Integrating China into Multilateral Debt Relief: Progress and Problems in the G20 DSSI
Deborah Brautigam and Yufan Huang
SAIS-CARI Briefing Paper, n° 9, avril 2023
Abstract :
This paper provides an evaluation of China’s participation in the G20’s COVID-19 Debt Service Suspension Initiative (DSSI). Through analysis of available data, more than 100 interviews, and fieldwork in Angola, Kenya, and Zambia, we argue, with some caveats, that the DSSI was a success.
First, the existing architecture for sovereign debt relief was badly in need of reform. The old system was based on the G7 negotiating rules for relief, which were carried out by the informal Paris Club and the IMF. With the G20 emerging as the premier forum for global economic coordination, and the rise of major new creditors like China and bondholders, new institutions, and new rules, were in order. The DSSI succeeded in providing a pathway for China, the world’s largest bilateral creditor, to negotiate debt treatments together with the Paris Club in the context of IMF balance of payments assistance. Getting Chinese commitment to join was “miraculous” as one G20 participant put it. Yet much remains to be done.
Second, China fulfilled its role fairly well as a responsible G20 stakeholder implementing the DSSI in the challenging circumstances of the COVID-19 pandemic. In the 46 countries that participated in the DSSI, Chinese creditors accounted for 30 percent of all claims, and contributed 63 percent of debt service suspensions. The perception that other creditors – private and multilateral banks -- were free-riding on Chinese suspensions reinforced Chinese banks’ later resistance to providing debt reductions in the Common Framework. On the other hand, Chinese disbursements dropped significantly in countries requesting DSSI relief, but remained steady for other creditors. The terms of the moratorium did not include instructions on how creditors should act in a situation that closely resembled a default.
Third, the DSSI prompted China and other G20 creditors to take steps to classify their banks into “official” and “commercial” categories, a necessary distinction for member countries participating in the IMF’s financing assurances requirement. It pushed the Chinese government to align interests among fragmented banks and bureaucracies with conflicting goals. It started an internal learning process about how debt restructuring has been done historically, and how China might safeguard its interests by participating with others in a multilateral forum.
Finally, geopolitical tensions affected negotiations over debt relief and allowed Chinese stakeholders facing losses to argue that pressure from the United States was an effort to “take advantage of China”.
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FITCH WIRE
China’s Stance on Multilateral Debt Relief Could Weaken MDBs’ Preferred Creditor Status
Tue 04 Apr, 2023 - 08:44 ET
China’s foreign ministry has called for MDBs to be included in debt restructuring as part of external debt relief initiatives in Zambia and Sri Lanka. We assume China will again call for this inclusion in the upcoming external debt restructuring of Ghana. Fitch rates the foreign-currency debt of all three countries ‘RD’.
In China’s view, the large share of debt owed to multilaterals in these countries means MDBs should be included within the perimeters of debt restructuring to achieve debt sustainability in the medium term. Debt owed to multilaterals accounted for 41% of public external debt of the 73 countries eligible for the Common Framework at end-2021, based on World Bank data.
MDBs’ status means that the repayment of sovereign debt due to them takes precedence over other creditors and that they would typically be excluded from sovereign debt restructuring. While not legally enshrined in loan documentation, this approach has been applied in previous debt restructurings and is enforced by the IMF, which does not tolerate arrears to multilateral creditors (such as the World Bank) under its lending into arrears policy.
Under Fitch’s rating criteria, preferred credit status can significantly enhance an MDB’s risk profile and is one of the main drivers underpinning their high ratings with 76% rated ‘AA’ and above. We apply a credit uplift of up to three notches over the bank’s average rating of loans, primarily based on an assessment of an MDB’s record of being treated as a preferred creditor. Fitch also considers preferred creditor status in its qualitative assessment of an MDB’s business profile and policy importance.
Inclusion of multilateral debt in debt restructuring would be considered a breach of this status by Fitch and could lead to negative rating actions. However Fitch understands that China could consider some form of compensation for MDBs from their shareholders, which could in part offset the negative impact of their participation in debt restructuring. Some multilaterals have been included in past debt restructuring programmes (e.g. the Multilateral Debt Relief Initiative in the 2000s) but have been fully compensated by shareholders and donors. This offset any losses and preserved their preferred credit status.
China’s position appears isolated, with Paris Club members and other official creditors strongly in favour of maintaining the status of MDBs. The agency therefore does not consider that the inclusion of multilaterals in ongoing debt relief is a real possibility.
China has steadily increased its role as a bilateral creditor to low- and medium-income countries as well as being a shareholder in MDBs. These include the Asian Infrastructure Investment Bank (AAA/Stable, in which China owns 31% of capital) and the New Development Bank (AA/Negative, 19.4% owned by China), both established within the last 10 years. Fitch will closely monitor any signals that China’s proposal on MDBs’ inclusion in debt restructuring could gain traction.
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The China-Global South Daily Brief, 5 avril 2023
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China vs. the MDBs: What Both Sides Are Saying |
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WHY IS THIS IMPORTANT? There is no indication that this impasse will be settled anytime soon, but a report like this could be very useful to the MDBs the next time they're negotiating with the Chinese by saying: "Listen, it's not us, it's not the Americans or the Europeans saying this, it's the ratings agencies, so c'mon, let's move on in the name of helping Zambia and other countries stuck in the middle of this mess." |
