Health of Nations: Preventing a Post-Pandemic Emerging Markets Debt Crisis

Abstract

Currently, 60% of low-income countries are at “high-risk” of insolvency, necessitating debt relief, according to the International Monetary Fund. The enormity of the problem cannot be overstated; prospective economic collapse threatens hundreds of millions around the world.

At the same time, the tools to address these challenges are wholly inadequate. Typically, debt reduction is effectuated through statutory mechanisms; sovereign debt is a critical exception, as there is no bankruptcy court for countries. Historically, this void was filled through a complex architecture based on custom, ‘soft law’ and contractual mechanisms. However, that construct has grown increasing ill-suited for contemporary challenges. A new system for sovereign debt renegotiation – the Common Framework – was established in late 2020 to much fanfare. It has universally underwhelmed.

This Article is the first to analyze the Common Framework, finding that it has failed because: (i) it lacks institutional infrastructure; (ii) exacerbates conflicts amongst creditors; and (iii) delivers insufficient benefits for debtors, including unduly restricting many nations – perhaps most pertinently, Ukraine.

Yet, the Common Framework arguably remains the most viable toolset for addressing the coming sovereign debt crisis – thus, it must be amended, rather than discarded. To that end, this Article prescriptively recommends a number of steps. Most significantly, to support Common Framework implementation, the Article proposes establishing a ‘Coordinating Forum’ – a mechanism distinct from a court of law, instead intended to fill critical gaps in informational and coordinating infrastructure. At the same time, the Common Framework should provide greater benefits for debtors, while being open to more nations. Finally, it must require private investors to share the burden, with an emphasis on leveraging innovative ESG and climate-linked instruments – with Belize’s recent restructuring, which tied debt reduction to environmental conservation, providing a template.

It is imperative that policymakers develop sufficient tools to address the coming sovereign debt storm. The economic and public health implications cannot be overstated; no nation should be forced to choose between vaccines and interest payments.

Keywords: sovereign debt, restructuring, emerging markets, COVID-19, international law, public international, private international, contracts, public finance, development economics, finance, capital markets, empirical analysis, analytics, IMF, emerging markets, debt, bonds, pandemic, financial crisis