The traditional signs of a debt crisis, such as plummeting currencies, bond spreads of 1,000 basis points and disappearing foreign exchange reserves, point to a record number of developing countries now in trouble.
Lebanon, Sri Lanka, Russia, Suriname and Zambia are already in default, Belarus is on the brink and at least a dozen others are in the danger zone as rising borrowing costs, inflation and debt fuel fears of economic collapse.
The sum of the costs is very striking. Using bond spreads of 1,000 basis points as a threshold, analysts calculate that there is $400 billion of debt at risk. Argentina is by far the most exposed country with $150 billion, while Ecuador and Egypt follow with between $40 billion and $45 billion.
Veterans of crises hope that many will be able to avoid default, especially if global markets calm down and the International Monetary Fund (IMF) step in with your support. These are the countries that are at risk.
The country with the world record for sovereign debt default could widen the gap. The peso is now trading at a discount of almost 50% on the black market, reserves are critically low and bonds are trading at just 20 cents on the dollar, less than half what they were after the country’s debt restructuring in the 2020.
The government does not have a significant debt to pay until 2024, but after that it soars and there are fears that the powerful Vice President Cristina Fernández de Kirchner could push to default on the IMF.
The Russian invasion means Ukraine will almost certainly have to restructure its more than $20 billion of debt, heavyweight investors like Morgan Stanley and Amundi warn.
The crisis looms in September, when US$1.2 billion in bonds must be paid. Aid money and reserves point to kyiv being able to pay. But this week, the state-owned company Naftogaz has called for a two-year debt freeze, leading investors to suspect the government will do the same.
In Africa there are several countries that turn to the IMF, but Tunisia seems to be one of the most at risk.
A budget deficit approaching 10%, one of the highest public sector wage bills in the world, and concerns that ensuring, or at least delivering on, an IMF program may be difficult due to pressure from President Kais Saied to beef up his control of power.
Tunisian bond spreads – the premium investors demand to buy the debt instead of US bonds – have risen to more than 2,800 basis points and, along with Ukraine and El Salvador, Tunisia is on the list of the three countries most likely to default from Morgan Stanley.
“An agreement with the IMF is an imperative”said the head of the Tunisian central bank, Marouan Abassi.
Egypt has a debt-to-GDP ratio of close to 95% and suffered one of the largest international cash exoduses this year: some $11 billion, according to JPMorgan.
Fund firm FIM Partners estimates that Egypt has to pay off $100bn of hard-currency debt over the next five years, including a hefty $3.3bn bond in 2024.
Cairo devalued the pound 15% and asked the IMF for help in March, but bond spreads are now over 1,200 basis points and credit default swaps (CDS) – an investor’s tool to hedge risk – are trading with a 55% chance of default.
Francesc Balcells, CIO of emerging country debt at FIM Partners, estimates, however, that about half of the $100 billion Egypt must pay by 2027 is to the IMF or bilaterals, mainly in the Gulf. “Under normal conditions, Egypt should be able to pay”Balcells said.
Kenya allocates approximately 30% of its income to interest payments. Its bonds have lost nearly half their value and it currently has no access to capital markets, a problem before a $2 billion bond matures in 2024.
On Kenya, Egypt, Tunisia and Ghana, Moody’s David Rogovic said: “These countries are the most vulnerable just because of the amount of debt maturing relative to reserves, and the fiscal challenges in terms of stabilizing the debt burden.”.
The adoption of bitcoin as legal tender has closed the door on hopes of going to the IMF. Confidence has fallen to the point where an $800 million bond due in six months is trading at a 30% discount and longer-dated ones at a 70% discount.
Pakistan has reached a crucial agreement with the IMF. The advance could not be more timely, since the high prices of energy imports have brought the country to the brink of a balance of payments crisis.
Foreign exchange reserves have fallen to $9.8 billion, barely enough for five weeks of imports. The Pakistani rupee has weakened to record lows. The new government has to cut spending fast as it spends 40% of its income on interest payments.
The Latin American country fell into default just two years ago, but has slipped back into crisis due to violent protests and the attempt to oust President Guillermo Lasso.
It has a lot of debt and, with the government subsidizing fuel and food, JPMorgan has increased its public sector fiscal deficit forecast to 2.4% of Gross Domestic Product (GDP) this year and 2.1% next. Bond spreads have topped 1,500 basis points.