Africa faces incredibly difficult decisions when it comes to financing its development. Countries need hundreds of billions of dollars each year to meet their climate, poverty, unemployment and inequality challenges. They cannot meet these needs with their own resources, grants and concessionary sources alone. They will have to tap into international capital markets.
But these private sources are expensive and difficult for African countries to access and manage.
Currently, 21 African countries have issued Eurobonds. In 2021, these foreign currency-denominated bonds accounted for $144.7 billion of Africa’s total stock of external debt of $789.8 billion. Payments due on these bonds will increase from around $5 billion in 2023 to more than $10 billion a year in 2024 and 2025.
Some countries already face challenges in servicing their Eurobonds. They face the prospect of having to restructure them. Egypt, Ethiopia, Ghana, Kenya and Tunisia are in this position.
Unfortunately, the current restructuring process is time consuming, complex, and unlikely to produce an optimal result. For example, Zambia defaulted on three Eurobonds at the end of 2020 and has yet to reach an agreement with its creditors.
Failures in the current system
Unlike in the case of corporate bankruptcies, there are no courts that can compel creditors to seek a balanced and expeditious solution to the sovereign’s debt problems.
On the other hand, the participation of the bondholders in the restructuring is voluntary. This essentially places the sovereign debtor in the position of a supplicant appealing to the kindness of his creditors. Bondholders are likely to show such “kindness” only if they believe they can get more money from the debtor by restructuring the bonds than by enforcing their contractual right to payment.
The bondholders’ strong bargaining position is bolstered by legal arguments about their limited room for compromise. For example, they maintain that they are limited by their responsibilities towards their own creditors. They point out that they themselves are debtors and are counting on payments from the sovereign to meet their own obligations to their creditors.
In addition, the bondholders argue that they have fiduciary responsibilities towards these parties, which include people who have placed their savings for their retirement, their children’s education or to buy a house with the institutions that buy the bonds of African countries. In addition, they can rely on the often unspoken but ever-present threat of litigation if the parties are unable to reach an agreement.
The negotiation process further favors bondholders because it treats debt contracts in isolation from all other obligations and responsibilities of the debtor. There is no space to explicitly address the sovereign’s obligations to his own citizens under his constitutional and legal order, and his international treaties.
This is unacceptable.
African debtors and their supporters must change the dynamics of these debtor-creditor discussions.
They need to create a conceptual framework that is based on existing international norms and standards that are widely accepted by creditors and debtors. The framework can be used to encourage creditors to be more open to innovative approaches to debt restructuring.
This should help the parties reach a restructuring agreement that balances the interests, rights and obligations of all participants in the negotiations and all parties that are affected by the sovereign debt situation.
Such a framework exists. The DOVE Fund Principles (Debts from Vulnerable Economies) offer a conceptual framework for sovereign debt restructuring that is balanced and respectful of the rights, obligations and responsibilities of all stakeholders in African debt.
The mechanics of a new system.
The DOVE Fund Principles serve three purposes.
First, the parties directly involved in a sovereign debt restructuring can use them to guide their debt restructuring decisions and actions. Second, the principles can be used as a benchmark for evaluating the terms of debt restructuring and its implementation. Third, the principles can be used by any investment fund, for example a DOVE Fund, to define the approach it will take in sovereign debt restructurings.
The DOVE Fund Principles are based on 20 international norms and standards that have been developed by international organizations, industry associations and civil society organizations over the past two decades.
Some of these norms and standards put compliance pressure on at least some of the parties involved in sovereign debt restructurings due to the credibility of their sponsoring entities and the process that was followed to develop them. Many of the parties interested in sovereign debt transactions recognize that others address issues relevant to sovereign debt restructurings. Consequently, most international investors support at least some of these international standards.
The Principles of the DOVE Fund are:
Principle 1: Guiding standards
- Credibility: all parties have confidence in the process.
- Accountability: The output accounts for all relevant economic, financial, environmental, social, human rights and governance issues.
- Good faith: there is a clear intention to reach an agreement that respects all the rights, obligations and responsibilities of the negotiating parties.
- Inclusiveness: all creditors can participate and all affected parties can access enough information to understand how the situation will affect them.
- Effectiveness: Negotiations lead to a timely and efficient agreement that does not unduly burden or undermine the sovereign’s inclusive and sustainable development process.
- Optimal outcome: the agreement reached by the negotiating parties is the best possible combination of economic, financial, environmental, social and human rights benefits for all parties.
Principle 2: Transparency
The sovereign debt restructuring process allows negotiating and affected parties access to the information they need to make informed decisions.
Principle 3: Due diligence
Both the sovereign debtor and its creditors must carry out appropriate due diligence before concluding a sovereign debt restructuring process.
Principle 4: evaluation of optimal results
Before concluding any agreement, the negotiating parties must explain why they expect it to result in an optimal result.
Principle 5: Monitoring
The restructuring process must incorporate credible mechanisms to monitor the implementation of the restructuring agreement.
Principle 6: Comparability between creditors
The restructuring process must ensure that all creditors of the sovereign borrower make a comparable contribution to the restructuring of its debt.
Principle 7: Fair sharing of the burden
The burdens of restructuring must be distributed fairly and must not impose undue costs on any affected party.
Principle 8: Maintain market access
The restructuring agreement, to the greatest extent possible, should be designed to facilitate future market access for the borrower.
Danny Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria
This article is republished from The Conversation under a Creative Commons license. Read the original article.
