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IDB: Latin America needs a forum for debt restructuring

IDB: Latin America needs a forum for debt restructuring

The new entity would complement existing institutions such as the Paris Club or the Common Framework, according to an IDB report released Thursday. It could develop general practices and standards, as well as facilitate the ability to have conversations before and during actual contract renegotiations.

“General coordination is still lacking, particularly given the diversity of creditors and instruments,” A team of experts led by Andrew Powell, a senior advisor in the IDB’s research department, and Oscar Valencia, a senior specialist in the bank’s tax division, wrote in the report. “It would serve as a general mechanism to coordinate the various institutions involved in debt restructurings.”

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Factors such as the expansion of creditors —China and other countries that are not members of the Paris Club have been increasing their credit activity in the region in recent years— as well as trade and debt reorganization make the composition of creditors between countries be “richer and more confused”the report said.

Five countries, including Ecuador and Argentina, have restructured their debt since the start of the COVID-19 pandemic as the region’s public debt levels rise more than 10 percentage points to close to 70% of its gross domestic product.

Countries would need to achieve an average primary surplus, or the gap between government revenue and spending before debt interest payments, of around 1% of their GDP to return to more sustainable debt ratios of around 52%. by 2032, Powell said.

“Many countries in the region with high levels of debt are likely to face a debt overhang,” according to the report. “One caveat to this finding is that the analysis is based on historical data given current institutions.”

The new forum would also help with debt restructurings linked to nature or environmentally friendly outcomes. Barbados and Belize have already completed such transactions.

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Source: Gestion

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