Debt relief for poorest nations risks default if includes private creditors - ratings agencies

By Tom Arnold

LONDON (Reuters) - Plans to provide debt relief to lower-income countries could increase the risk of default if payment obligations to private sector creditors were restructured, credit-rating agencies warned on Tuesday.

In a bid to help the poorest countries struggling with the effects of the coronavirus, the World Bank and the International Monetary Fund have urged official bilateral creditors to provide debt relief.

But both Fitch and Moody's warned that any linking of official debt relief to restructuring of private-sector debt could qualify as a distressed debt exchange, triggering a move to restrictive default, Fitch said.

If relief were applied only to debt held by official creditors it would not be counted as a default, Fitch said. It would offset rising liquidity pressures on weaker frontier-market sovereigns, acting as positive for their credit, Moody's said in a note.

But Moody's warned: "The lack of clarity so far around potential private-sector participation suggests a heightened risk of delay to debt service payments, which could constitute defaults under our definition."

In a joint statement, the World Bank and the International Monetary Fund last week called on official bilateral creditors to immediately suspend debt payments from International Development Association (IDA) countries, which are home to a quarter of the world’s population.

France added its support for the move, with Finance Minister Bruno Le Maire saying on Tuesday that France would seek a debt moratorium for the poorest countries.

Goldman Sachs said in a note this week that IDA countries, those with a GDP per capita below US$1,175 in the fiscal year 2020, made up around 10% of the JPMorgan Emerging Market Bond Index. Zambia and Sri Lanka would in particular stand to benefit from the move, it said.

Moody's said Ghana, Pakistan, Zambia, Mongolia and Sri Lanka were among those suffering from a sharp drop in economic activity because of the coronavirus, a collapse in commodity prices, strained government revenue and market dislocation, threatening their debt sustainability.

But it added risks from the crisis went beyond frontier markets subject to the initiative to encompass emerging markets such as Turkey and Tunisia most reliant on foreign currency debt.

(Reporting by Tom Arnold, editing by Larry King)