Fiscal deficits have grown, and government indebtedness has risen in practically all rich and developing nations throughout the global COVID-19 crisis. Furthermore, countries with the fewest resources have done poorly on various fronts, including perceptions of sovereign risk.
Since the start of 2020, 15% of advanced economies have had their credit ratings downgraded, while the similar percentage of downgrades for emerging markets and developing economies (EMDEs) is over 40%.
Concern regarding the long-term viability of government debt has been growing in several EMDEs even before the pandemic.Many EMDEs acquired huge “hidden debts” to non-Paris Club creditors, especially China, during high commodity prices and robust growth that lasted until roughly 2014. (Horn et al. 2019). A significant portion of these debts went unreported in critical databases and was not on credit rating organizations’ radar screens.
External borrowing by state-owned firms increased as well, despite their reporting criteria being significantly more inconsistent. As investors underpriced risk in nations with opaque debt arrangements, some low-income countries began to issue Eurobonds, adding to the debt accumulation.
Domestic debt (a minor concern during the 1980s debt crisis) has progressively increased, and data is scarce.Transparency will not address all of the issues discussed above, but it will go a long way toward increasing creditor trust, which is now low.
The G20’s Common Framework (CF) for dealing with unsustainable debt, Late last year, was authorized. It wants equal treatment from all official bilateral creditors, including Paris Club and non-Paris Club, and private creditors.
Individual creditors maybe hesitant to take the initial step toward debt restructuring without openness and information, and prolonged default periods punctuated by fruitless restructuring conversations may once again become the norm.
