The Bolton Committee
The COVID-19 pandemic has hit the global community with tremendous force, with developing countries particularly vulnerable to the economic and health implications of this crisis. For these countries, the economic costs of social distancing are even higher than in the US and Europe, and vulnerable SMEs, with low cash reserves, account for a much larger share of the economy. Such countries also have far more precarious health-care systems. The funds required to support vulnerable workers and businesses, as well as to treat COVID-19 patients, are significant.
Left to their own devices, financial markets will pick winners and losers. The winners will be those countries with enough capacity to issue safe bonds. They will be able to borrow huge amounts at rock-bottom interest rates. The losers will be those countries unable to raise funds to deal with the crisis, but capital will also move away, as it has already started to, precisely because of borrowing by the US, China, and European countries. It is little wonder, then, that more than 90 countries have already approached the International Monetary Fund for financial assistance.
A cascade of disorderly sovereign defaults now, when developing-country governments need to spend huge sums to keep their citizens healthy and their economies on life support, would have enormous human and economic costs, and sharply diminish our chances of containing the pandemic.
Who we are:
Columbia University Professor Patrick Bolton recently assembled a group of economists and legal scholars with expertise on sovereign debt defaults to start a conversation about the coming crisis. As this group began an active exchange about possible solutions, we came together to draft guidelines for how a standstill on debt service payments by sovereign borrowers might be implemented. Our goal was to provide best practices for implementation that would protect many of the world’s poorest nations from default as they grapple to deal with the economic impacts of the COVID-19 pandemic.
- Patrick Bolton (Barbara and David Zalaznick Professor of Business,
- Lee C. Buchheit (Honorary Professor, University of Edinburgh)
- Pierre-Olivier Gourinchas (Professor of Economics, University of California at Berkeley)
- Mitu Gulati (Professor of Law, Duke University)
- Chang-Tai Hsieh (Phyllis and Irwin Winkelried Professor of Economics, University of Chicago; Co-Director of BFI Development Economics Initiative)
- Ugo Panizza (Professor of Economics, The Graduate Institute Geneva)
- Beatrice Weder di Mauro (Professor of International Economics, The Graduate Institute Geneva)
In short, a tsunami of sovereign debt distress is coming. And the choice for the private creditors of low- and middle-income countries is simple and stark: agree to an orderly process of debt mitigation that shares the burden and limits the damage or demand immediate repayment and set off a wave of catastrophic defaults that sweeps many countries—and their creditors—away.
The official sector has moved swiftly to assist the poorer countries most affected by the COVID-19 pandemic, under the banner of the Debt Service Suspension Initiative. Will private sector creditors follow suit? The G20 “called upon” commercial creditors to provide comparable forbearance but did not mandate it. In response, the private sector has offered an impressive list of the reasons why a temporary deferral of payments to commercial creditors will be time-consuming, expensive and possibly very damaging to the debtor countries requesting it. This column discusses the challenges in attempting to coordinate wholly voluntary private sector debt relief for sovereigns afflicted by the pandemic.
Many low and middle income countries may face problems servicing their external debts while addressing the COVID-19 emergency. Urgent action is needed to prevent disorderly defaults and litigations. This Policy Insight describes a mechanism to implement a debt standstill which would free significant resources to cover some of the most immediate costs of the COVID-19 crisis.
On April 14, the G-7 announced they would support an initiative to suspend the debt payments of the world’s poor countries, but only if the G-20 agree to the proposal. In advance of the G-20 decision, a group of experts from various institutions – economists and legal scholars – have drafted guidelines for how a standstill on debt service payments by sovereign borrowers might be implemented. Their goal is to provide best practices for implementation that would protect many of the world’s poorest nations from default as they grapple to deal with the economic impacts of the COVID-19 pandemic. The implementation guidance can be found here.
The world is facing a potential flood of disorderly sovereign defaults at a time when developing-country governments need to be spending huge sums on keeping their citizens healthy. To avoid a catastrophic outcome, the International Monetary Fund should coordinate a broad debt moratorium.