Plan for emerging markets: Wall Street vs Washington


When Bill Rhodes says the debt crisis that’s erupted across the world’s emerging markets is the worst he’s ever seen, it must be bad.

Rhodes (84) knows a thing or two about the topic. The former Citigroup executive is a veteran of the 1980s Brady Plan that reset the clock for Latin America’s struggling economies by creating a new debt structure for developing nations that’s largely in place to this day.

“It’s going to be difficult,” Rhodes said on Thursday. “You need to have some sort of coordination between the private and public sectors.”

Three decades after US Treasury secretary Nicholas Brady stepped in to rescue emerging markets, the Covid-19 pandemic is again challenging the world for a solution – and a raft of private bondholders must also be on board this time.

More than 90 nations have already asked the International Monetary Fund (IMF) for help amid the pandemic.

Here we have a planet-wide phenomenon that’s going to make a number of countries face unsustainable debt positions.
Lee Buchheit

It’s clear that the task will be daunting. The $160 billion (R3 trillion) debt renegotiated during the Brady Plan pales next to the $730 billion that the Institute of International Finance (IIF) says is due in hard currency debt by emerging-market nations by the end of this year.

And, unlike in 1989, when the loans were mostly held by banks and defaults had already happened, it’s now split between hundreds of creditors, ranging from New York hedge funds to Middle Eastern sovereign wealth funds and Asian pension funds.

Academics and authorities are advocating steps that would allow developing nations to pause bond payments through at least this year, if not longer, until Covid-19 fades and economies stabilise enough to analyse debt sustainability.

This is upsetting some creditors on Wall Street who depend on those funds to keep their portfolios afloat.

G20 leaders and multilateral organisations are already working towards relief for nations to stay current on debt. The IMF and Paris Club asked the Washington-based IIF to coordinate a standstill, and the UN is calling for a new global debt body.

Private creditors are exploring ways to join initiatives to waive debt payments from poor countries, the IIF and Paris Club said on Thursday.

They’ll work in the coming weeks on reference terms for voluntary private-sector participation in debt-relief efforts.

A solution can’t come soon enough. According to data compiled by Bloomberg, dollar-denominated notes from 18 developing nations already trade at spreads of at least 1 000 basis points over US Treasuries, the benchmark for distressed debt.

While the top three outliers – Venezuela, Argentina and Lebanon – were grappling with their own problems before the pandemic, others are approaching those levels amid currency sell-offs and record-shattering outflows.

Brazil, Mexico, Colombia, South Africa, India and Indonesia may be among the most vulnerable to a virus-related crisis, Anna Stupnytska, Fidelity International’s London-based head of global macro and investment strategy, said on Wednesday. She expects the coming months to be critical.

It isn’t just risky for governments. Moody’s Investors Service expects Covid-19-related disruptions and uncertainty to push emerging-market corporate defaults much higher in 2020.

Debt relief

Countries that look to markets and are willing to engage market participants have found success in bridging the Covid-19 financial shock.
Hans Humes

Forbearance on debt payments is the most popular idea for helping emerging markets, although it would probably need to extend beyond this year, according to Anna Gelpern, a law professor at Georgetown University who spent six years at the US Treasury.

A coordination group could offer standardised terms to all of a country’s creditors that automatically push out payments, she said.

Still, it would be no easy task persuading private creditors, especially those with large emerging-market exposure, to take a hit by deferring debt payments.

Zambia is asking restructuring houses for advice on how to handle its debt load, while Argentina has proposed a restructuring plan that includes a three-year payment moratorium.

“Countries that look to markets and are willing to engage market participants have found success in bridging the Covid-19 financial shock,” says Hans Humes, chief executive officer of New York-based Greylock Capital Management, which has been involved in most emerging-market restructurings over the past 25 years.

Bondholders have already granted Ecuador a delay on coupon payments until August, which may save the government as much as $1.35 billion this year as it deals with one of the region’s worst virus outbreaks and a sell-off in oil.

Even so, “the time and resource costs of pursuing market debt relief may outweigh the benefits”, wrote Dylan Smith, a London-based economist at Goldman Sachs, on April 17. Plus, “it isn’t clear that the fiduciary duties of large bondholders towards their investors would allow them to provide lenience to debtors, even if they privately support the initiative”.

Lee Buchheit, a four-decade veteran of the restructuring world, says forcing each nation to renegotiate on its own would only exacerbate the pain.

“Here we have a planet-wide phenomenon that’s going to make a number of countries face unsustainable debt positions,” he said. – Bloomberg


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