Credit downgrade buffer proposed for poor nations seeking debt help -study

LONDON (Reuters) - Poor countries struggling to meet their dues in the wake of the COVID-19 crisis should be given a temporary buffer to avoid the risk of credit rating downgrades while they renegotiate their debt, a study published on Friday said.

Costs from the pandemic have triggered a spiralling in the public debt burdens of many developing countries, prompting the G20 group of major economies to last year unveil a proposal designed to help governments to overhaul the debt they owe to official and commercial creditors.

But participation in the G20 common framework has been limited so far by fears that countries signing up will face credit rating downgrades because of potential losses for private creditors from any debt overhaul.

A proposal to break through the impasse has now been put forward by a credit rating and financial regulation expert at Britain’s Aston University in collaboration with South Africa-based Credit Rating Analytics.

“Multilateral initiatives designed to encourage debt negotiations between the world’s poorest and most vulnerable countries and their creditors are failing,” said Daniel Cash, from the university’s Aston Law School, who co-wrote the plan.

The solution proposes a three-stage initiative for poor countries seeking debt relief. The first involves a waiver granted by private creditors, a move that allows credit rating agencies to change their sovereign rating model temporarily under a scoring system that acts as a buffer between a default and the country’s current rating.

“This temporary buffer will allow for countries to renegotiate their debt arrangements without the automatic prospect of being downgraded, whilst still allowing the credit rating agencies to fulfil their duties to private creditors,” said Saveshen Pillay, director, Credit Rating Analytics.

The initiative’s third stage proposes engaging an advisory service to assist the affected countries, rating agencies and private investors in the process.

The limitations of the G20 common framework were highlighted in January when Ethiopia’s application to the programme prompted Fitch and S&P to slash its sovereign rating.

The framework is intended for poor countries that require help beyond participation in the G20’s Debt Service Suspension Initiative (DSSI) set up in the pandemic’s aftermath.

In 2020, 43 countries received around $5.7 billion in debt service suspension and DSSI’s first six-month extension through June 2021 could provide an additional $7.3 billion of debt service suspension.

Editing by David Evans