Time For a New Sovereign Debt Restructuring Regime: Can Chinese creditors navigate through a potential global debt crisis?

• Author: Brautigam, Deborah

During the boom years of the 2010s, lending to low- and middle-income countries expanded dramatically, led by two new groups of creditors: bondholders and Chinese banks. Since the Covid-19 pandemic began, Argentina, Belize, Ecuador, Lebanon, Suriname, Zambia, and now Sri Lanka have all declared bankruptcy: defaulting on their sovereign bonds, and actively seeking debt restructuring. Others are sure to follow. How are Chinese creditors going to navigate what may become a systemic global debt crisis?

HISTORIC SHIFT IN THE RESTRUCTURING ARCHITECTURE

Since 1956, the treasury departments of industrialized countries with large outstanding loans to developing country governments have negotiated debt restructuring as an informal cartel known as the Paris Club. Although sometimes present as observers, China and most other developing country lenders had never joined. The economic challenges of the Covid-19 pandemic, however, have led to a potentially historic shift in the financial architecture of sovereign debt management. In April 2020, China joined with other G20 members, including Turkey, South Africa, and India, in launching the Debt Service Suspension Initiative.

The DSSI allowed seventy-three low-income countries that were not in arrears with the World Bank or International Monetary Fund to apply for a suspension of interest and principal payments on their official bilateral external debt between May 2020 and December 2021. The G20 called on private and multilateral creditors to join them in pandemic debt relief.

The DSSI was temporary, allowing modest gains in liquidity for borrowers. In November 2020, the G20 joined with the Paris Club to launch the Common Framework for Debt Treatments Beyond the DSSI. Through the Common Framework, the same group of low-income countries can apply for debt restructuring (middle-income countries like Sri Lanka are not currently eligible). As of July 2022, only three countries (Chad, Ethiopia, and Zambia) have asked for a Common Framework treatment.

DIMENSIONS OF CHINESE LENDING

By 2020, according to the World Bank's International Debt Statistics, bondholders controlled 51 percent of all outstanding public and publicly guaranteed (PPG) debt in low- and middle-income countries. Chinese banks held 5 percent, with 23 percent held by the World Bank and other multilateral lenders. Chinese lending has a larger footprint in the seventy-three countries eligible to join the G20's DSSI. In 2020, Chinese banks accounted...