The difficulty in managing various creditors with different interests and backgrounds has been identified as a major obstacle to restructuring African debts. This view was held by Nobel Laureate in Economics, Professor Joseph Stiglitz and Nigeria’s former Minister of Finance, Mrs. Kemi Adeosun.
Stiglitz, who spoke in Paris, France, specifically mentioned China and Western hedge funds as examples of these diverse creditors.
Debt restructuring refers to the process of making changes to the terms of outstanding debts, with the aim of providing relief to the debtor. This could involve negotiating new repayment schedules, reducing interest rates, or even forgiving a portion of the debt.
He said coordinating diverse creditors in debt restructuring can be challenging because each creditor has its own objectives and concerns. China, as a creditor, may have specific priorities such as protecting its investments, or ensuring that its strategic interests are upheld.
Western hedge funds, on the other hand, he stated, are profit-oriented entities seeking to maximize returns from their investments. These differing objectives and interests can complicate negotiations and make it difficult for all parties involved to reach a mutually acceptable agreement on restructuring the continent’s debts.
Another challenge to restructuring Africa’s debt, he argued, is that diverse creditors may have varying levels of influence, which can further complicate the coordination process. For example, China’s economic and geopolitical significance afford it more leverage in negotiations compared to other creditors.
Stiglitz and Adeosun took the position that without the mechanisms to address these challenges, it would be difficult for African countries to achieve sustainable public finances. This is because when a country is struggling with debt repayment, it can impact its ability to invest in public services and infrastructure. It can also lead to economic instability and decreased confidence from investors and international organizations, the duo stated.
Mrs. Adeosun joined Stiglitz in a panel discussion on sovereign debt crises at the Columbia Global Centers in Paris on Tuesday.
Stiglitz said: “The difficulty of coordination between diverse creditors, including China and Western hedge funds who don’t trust anyone else, makes debt restructuring more difficult. We have no framework for debt restructuring across sovereigns and the result is too little debt restructuring, too late,” adding that “private sector lenders have shown they are not good at assessing risk, as evidenced by the Great Financial Crisis starting in 2008. Nothing has been learned by the West since. There are incentives not to learn and not to respond to what is predictable,” he stated.
On her part, Mrs. Adeosun emphasized the importance of taking action before a default occurs, particularly in managing the pre-default period. She said that countries in debt distress are often reluctant to admit it due to the need to cut social spending, especially in democratic countries. This leads to a tendency to delay restructuring, thereby creating more difficulties down the road.
The former minister advised Eurobond holders to initiate conversations with sovereigns before a potential default occurs, saying this proactive approach would allow for early discussions and potentially expedite the restructuring process.
She said: “The long period needed to carry out debt restructuring such as that in Zambia, have their roots in lack of action before a default takes place, that means there is a tendency to kick the can down the road,”
With regards to the huge debts faced by many African countries which pose challenges in feeding their people and mitigating the effects of climate change, Martin Guzman, the former Minister of Economy in Argentina, said the unsustainability of Africa’s sovereign debt, suggests that both creditors and debtors have an incentive to delay restructuring in the hope that institutions like the International Monetary Fund (IMF) will provide financing.
Stiglitz, Adeosun and Guzman argued that international mechanisms for sovereign debt restructuring are crucial for Africa to achieve sustainable public finances, address climate change and mitigate the negative impacts of debt.