Emerging Economies Need New Finance, Not Moratoriums
A comprehensive debt-repayment freeze could be counterproductive for emerging economies that currently retain access to financial markets. Instead, leading central banks should establish a special-purpose vehicle that would act as a bridge between the vast amount of available global liquidity and these countries’ growing financing needs.
BOGOTÁ – Many are calling for a temporary moratorium on all debt repayments by developing and emerging economies, in order to prevent the COVID-19 pandemic from triggering a tsunami of sovereign defaults. Rather than waiting passively until debtors stop meeting their obligations, the argument goes, creditors would be better off agreeing now to suspend repayments for a while.
But although a comprehensive debt-repayment freeze could help many low-income countries that lack a better option, it could be counterproductive for emerging economies that currently retain access to financial markets. What these countries need now are more capital inflows, not restrictions on outflows.
Payment suspensions pose two problems. First, emerging economies need new net financing – in other words, more resources than would be made available by freezing their debt-service obligations. Second, countries that participate in a repayment standstill will face legal action by some bondholders, compromising their future access to capital markets.
To continue reading, register now.
Already have an account? Log in