Private investors in wealthy nations are reportedly making substantial profits from around $200 billion of complex debt issued by 28 developing countries.
This disclosure was contained in a statement issued on the recent analysis of the International Institute for Environment and Development (IIED).
The statement notes that many of the affected developing countries are susceptible to climate change, adding that the debts are significant burden for poorer nations and hinder their ability to cope with climate-related challenges.
The IIED notes that the heavy debt load is particularly problematic for lower-income countries that are grappling with climate crises they did little to cause. These nations often find themselves more exposed to climate impacts than wealthier counterparts.
Citing factors such as COVID-19 pandemic, rising food prices, and conflicts such as the one in Ukraine which has put many countries further into debt, the statement it is high time wealthier countries consider the developing nations.
Despite discussions about debt at G20 meetings early 2023, the IIED notes that there has been minimal progress in reforming global financial systems to address the anomaly.
IIED’s analysis also focused on the external sovereign hard currency bond debt of 53 countries with a ‘sub-Investment Grade’ rating from public rating agencies.
Among these, it was noted, 28 were either least developed or lower-middle-income countries, with a combined bond debt of $173.2billion (about N), While it can be challenging to identify the owners of bond debt, the statement says researchers be believe that a significant portion of the quoted amount is held by institutions in wealthy countries such as investment funds, mutual funds, and private banks.
Least developed countries are burdened with $207 billion (about N) the IIED statement reads.
It says further that in a report from September 2020, JP Morgan had estimated that the total ‘emerging market’ bond debt of this kind stood at $1.29 trillion, with over 80% owned by institutions in ‘developed markets.’
For the countries in IIED analysis, this proportion is likely to be even higher.
Unlike loans from multilateral banks or bilateral agreements, these bonds are owned by numerous investors aiming to maximize their profits, this complicates the process of restructuring the debt, as most private investors are only willing to accept reduced profits if countries officially default, which is a lose-lose situation for both parties.
Executive Director, IIED, Tom Mitchell, emphasised on the urgent need for international organizations like the International Monetary Fund (IMF) and World Bank to address the escalating debt burdens of climate vulnerable countries.
These nations require fiscal flexibility to prepare for and mitigate the increasing climate-related challenges, the IIED notes.
Many of the countries in the analysis have recently experienced extreme floods, droughts, and other disasters and while the public sector has taken some steps to acknowledge the difficulties faced by developing countries, private bondholders have yet to significantly contribute to debt relief, IIED calls for greater involvement from private investors to address the growing debt crisis.
It further notes that for poorer nations, restructuring bond debt can be painful, especially without bankruptcy process to rely on.
Mitchell states: “Navigating complex legal structures and dealing with aggressive investors can prolong sovereign debt crises, as seen in the case of Sri Lanka.”
He then suggested that by first restructuring multilateral and bilateral loa debt for the poorest nations, wealthier countries could provide struggling governments with the time and fiscal flexibility to handle bondholders who make debt restructuring, challenging.
