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July 16, 2021
Sovereign Debt and the COVID-19 Pandemic
The Coronavirus Disease 2019 (COVID-19) pandemic and
the ensuing downturn in economic growth has had
significant economic and financial consequence for low-
The landscape of sovereign borrowing has changed over the
income countries. The World Bank estimates that the
past few decades. Following a sharp decline after the 2005
pandemic led to 97 million more people being in poverty in
G8-led Multilateral Debt Relief Initiative, sovereign debt
2020. Several countries have already defaulted on their
began accumulating during the 2007-2009 global financial
sovereign debt, and many others are at high levels of debt
crisis and has continued to rise through the COVID-19
distress, potentially impeding their ability to support
pandemic. According to World Bank figures, total external
recovery.
government debt of low- and middle-income countries
increased from $1.7 trillion in 2011 to $3.1 trillion in 2019.
The United States is participating in two G20 creditor
While the earlier waves of sovereign debt accumulation
country-led debt relief initiatives. The Biden
consisted primarily of bank loans and bilateral borrowing
Administration is requesting $52 million in FY2022 funds
from advanced economies and the multilateral development
from Congress to support these efforts. Members of
banks, recent increases in aggregate sovereign debt are
Congress have also introduced sovereign debt-related
largely attributable to China’s emergence as a key
legislation aimed at improving the transparency of the scale
developing country creditor and the rising use of private
and scope of creditor countries’ sovereign lending (e.g., S.
sector bonds to finance developing country public debt.
1169). China is now the largest creditor to developing
Both of these trends have raised new challenges in
countries, and some Members have raised concerns about
resolving sovereign defaults.
the economic and security impacts of China’s economic
diplomacy. Some Members have also expressed concerns
China’s Lending to Developing Countries
about the growing complexity of sovereign debt financing
Since the early 2000s, China has become the largest
and its associated risks.
creditor to low-income countries, surpassing a core group
of traditional donor governments (organized informally as
Debt Vulnerabilities
the Paris Club), the International Monetary Fund (IMF),
The debt stock of 120 low- and middle-income countries
and the World Bank (Figure 2). Unlike the IMF, the World
rose to $8.4 trillion in 2020 (Figure 1). According to the
Bank, or the 22 countries that compose the Paris Club,
World Bank, at the end of 2020, 54% of countries of
China rarely discloses the amounts or terms of its bilateral
International Development Association (IDA) were in or at
debt agreements. According to one 2019 National Bureau
a high risk of debt distress. In emerging market countries,
of Economic Research study, half of China’s official
the past year has seen a surge in sovereign defaults. Since
lending to developing countries is not reported in World
the end of 2019, six countries (Argentina, Belize, Ecuador,
Bank/IMF debt statistics. China is not a member of the
Lebanon, Suriname, and Zambia) have defaulted on
Paris Club and, until recently, did not participate in
sovereign debt obligations. Public debt in emerging markets
multilateral debt relief initiatives.
(excluding China) is expected to reach 61% of GDP in
2021.
Figure 2. China’s Emergence as a Leading Creditor
Figure 1. Government Debt Ratios and Gross
Financing Needs (Percentage of GDP)
Source: International Monetary Fund; figure created by CRS.
Source: Figure created by CRS based on WB IDS Statistics 2021
data; retrieved from https://t.co/Ppts0t1ORG?amp=1.
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Sovereign Debt and the COVID-19 Pandemic
Proliferation of Debt Instruments
assurances that the debtor will seek treatment from all its
Since1989, private international banks reportedly have
creditors, public and private, on comparable terms.
exchanged distressed loans for tradable bonds at a discount.
Many developing countries also have turned to selling
Despite their high levels of debt distress, three eligible
bonds in private equity markets , As a result, the bond
countries have requested Common Framework debt relief:
market has become a key source of public financing
Chad, Ethiopia, and Zambia. Many eligible countries
globally. Between 2011 and 2019, sovereign bond
reportedly are concerned that seeking debt restructuring,
financing to low- and middle-income countries tripled
especially with commercial creditors, will lead to ratings
(Figure 3).
downgrades and reduce their future access to financing.
Moody’s, for example, downgraded Ethiopia’s sovereign
Figure 3. External Public/Publically Guaranteed Debt
bonds, in part due to the possibility that a Common
Framework agreement might cause private creditor losses.
The risk of private sector debt downgrades has been less of
an issue with the DSSI, which has been limited to official
sector debt. Despite calls from the IMF and others for the
private sector to participate in the DSSI, there has been
little private creditor appetite. The Institute of International
Finance (IIF), an industry group, has argued that a
comprehensive agreement on private sector debt could risk
reducing countries’ access to the private capital markets.
U.S. Debt Relief and the Role of Congress
Congressional authorization is necessary for the United
Source: World Bank International Debt Statistics (IDS).
States to participate in multilateral debt relief efforts. Under
authority first granted by Congress in 1993 (P.L. 103-87),
As the IMF and others note, sovereign debt is the only debt
an appropriation by Congress of the estimated amount of
instrument without a bankruptcy mechanism. In lieu of a
debt relief is required in advance.
formal bankruptcy procedure, the international community
has relied on contractual solutions for resolving sovereign
The FY2022 budget requests $52 million for the DSSI and
debt crises, such as including collective action clauses to
Common Framework. According to Treasury, this funding
steer creditor coordination.
is necessary to restructure and lower U.S. interest rates
charged to the 44 countries that, as of June 2021, had
Debt Service Suspension Initiative
requested payment suspensions under the DSSI. This would
On April 15, 2020, the G-20 finance ministers , in
put U.S. interest rates in line with those charged by other
conjunction with private creditors, announced a temporary
G20 official bilateral creditors, including China, and fund
debt payment suspension through the end of 2020 for the
the cost of debt treatments for poor countries under the
world’s poorest countries, which have been hard-hit by the
Common Framework. Treasury has not provided a country-
pandemic-related collapse in commodity prices, export
by-country breakout of the $52 million request.
revenues, and tourism. Formalized as the Debt Service
Suspension Initiative (DSSI), the effort allows for the
Issues for Congress
temporary suspension of interest and principal repayments
Some in Congress have raised concerns about sovereign
on G-20 official bilateral loans. Repayment schedules are to
debt risks, notably with respect to the lack of transparency
be net present value-neutral, meaning that no debt is
of China’s lending. For example, in the 116th Congress, the
actually written off, but rather rescheduled to be paid later.
House passed H.R. 5932, Ensuring Chinese Debt
The DSSI was later extended through December 2021.
Transparency Act of 2020, which would have instructed
According to the World Bank, the DSSI has delivered more
U.S. international financial institution representatives to
than $5 billion in official debt relief to more than 40 of the
“seek to secure greater transparency with respect to the
73 eligible countries. Despite appeals from World Bank and
terms and conditions of China’s financing” of sovereign
IMF leaders, among others, private creditors have not
debt by country members of these institutions. Efforts are
participated in the DSSI.
also ongoing at the IMF to improve national disclosure of
sovereign debt loans and obligations.
From Debt Suspension to Debt Forgiveness
While DSSI is providing temporary debt restructuring, the
Members may also consider the increased complexity of
G-20 and the 22 members of the Paris Club, comprising 39
sovereign debt markets and various public and private
creditors (including China), endorsed a new “Common
efforts to improve coordination among creditors. As debt
Framework for Debt Treatments beyond the DSSI” in
instruments become more diverse and the creditor base
November 2020 for providing permanent debt forgiveness.
becomes more fragmented, debt risks and the costs of
Debt treatment options under this framework include
restructurings are increasing.
extending the duration of sovereign debt and in extreme
cases, debt write-offs or cancellation. Unlike the DSSI,
Martin A. Weiss, Specialist in International Trade and
Common Framework debt restructuring requires a formal
Finance
process similar to earlier Paris Club debt treatments,
including backing by an IMF lending program and
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Sovereign Debt and the COVID-19 Pandemic
IF11880
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https://crsreports.congress.gov | IF11880 · VERSION 1 · NEW