Sovereign debt crises more likely, new mechanisms needed

26 October 2016

​The world needs a new mechanism to deal with sovereign debt crises, which represent a growing danger to the economic stability of many developing countries.

The world needs a new mechanism to deal with sovereign debt crises, which represent a growing danger to the economic stability of many developing countries and would thwart the 2030 Agenda for Sustainable Development before it had taken off, UNCTAD said on Wednesday ahead of a UN meeting on sovereign debt restructuring.

Countries in Africa and elsewhere have been stacking up debt, even as their ability to repay these debts is shrinking. Falling commodity prices, a rising dollar and the prospect of higher interest payments mean these debts may be harder than ever to repay.

Previous debt crises have seen the emergence of highly speculative funds, run by non-cooperative or holdout bondholders, including so-called vulture funds, which aggressively pursue debt repayments, making them more expensive and possibly disruptive. Since 2000, hedge funds have been the main plaintiff in 75% of all litigation cases against sovereign debtors.

"Sovereign nations do not have the protection of bankruptcy laws to restructure or delay their debt repayments in the same way that private debtors can," UNCTAD Secretary-General Mukhisa Kituyi said.
"But while creditors cannot easily seize non-commercial public assets, sovereign debt faults bring major problems in terms of reputation and access to further loans," he added.

New research to be published in November 2016 shows that the latest round of borrowing goes back to 2006 when the Seychelles issued a sovereign bond, the first sub-Saharan African country with the exception of South Africa to do so in 30 years.

In the decade since then, Angola, the Democratic Republic of Congo, Côte d’Ivoire, Ethiopia, Gabon, Ghana, Kenya, Namibia, Nigeria, Rwanda, Senegal, Tanzania and Zambia have accumulated more than $25 billion worth of bonds, with a principal amount of more than $35 billion.

Many African countries are now facing repayment difficulties, the researchers, Aleksandr V. Gevorkyan and Ingrid Harvold Kvangraven, say. They point to the example of Ghana.

"Ghana is in a difficult, yet unfortunately common, position as it depends on commodity exports such as gold, oil and cocoa," they said.

"With falling commodity prices, the country faces a decline in revenue and a growing current account deficit," they added, pointing out that Ghana’s total debt, both external and domestic, is at more than 55% of its GDP.

In September 2015, following work done by UNCTAD, the UN General Assembly adopted a resolution saying that sovereign debt restructuring processes should be guided by basic international principles of law, such as sovereignty, good faith, transparency, legitimacy, equitable treatment and sustainability.

The adoption of the resolution reflected growing concerns about renewed sovereign debt crises and long-term debt sustainability in the context of a continued global economic fragility.