Pandemic Requires Comprehensive Debt Standstills

Emerging-market economies must be allowed to defer all payments to international creditors — official and private — for at least one year.

The Covid-19 pandemic is a one-two financial punch for developing economies. Not only has it put extraordinary pressure on the budgets of governments, which need to ramp up public health spending and prop up their reeling economies, but it has also caused a sharp exodus of capital from emerging markets. JPMorgan Chase & Co. predicts that 1 in 5 emerging-market countries will default on their debt obligations.

These are extraordinary circumstances calling for extraordinary measures that must include a comprehensive debt standstill. Developing countries, even those considered middle-income countries, must be allowed to defer all debt-service payments to all international creditors — official and private — for at least one year. Group of 20 leaders, in their April 15 communique, acknowledge the need for debt relief. But they call for it only for the poorest countries and only from official lenders. Private lenders are asked to consider giving poor countries a break on debt payments, but they are under little pressure to oblige. This does not go far enough, for reasons we explain below.

The simplest way to achieve the debt relief we call for is to push back by a year all debt repayments due in the next 12 months and to require creditors to forgo one year’s interest income. This would be a one-time-only arrangement. It should not set a precedent for the future, and it should not constitute permanent debt relief. Some government borrowers may need their foreign obligations to be reduced for good, but those negotiations must await more normal times.