Africa considers own ‘Brady Plan’ as debt relief proposal
The AU, the UN Economic Commission for Africa and finance ministers consider SPV for sovereign debt swap
Abuja — Some African countries may seek to exchange their sovereign debt for new concessional paper to avoid using funds needed to battle the fast-moving coronavirus to pay private creditors, according to a United Nations body.
The AU, the UN Economic Commission for Africa and a group of finance ministers from the continent are designing a special-purpose vehicle (SPV) for the swap. The mechanism would be underwritten by a triple-A-rated multilateral lender or central bank and used to convert commercial debt into longer-maturity paper with a five-year grace period and lower coupons, according to the commission.
Years of borrowing at relatively low cost amid record-low rates in developed nations have left many governments — especially in Africa — spending more on debt-service costs than on health. With economies in free fall as the coronavirus shuts down businesses and halts trade, African countries and others about the developing world are ramping up stimulus, which may increase debt levels further.
“Bondholders should in principle be eager to participate because they will give up an obligation that is illiquid for triple-A paper that you can put in any basket,” commission executive secretary Vera Songwe said in an interview. “We don’t want Africa to go into default, let’s be clear.”
Songwe said she is working on the proposal to pause about $16.25bn in commercial debt payments in 2020 with the backing of finance ministers including Ghana’s Ken Ofori-Atta. Ofori could not be contacted for comment.
Such a proposal would need agreement of bondholders to proceed. So far, no African government has publicly said its wants to waive payments on Eurobonds or change the terms, though Zambia has mandated banks to undertake what it termed “liability management”.
The G20 leading economies agreed earlier in April to suspend $20bn in bilateral debt payments from the world’s poorest countries — many of which are in Africa — until the end of the year. However, calls for bondholders to offer a similar waiver face complex negotiations and possible challenges in courts.
Last week, the AU’s special envoy for the pandemic response, Ngozi Okonjo-Iweala, said the SPV could also be financed by special drawing rights of rich nations at the International Monetary Fund. The SDRs are claims that make up the IMF’s reserves.
Another AU special envoy, Tidjane Thiam, former CEO of Credit Suisse Group, said the group is in talks with bondholders, ratings agencies and some countries to make a commercial debt standstill viable.
“We have an exogenous shock of a very significant magnitude that was not anticipated by either debtors or creditors, and we need some form of bridging to go through this without permanent damage to the economy,” Thiam said by phone. “It’s better to come into this scheme in an orderly manner than six to nine months down the road having to go to Washington to negotiate this alone under duress.”
The potential debt exchange could be similar to the 1989 Brady Plan that converted bank loans, mostly owed by Latin American countries, into new paper backed by US Treasury bonds. The initiative, proposed by then Treasury secretary Nicholas Brady, was tied to economic reforms in debtor countries.
‘Fallen into crisis’
“The Brady Plan saved us from a crisis, but it was a policy-induced crisis,” said Songwe. “This time we are not insolvent, we are not poorly managed economies, but we have fallen into a crisis because of the pandemic.”
World Bank president David Malpass showed interest in the idea when Songwe discussed the proposal with African finance ministers during the Washington lender’s spring meetings earlier in April, she said.
If successful, the model could be replicated in other regions that seek a debt standstill while they weather the pandemic, Songwe said.