The impact of COVID-19 pandemic on global debt markets has been unprecedented. In early 2020 the COVID-19 shock prompted a sharp sudden stop in portfolio debt flows to emerging markets, with Q1 recording the largest quarterly EM outflows on record—exceeding the worst seen during the global financial crisis. As social distancing became the norm around the world, the global economy plunged into recession with significant adverse implications on global trade and international investment flows. Along with a sharp contraction in economic activity, increased debt accumulation by governments led to a record surge in global debt ratios in the immediate aftermath of the lockdowns, with emerging market debt rising by over 10 percentage points to 230% of GDP. While there was some pickup in growth momentum in Q3, the IIF estimates that the global GDP will decline by over 4 percent in 2020. Recovery remains patchy and varied across countries, leaving economic activity more dependent on supportive policy measures. In this volatile and challenging environment, maximizing liquidity relief for households and corporates remains vital for handling the COVID-19 crisis. However, this will add an additional burden to sovereign budgets. With economic recovery expected to be slow and uneven, government debt levels in 2021 are projected to reach 125% of GDP in mature markets and 65% of GDP in emerging markets—up by 20ppts and 10pts from 2019 levels, respectively.
In this highly uncertain environment, the Principles for Stable Capital Flows and Fair Debt Restructuring continue to provide 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 the rising uncertainty in global financial markets, the PCG stepped up the frequency of its conference calls and extensive discussions around country cases and the global response to financial turmoil triggered by the Covid-19 pandemic. The discussions have covered the growing diversity of the creditor base in sovereign debt markets, with a greater role for non-Paris Club bilateral creditors, different types of commercial creditors and lenders with hybrid public/private features. As was highlighted by the implementation of the G20 DSSI, these changes have underscored the need for better coordination among all creditors and more transparency. The PCG has also discussed developments in the recent sovereign debt restructurings in Argentina, Ecuador, Congo and the Gambia as well as recent defaults in Lebanon and Venezuela where progress on debt restructuring hinges on normalization of the political backdrop. During the PCG discussions, many members noted that the evolution of some debt restructuring cases in 2020 suggest the need for a review of the contractual framework including the use of collective action clauses. The group also closely followed a number of other country cases with growing debt vulnerabilities, including Zambia, Angola and South Africa. Finally, the PCG also received regular updates on the unique debt restructuring operation in the U.S. territory of Puerto Rico.