LONDON (IFR) - Christine Lagarde, managing director of the International Monetary Fund, has expressed concern that the high debt levels that low-income countries have built up through non-traditional sources could complicate any debt restructuring.
“We need better collaboration to prepare for debt restructuring cases that involve non-traditional lenders,” Lagarde told a sovereign debt restructuring conference at the IMF’s headquarters in Washington.
China in particular has become a major provider of credit to such countries but it is not a member of the Paris Club of bilateral lenders, which has developed guidelines on how to restructure any such debts. It is the biggest single creditor of Venezuela, for example.
“With substantial non-Paris Club debt, we need to think about new ways in which official creditor coordination — often so critical to debt crisis resolution — can take place,” she said. “Building trust in sovereign borrowers is now more important than ever, especially in low-income counties.”
Lagarde said that 40% of low-income countries already face “significant debt challenges”.
“The shift towards new borrowing sources generally means higher interest rates and shorter maturities,” Lagarde said. “Borrowing from non-Paris Club lenders also means that creditor coordination will likely become more complicated.
“Managing these debt vulnerabilities is critical.”
She also urged borrowers and their new creditors to be more transparent about their liabilities. “A key challenge is preventing ‘debt surprises’, which can be driven by poor governance, off-balance sheet borrowing, and weak debt recording and reporting,” she said.
“There is room to significantly strengthen the institutions that record, monitor, and report debt in individual countries. One-third of low-income countries do not report debt guarantees for state-owned enterprises; and fewer than one in 10 report debt of public enterprises.
“Greater transparency can help prevent these contingent liabilities from turning into massive government obligations.”
This happened in Mozambique in 2016, when it was unable to keep servicing its US$727m 2023 bonds after several sovereign-guaranteed loans were disclosed.
“We have seen a sharp rise in the number of cases where debt contracts are not publicly disclosed by either the borrower or the lender,” Lagarde said.
“By working together, both parties can ensure better disclosure, which reduces risk and increases accountability.”
Writing by Christopher Spink; Editing by Ian Edmondson