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By Marc Jones
LONDON, August 25 (Reuters) – The option of a one-time-paying holiday in times of intense crisis can enable countries to meet their pandemic obligations, a primary debt fund says.
The economic consequences of COVID-19 triggered a record number of sovereign defaults in 2020, and Boston-based GMO executives, strongly in sovereign restructuring in recent years, have proposed redefining bonds so that countries can suspend or even erase debt bills for up to a year.
Credit rating firm S-P downgraded countries this year, and 4 (Lebanon, Ecuador, Argentina and Belize) have already failed, breaking a record set in 2017.
“In the case of Ecuador, this may have provided sufficient liquidity to a breach,” said Carl Ross of GMO, one of the two architects of the payment licensing plan and negotiator in the restructurings in Ecuador and Argentina.
He prefers this concept to existing approaches, such as the link between debt bills and selected economic fortunes in 2012 across Greece, and the “hurricane clause,” which provides debt relief in the event of a catastrophic typhoon at the time, used in the restructuring of Grenada in 2015.
“Our proposal is to go back to something much simpler,” Ross said. “The general concept is to prevent countries from entering misery in the first place.”
Sui-Jim Ho, the spouse of Cleary Gottlieb, the law firm that helped draft the Hurricane Clause in Grenada, said the discussion about debt suspensions for transitoryness is gaining ground.
However, he questioned how undeniable it would be to put them into force.
“We still want to see how the cause of the pandemic is written,” he said.
GAME THEORY
Ross said the possible complaint that the GMO proposal can be abused by politicians seeking artistic funding presents a low risk.
Bond markets will soon place governments looking to play with the system, and since the deferral option would only be held once, or perhaps once a decade for long-term bonds, it will most likely also be used sparingly.
“Interactions between bond markets and governments are a “repeated game”… We believe this dynamic would be a very effective self-control mechanism,” he said.
His concept would want it to take off from that of the International Monetary Fund or the United States Treasury, and one country would also have shown it to be feasible.
Ross said he had advised Ecuador, but that the procedure was moving too fast at the time, and that would not have prevented Argentina or Lebanon from defaulting, as their debts were already uncontrollable.
Crisis-affected countries would also not be stored because having more than one option to bring in or write off debt would increase their borrowing costs.
Ross and the proposal’s co-author, Mustafa Ulukan, estimate that a one-year deferment option for singles can rise 0.6% to 8% that a low B-rated country can pay to borrow for 10 years.
The technique may also respond to criticism of the ‘freeride’ that personal sector bondholders have lately faced for not following G20 governments and allowing the world’s poorest countries to suspend COVID-19 debt bills.
The tension for that to happen is growing, but creditors warn that rating agencies would classify it as non-compliance, creating a number of problems. This is anything GMO thinks its plan would prevent.
“This (deferral) option, if used extensively, would be incredibly valuable in today’s environment,” Ross said. “This year and 2021, we have many countries that are going to fail.”
(Additional report through Karin Strohecker; edited through John Stonestreet)