interest rate loans to the countries and the money turns around
01:02:10 and goes to creditors in a lot of cases. We're facing that and we're just strongly
01:02:15 encouraging the world towards some kind of process to break the spiral that's occurring.
01:02:25 Any other comments and then I'm going to read questions from the audience.
01:02:31 Does anyone have want to intervene right now?
01:02:40 Okay then, I'm going to ask a question. Let's talk about the debt itself, the amount. 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 that and is that process working pretty well? I bet S&P,
01:03:11 maybe Paul will comment on that, but who publishes data and who arbitrates that publication? I know
01:03:17 you're famous in this field, Carmen. [Carmen Reinhart]
01:03:22 David, historically on external debt, the World Bank, in the debt reporting system, has had
01:03:36 the longest, most established history and I don't say that because this is a World Bank conference.
01:03:43 This has been the norm for decades. However, I think a big challenge on… There are also series
01:03:59 that the governments themselves publish, there are also alternative series, that academic studies and
01:04:08 other agencies publish. I'm going to speak to that in a minute because I think it's very relevant to
01:04:17 the transparency to discussion we've been having, but one of the elements of the more
01:04:30 recent challenge, is that as borrowing becomes more complex, more borrowing of governments is
01:04:39 state owned enterprises, more borrowing of governments are special purpose vehicles.
01:04:48 Also more borrowing of governments is domestic debt. It's really important for governments to
01:04:54 have consolidated public sector accounts. In a recent survey we did at the Bank,
01:05:02 it shows that 54% of the respondents do not have consolidated fiscal accounts and so
01:05:13 what I'm saying is, getting an overall public sector indebtedness picture that also includes
01:05:21 new types of debts, 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 increasing important, but at the same time, many, many governments don't provide it.
01:05:46 In answer to this question, I would say that we are at a critical juncture and
01:05:52 very much this is also in the spirit of the report, which gives a list of recommendations
01:05:59 of what to do to improve transparency. I think the multilaterals also have to go
01:06:07 beyond, 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 disclosure requirements that they do not disclose the debt to go to other sources,
01:06:30 sources from the market sources from academia. I think a big push forward on the getting better
01:06:39 debt data than the one say, historically, there is the World Bank, BIS, IMF, data hub, going beyond
01:06:51 that to draw on other sources, is going to be increasingly important because of all these other
01:06:58 types of borrowing that are comparatively newer. [David Gruenwald]
01:07:03 Yeah, David, let me second that. 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 but I think we would definitely support any effort to increase debt transparency
01:07:37 and let the sovereign teams do their job. The world's moving quickly, not just with
01:07:43 some of the contingent liabilities and off balance sheet stuff that Carmen talked about. We've got
01:07:48 these global digital actors now and we're going to be increasingly in a world where we've got a
01:07:52 lot of digital debt with smart contracts and a lot of things that are going to be customized and not
01:07:59 homogeneous and tough to aggregate and tough to do under surveillance regimes. I think staying ahead
01:08:07 of that game's going to be increasingly difficult, but again, we're using the same tool kit as the
01:08:13 IFI's 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 five minutes
01:08:21 left. I wonder if we can focus on... The question is on collective action clauses. Did they work?
01:08:28 Are they working and are there ways to extend them and are there other ways to improve the system?
01:08:36 This is kind of a forward leaning question. I want to ask, I guess, Lee and Joyce on that. Well,
01:08:42 Joyce first. Did collective action clauses work and are there ways that those could extend into
01:08:50 other kinds of contracts? [Joyce Chang]
01:08:53 I think the collective action clauses were a real success and we can talk more about this. I would
01:08:59 just say, the fix for 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 but I also just wanted to add the point on the debt transparency. The world that the official
01:09:24 creditors really have just been stalwart at, has been a lot of the technical assistance,
01:09:30 whether it's from the IMF or the World Bank. I think on this whole issue of
01:09:34 debt transparency and consolidation of debt, accounts and reporting of it,
01:09:39 it seems to me like we've had these discussions, well, what exactly can the official creditors do?
01:09:43 There's a line on how you can use guarantees and all of that is understandable. To me the
01:09:48 technical assistance piece of it has always been critical to the private sector in the
01:09:54 debt restructuring, whether it was the lowest income countries or whether it was the Eurozone,
01:10:02 in the IMF examples with Greece. I think that the technical assistance,
01:10:07 I wouldn't downplay just the credibility that the official creditors have and the way that
01:10:12 they can access this and put all of the brain power to is something that is really unique
01:10:19 and valuable and I think can really help in these discussions, in making sure that people are using
01:10:25 this uncommon information that's transparent. I would just say collective action clause is a
01:10:30 success, but simplifying consistency in the bond contracts. Standardization, I think, is key.
01:10:41 [David Malpass] There has been mention today the
01:10:45 Greece issue and the central bank swaps. DRS is trying to comprehend the effective options and
01:10:55 the central bank swaps have been included in the World Bank's DRS as a form of debt.
01:11:04 Our reports now use the concept of debt-like instruments in order to get broader view. Lee,
01:11:11 any final thoughts on either, on the simplification of the bond contracts,
01:11:17 as Joyce mentioned or on collective action clauses or on what governments could do to make
01:11:23 this process work better? Maybe the UK government or the US government. Any thoughts in that area?
01:11:30 [Lee Buchheit] I'm entirely with Joyce. Collective action clauses
01:11:36 have been 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,
01:12:01 but only up to a point. The collective action clauses are only in bond contracts. You don't
01:12:09 even find them in syndicated loan agreements. They are not a panacea,
01:12:15 as we saw in Greece in 2012. Greece had 35 English law bonds, each with a collective action clause.
01:12:24 Only 17 of those series of bonds joined the restructuring. They are not a panacea
01:12:30 and the market has adapted to them so that determined holdout creditors can
01:12:36 get blocking positions in the bonds and thereby stymie the use of a collective action clause.
01:12:44 The question is, do we do anything more? There are those who are arguing, David, as you have just
01:12:53 alluded to, 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 markets 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 that was great.
01:13:57 We have the hook too 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
01:14:14 a joint interest between creditors, between the governments of the debtor countries and
01:14:19 between the people of the debtor countries in getting new investment, everyone has, in a way,
01:14:25 worked together on this to make it better going forward, so that's the point of our transparency
01:14:30 report. It's called Debt Transparency and it's on the World Bank web site. I want to greatly thank
01:14:38 Carmen Reinhart, my colleague at the World Bank and chief economist here, Lee Buchheit, Joyce
01:14:43 Chang and Paul Gruenwald for the great panel. Thank you everybody. I'll say goodbye. Thanks all.
01:14:52 [Lee Buchheit] Thanks everyone.

Meet our Expert Bloggers

Diego Rivetti

Senior Debt Specialist, Macroeconomics Trade and Investment, World Bank
@RivettiDiego
Lilia Razlog

Senior Debt Specialist, Macroeconomics, Trade & Investment, World Bank

Read the chat below

Speakers

David R. Malpass

Former President, World Bank Group
@DavidMalpassWBG
Carmen M. Reinhart

Former Senior Vice President and World Bank Group Chief Economist, Development Economics
@carmenmreinhart
Lee C. Buchheit

Honorary Professor, University of Edinburgh Law School
Joyce Chang

Global Chair of Research, J.P. Morgan
Paul Gruenwald

Global Chief Economist, S&P Global Ratings
Indermit Gill

Chief Economist of the World Bank Group and Senior Vice President for Development Economics
@IndermitGill

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Rethinking Debt: Financing the Future Amid Crisis

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April 07, 2021

Rethinking Debt: Financing the Future Amid Crisis

Corporate Debt in Developing Countries

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March 19, 2021

Corporate Debt in Developing Countries

Dealing with Debt

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July 16, 2020

Dealing with Debt

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