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Credit FAQ: Beyond DSSI: S&P's Perspective On The G20 Common Framework For Debt Relief

This report does not constitute a rating action.

The G20 announced a temporary debt relief scheme for the poorest countries in mid-April 2020 to mitigate the human and economic fallout of the COVID-19 pandemic. Formalized as the Debt Service Suspension Initiative (DSSI), this scheme allows the temporary suspension of interest and principal repayment on G20 official bilateral loans to eligible low- and lower-middle-income countries that are current on their debt service obligations to the IMF and the World Bank. In practice, the implementation of the deal has been led by the Paris Club group of largely Western sovereign creditors, working alongside other major lenders like China.

Originally slated to end on Dec. 31, 2020, the terms of the DSSI have since been extended to June 2021. The IMF and World Bank have expressed support for a further extension of debt relief until end-2021. To date, the initiative has provided over US$5 billion in total debt relief to more than 40 of the 73 eligible countries worldwide (see "The G20 External Interest Payments Moratorium Will Partly Ease African Sovereign Debt Service Burdens," published June 24, 2020, on RatingsDirect).

In November 2020, the G20 launched the "Common Framework for Debt Treatments beyond the DSSI" (Common Framework) to address unsustainable sovereign debt burdens and provide longer, larger, and more comprehensive debt relief. Under the terms of the framework agreement, the debtor country and all participating creditors must sign a Memorandum of Understanding (MoU) constituting a series of bilateral agreements between the debtor country and each participating creditor. The framework requires debtor countries to seek debt treatment on comparable terms from all creditors, including the private sector, to ensure a more equitable burden-sharing process for all lenders. The required debt treatment will be determined by a joint IMF-World Bank debt sustainability analysis (DSA). Below we answer some frequently asked questions.

When it comes to ratings on sovereign debt, what does S&P Global Ratings consider?

In our sovereign rating methodology, we distinguish between two different types of sovereign debt:

  • Official debt (contracted under noncommercial terms owed to other governments, public sector enterprises, or supranational institutions); and
  • Commercial debt (held by private sector creditors).

Our ratings address the capacity and willingness of an issuer to pay interest and principal on commercial debt on the due date or within our timeliness standards, which includes a stated grace period (see the Payment Timeliness Standards section in "S&P Global Ratings Definitions," Jan. 5, 2021).

There are two general categories of sovereign default. One is missing a commercial debt payment.

The other is a distressed exchange. In a distressed exchange we assess whether a proposed exchange is opportunistic or not; and whether it involves tendering an exchange offer of new debt on less-favorable terms than those of the original issue without adequate offsetting compensation. Under our ratings definition, such "less-favorable terms" could include a reduced principal amount, extended or different maturities, a lower coupon, or effective subordination.

When such exchanges occur, we lower the rating on the obligation to 'D' (default) even if only a portion of the rated bonds is subject to the exchange offer. We also lower the sovereign credit rating to 'SD' (selective default), indicating that the sovereign is proposing to pay less than it had originally undertaken (see the Distressed Debt Restructuring And Issue Credit Ratings section in "S&P Global Ratings Definitions," and "Distressed Sovereign Debt Exchanges: Examples From The Past And Lessons For The Future," June 28, 2011).

Zambia is a recent case of a sovereign default. On Oct. 13, 2020, after having requested official debt relief under DSSI, the Zambian government announced that it was also going to suspend debt service payments to external commercial creditors because of liquidity difficulties compounded by the pandemic. Zambia then failed to make an interest payment due on Oct. 14, 2020 for its April 2024 Eurobond, asking Eurobond holders to agree to a temporary debt repayment freeze. In our view, Zambia's nonpayment of debt service on the Eurobond, and the government's statement that it would not make further debt service payments on the bond, constituted a default on Zambia's commercial debt obligations. This resulted in us lowering the long- and short-term foreign currency ratings to 'SD/SD' (see "Zambia Foreign Currency Ratings Lowered To SD/SD On Suspension Of Debt Service Payments To External Commercial Creditors," Oct. 21, 2020).

How does the Common Framework differ from the DSSI?

The DSSI and Common Framework both call for the private sector to participate in the debt restructuring process. Commercial creditor involvement in the DSSI, however, has so far been limited; Zambia is the only rated sovereign to have requested debt relief from commercial creditors under the DSSI. In contrast, Kenya and Angola were granted DSSI debt relief from bilateral official creditors without having obtained relief from private lenders.

The Common Framework explicitly states that participating creditors will be "required to seek" treatment, on at least as favorable terms, from all other official bilateral and private creditors.

The DSSI offers a temporary suspension/delay to interest and principal payments. In other words, the initiative merely postpones the repayment of debt rather than outright lowering the overall debt burden. The Common Framework, however, highlights the potential reduction of debt, in net present value terms, as a key parameter to be agreed by participating creditors.

While debt write-offs or cancellations are expected only in the "most difficult cases," debt relief under the Common Framework is designed to be more comprehensive and help countries alleviate structurally high debt burdens beyond the provisional procurement of liquidity relief under the DSSI.

Which countries have requested debt restructuring under the Common Framework?

On Jan. 27, 2021, Chad (not rated) became the first country to request debt restructuring under the Common Framework, citing debt sustainability difficulties amid the pandemic and low oil prices. Ethiopia announced the restructuring of its government external debt on Jan. 29, 2021, with some ambiguity surrounding whether private sector lender involvement would happen.

Zambia is the most recent applicant to the Common Framework, expressing its commitment to engage with the IMF on Feb. 5, 2021 with preliminary discussions to conclude on March 3. Zambia and Ethiopia's (and others') debt restructuring requirements and processes will be largely informed by the results of the IMF-World Bank DSA.

Is Chinese involvement expected under the Common Framework?

China is a participant in the Common Framework. It is also a signatory to the DSSI and has occasionally chosen to provide debt relief on a case-by-case basis, somewhat separately from the Paris Club group of creditors. Under the Common Framework, China will likely also have to follow guidelines for the comparable treatment of debt payments by official and private creditors more comprehensively than under the DSSI.

China is the largest single bilateral lender to Africa. According to the China-Africa Research Initiative, the Export-Import Bank of China (A+/Stable/A-1) is the most active official lender to projects on the African continent. It extended over 589 loans worth at least US$82 billion to African governments and state-owned enterprises in 2000-2018. Overall, Chinese official loans to the 73 DSSI qualifying countries were an estimated US$120 billion at end-2020 (see "G20 Sovereign Debt Suspension: To Apply, Or Not To Apply," Dec. 1, 2020).

How would S&P Global Ratings treat debt restructurings under the Common Framework?

Under the DSSI framework, we did not put sovereigns on 'SD' for seeking a temporary debt moratorium if it was limited to official creditors. Angola and Kenya managed to benefit from the DSSI, without involving private sector creditors. Zambia, on the other hand, involved private creditors and this led us to lower the ratings to 'SD'.

The Common Framework requests debtor countries to seek from private creditors a debt treatment at least as favorable as that provided by official lenders. In practice, it remains to be seen whether debtor countries aiming to restructure their debt will also restructure payments to private creditors.

Restructuring or changing the terms of commercial debt obligations held by private investors could be viewed as a default under our criteria. However, we would assess the specific characteristics of the restructuring on a case-by-case basis. Of the rated sovereigns that have expressly requested debt restructuring under the Common Framework, Zambia is already in selective default while our 'B-' rating on Ethiopia is on CreditWatch with negative implications (See "Ethiopia Downgraded To 'B-'; Placed On CreditWatch Negative On Potential Debt Restructuring," Feb. 12, 2021).

Related Criteria

Related Research

  • Ethiopia Downgraded To 'B-'; Placed On CreditWatch Negative On Potential Debt Restructuring, Feb. 12, 2021
  • Zambia Foreign Currency Ratings Lowered To SD/SD On Suspension Of Debt Service Payments To External Commercial Creditors," Oct. 21, 2020
  • G20 Sovereign Debt Suspension: To Apply, Or Not To Apply. Dec. 1, 2020.
  • The G20 External Interest Payments Moratorium Will Partly Ease African Sovereign Debt Service Burdens. June 24, 2020.
  • Credit FAQ: COVID-19 And Implications Of Temporary Debt Moratoriums For Rated African Sovereigns, April 29, 2020.
Primary Credit Analysts:Ravi Bhatia, London + 44 20 7176 7113;
ravi.bhatia@spglobal.com
Tatonga G Rusike, Johannesburg + 27 11 214 4859;
tatonga.rusike@spglobal.com
Secondary Contacts:Frank Gill, Madrid + 34 91 788 7213;
frank.gill@spglobal.com
Roberto H Sifon-arevalo, New York + 1 (212) 438 7358;
roberto.sifon-arevalo@spglobal.com
Valerie Montmaur, Paris + 33144207375;
valerie.montmaur@spglobal.com
Dhruv Roy, Dubai + 971(0)56 413 3480;
dhruv.roy@spglobal.com
Research Contributor:Giulia Filocca, London 44-20-7176-0614;
giulia.filocca@spglobal.com

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