Debt Sustainability & The Belt & Road Initiative: Determining a U.S. Response

(US$34.5 billion) by October 2020 (US$42.5 billion).80 However, nations such as Ecuador and Suriname could be eligible under the proposed plan due to their loss of market access as a result of prior defaults and commercial debt restructuring.

In the revamped plan, the SPV could be utilized to convert non-performing commercial loans into bonds underwritten by a triple-A rated multilateral institution or official bilateral partner such as the IMF.81 Similar to the original Brady Plan, commercial lenders would take a haircut on the net present value of outstanding debt, but to encourage involvement, bonds could offer longer maturities and lower coupons to reduce potential collective action concerns with holdout creditors. One such proposal, “Bendy Bonds,” would apply principles from current corporate-debt markets to the sovereign debt market. In a crisis, these bonds would offer maturity extensions and interest deferral in the short to medium-term for additional interest payments at the conclusion of the bonds’ payment period.82 It would be important to cap additional interest payments to avoid increasing debt burdens in the long-term.

Given its excellent credit rating, the U.S. could collateralize some of the debt with long-maturity U.S. Treasury zero-coupon bonds. Countries facing bond spreads that exceed U.S. Treasury securities by over 1,000 basis points, including Angola and El Salvador, should be prioritized for debt forgiveness.83 2. Restructure Debt Sustainability Criteria to Include Broader Development Objectives.

The World Bank and IMF’s criteria for debt sustainability focus on a country’s ability to service its debt repayments while maintaining macroeconomic stability. However, broadening the scope of debt sustainability to include development objectives could bolster macroeconomic resilience for Low and Middle Income Countries (LMIC) to respond to external shocks as well as improve public debt management systems.

Previous multilateral debt relief programs in Africa started with the Fifth Dimension of the Strategic Partnership with Africa in September 1987. Led by the Group of Seven (G7) and the Paris Club, similar programs continued throughout the 1990s, culminating in the launch of the Heavily Indebted Poor Countries (HIPC) Initiative in September 1996.84 To supplement HIPC, the Multilateral Debt Relief Initiative (MDRI) was developed to reorient the HIPC Initiative towards the Millennium Development Goals by offering full relief on multilateral debt.

Additionally, MDRI aimed to allocate funds to debtor countries according to performance on key policy indicators. Aiming to ensure that reform programs were not derailed by high public debt burdens, the HIPC Initiative offered conditional relief on multilateral debt to 41 countries eligible for International Development Association lending. According to the IMF, these initiatives provided US$76 billion in debt service relief and enabled HIPC countries to increase social spending, reduce their debt service, and improve public debt management.85 The architects of both the MDRI and the HIPC Initiative expected that conditional debt relief would translate into long-run public debt management improvements. However, current events reveal the limitations of the initiatives’ success. In part, this is because some inputs to debt sustainability, like commodity prices, are beyond the control of debtor nations and can be very volatile. Currently, commodity exporting nations such as Angola have experienced credit downgrades due to the weakening of local currency and subsequent increased debt servicing costs as a result of globally reduced oil prices.86 80 Fitch Ratings. “LatAm Sovereign YTD International Bond Issuance Exceeds 2019 Total.”

81 Soto, “Africa Eyes Own ‘Brady Plan’ as Debt Relief Proposal Takes Shape.”

82 Heller and Virketis, “Prefer to Defer: Has the Time for ‘Bendybonds’ Finally Come?”

83 Maki, “Why There’s a Looming Debt Crisis in Emerging Markets.”

84 Gamarra, Pollock, Dömeland and Braga, “Debt Relief and Sustainability.”

85 IMF, “Debt Relief Under the Heavily Indebted Poor Countries Initiative.”

86 Fitch Ratings, “Fitch Downgrades Angola to CCC.” 18