As noted in the IIF Global Debt Monitor, global debt rose to some $250 trillion—or 320% of GDP—in Q1 2019, with emerging market debt accounting for $70 trillion of the total. With foreign ownership of EM debt consistently higher in the post-crisis period, EM countries could be seriously challenged if trade tensions and consequent market fragmentation were to lead to lower capital flows. Indeed, debt sustainability is already at risk for some vulnerable low-income countries (LICs). For example, more than 50% of the bond and loan universe covered in our Frontier Debt Monitor are denominated in foreign currencies, implying significant refinancing risk as they mature. Furthermore, heightened government debt worldwide—some $67 trillion in 2019—has translated to a big jump in interest expense in many jurisdictions, limiting the fiscal space to address long-term issues like rising inequality and the cost of adaptation to low-carbon growth models.
In this highly uncertain environment, the Principles for Stable Capital Flows and Fair Debt Restructuring continue to serve as a helpful framework for crisis prevention and resolution, particularly in the cases of sovereign debt distress or restructuring, such as those featured in this report. The Principles are a voluntary code of conduct between sovereign debt issuers and their private sector creditors, agreed to in 2004 and endorsed by the G20 Ministerial Meeting in Berlin in November 2004 (see Annex I). Until October 2010, the Principles applied only to sovereign issuers in emerging markets, but their applicability has since been broadened to encompass all sovereign issuers (on a voluntary basis) and non-sovereign entities in cases where the state plays a major role in influencing the legal parameters of the debt restructuring.
The Principles incorporate voluntary, market-based, flexible guidelines for the behavior of sovereign debtors and private creditors with the aim of promoting and maintaining stable capital flows, financial stability and sustainable growth. The Principles promote crisis prevention through the pursuit of strong policies, data and policy transparency, and open communication and dialogue with creditors and investors —particularly through investor relations programs (IRPs). The Principles strive for effective crisis resolution through, inter alia, good-faith negotiations with representative groups of creditors and non-discriminatory treatment of all creditors. The Principles are monitored by two oversight bodies—the Group of Trustees and the Principles Consultative Group (PCG), which includes senior officials from developed and emerging-market countries, as well as senior bankers and investors.
In view of evolving trends in global financial and sovereign debt markets, the PCG has continued to hold regular conference calls and extensive discussions of strengthening the framework for sovereign debt markets. The discussions have covered the importance of debt transparency and debt sustainability as well as efforts to strengthen coordination between public and private sector creditors on this issue. The PCG followed the developments in the recent sovereign debt restructurings in Mozambique, Barbados and Congo, as well as the unique debt restructuring operation in the U.S. territory Puerto Rico. The group also closely followed the recent debt default in Venezuela, as well as a number of other countries facing rising debt vulnerabilities, including Gambia, Zambia and Lebanon.