Rating agency Moody’s argues that a downgrade for countries seeking to write off debt is inevitable, because the decision to restructure is made by a committee of creditors, regardless of the government’s will with respect to individuals.
In an interview with Lusa, Marie Deeron, director of the sovereign risk analysis group at Moody’s, explained that when a country adheres to the Common Debt Management Framework besides the Debt Servicing Suspension Initiative (DSSI), it abandons the decision on which lenders will participate in restructuring, the final word rests with the creditors’ committee.
“Although the Ethiopian government was very clear about its willingness to continue to honor its obligations to private creditors and use the Common Framework only to increase liquidity, when they signed up, they agreed with a paragraph that says that all creditors will be treated equally, which means a loss control, since the decision goes to the creditors’ committee, ”explained Marie Deeron, answering the question whether it is possible to adhere to the Common Framework and not tolerate a drop in the rating.
“The decision is made by a committee of creditors, and while the government may intend to maintain financial commitments to the private sector, it is the committee that decides how to proceed with the restructuring,” said the director of Moody’s, which ceased to exist this month. rating “Ethiopia after delayed meetings with creditors.
“The rating was B2 in March, pending to downgrade and there has been no major change in the meetings since then, so we dropped to Caa1, two notches down because the committee needs time to“ Meet and agree on restructuring, this suggests that the risk of losses for private lenders has increased, ”the analyst explained.
Regarding the inevitability of a rating downgrade after joining this method of debt restructuring, Marie Deeron said that this will not happen only if the rating is already so low that it already takes into account the likelihood of losses for creditors.
“If the rating is high, it will probably force us to update our opinion on credit quality, but if it is low, it already includes a level of uncertainty about payments to lenders,” he said.
The DSSI is an initiative launched by the G20 last April that guaranteed a moratorium on debt payments from the heavily indebted countries to more developed countries and multilateral financial institutions, with an initial deadline of December 2020, but which has been successively extended until the end of this year.
This initiative only encouraged countries to seek debt relief from the private sector, while the General Framework approved by the G20 in November argues that reaching out to private creditors is mandatory, even if it does not explicitly state what will happen if there is no agreement. between the debtor and the creditor.
Three African countries (Chad, Ethiopia and Zambia) have applied for membership in this Framework, but several analysts believe there will be more countries that will have to join due to their dire financial situation, despite opposition from countries that they will automatically downgrade their rating if they continue to restructure their private debt, which will make it difficult to access the market and finance the development of their economies.
The proposal, presented by the G20 and the Paris Club in November, is the second phase of the DSSI, launched in April and widely criticized for not requiring individuals to participate in the effort, as it will pave the way for debtor countries not to pay creditors and bilateral ( countries and multilateral financial institutions) and continue to service private debt.
This framework aims to recruit all debt agents, including private and public banks in China, which have become the largest lenders to developing country governments, including Africans.