Alicia Bárcena on Debt Restructuring and Renegotiation at a Time of Pandemic: “We Need to Level the Playing Field. Both Creditors and Debtors Should Share the Burden”

Debt restructuring and renegotiation as well as debt relief are of both public and private interest at this time of pandemic. 'We need to level the playing field between creditors and debtors. Both should share the burden,' Alicia Bárcena, Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), stated today during the 2021 Forum on Financing for Development, which is being held this week under the direction of the United Nations Economic and Social Council (ECOSOC).

The high-level meeting brought together by virtual means heads of State, ministers and government authorities, prominent specialists from international organizations, as well as representatives of civil society and the private sector, with the aim of advancing a dialogue on solutions for financing the post-COVID-19 recovery and sustainable development on the path to 2030.

The senior United Nations official participated on Panel 3 of the event, entitled 'Strengthening private creditor and credit rating agencies contribution to pandemic response and recovery,' where she called emphatically for making rules transparent and establishing a multilateral debt restructuring system that - above all in times like these, marked by the crisis stemming from the COVID-19 pandemic - would keep from worsening the difficult economic situation of many countries, especially in the Latin America and Caribbean region.

'The main obstacle to private sector participation in debt renegotiation and restructuring has been the absence of an adequate equilibrium between the public and the private interest. There is an urgent need to level the playing field,' Bárcena stressed. 'It is necessary to guarantee an effective communication strategy between governments and the private sector to set common objectives and expectations.'

ECLAC's Executive Secretary also indicated that there is a pressing need for a multilateral sovereign debt restructuring mechanism that would go hand in hand with the creation of a multilateral credit rating agency that could act as a counterweight to the existing oligopoly of credit rating agencies.

'Look at what has happened in Latin America and the Caribbean. According to Fitch's ratings, the region has experienced 19 downgrades to its sovereign credit ratings. In 2021, even some countries like Chile that have solid economic fundamentals have suffered a downgrade. I don't understand what's going on… We are in a pandemic!' she contended.

In her presentation, Alicia Bárcena cited the example of four recent cases of debt restructuring and renegotiation in the region: Argentina (2020), Barbados (2018-2019), Grenada (2013-2015) and Ecuador (2020); and she listed the lessons learned from these experiences.

First, the aforementioned need to level the playing field and share the burden among creditors and debtors. For example, both Ecuador and Grenada managed haircuts in the original value of the bonds issued. Second, guarantee an effective communication strategy between governments and creditors on a periodic basis. 'They should set common objectives and expectations as well as share data on a regular basis,' she explained.

Third, Bárcena indicated that timing and speed are of the essence to a successful debt restructuring or renegotiation initiative, which should be led by official creditors that can help crowd in private creditors. Furthermore, creditors' participation and interests must be aligned. This can be done through collective action clauses, which are essential for aligning the private sector and streamlining the process. Argentina, Barbados, Ecuador and Grenada included collective action clauses in their debt negotiations, she noted.

ECLAC's Executive Secretary also emphasized that the backing of International Financial Institutions is critical for facilitating debt renegotiations and restructurings, but this should not involve a trade-off between such initiatives and the growth, employment and welfare-related goals of governments.

'(Debt) restructuring should be accompanied by innovative initiatives that allow for developing new financing instruments, such as hurricane clauses, for example, which link countries' repayment capacity to their risk exposure to natural disasters. Similarly, income-linked bonds can take into account external sector constraints, which are one of the main problems faced by many middle-income countries,' Alicia Bárcena specified.

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