African Countries Need Not Fear Default

At “Project Syndicate” Moritz Kraemer, Chief Economic Adviser of the risk consultancy Acreditus and former S&P’s sovereign chief ratings officer, addresses the reluctance of African countries to pursue restructuring of crushing debt burdens.

As Moritz Kraemer, who also contributed to the DRGR proposal, argues, the fear of losing market access is exaggerated: 

“While rating agencies will indeed classify a restructuring as a default, worries about losing market access are overblown. For starters, the poorest countries already lost access to capital markets back in March. They should now be focused on regaining market access in a sustainable way.” 

The time is right for it since investors’ quest for yield has grown increasingly desperate, the article continues:

“Today, yields have fallen below 1%. Globally, negative-yield bonds exceed $18 trillion. In this context, investors simply cannot afford to sulk over a defaulted sovereign for too long if it means foregoing attractive returns. And, indeed, the decline in global interest rates has been accompanied by an observable reduction in the time it takes for a sovereign to regain market access after default.” 

In fact, getting active now could actually have a positive long-term effect without the stigma of default since investors are well aware that the current conditions are unique, as Moritz Kraemer explains: 

“Moreover, for a borrower on the brink of insolvency, debt restructuring boosts creditworthiness. As excess leverage is removed, growth and development potential improve. That should make DSSI-eligible sovereigns in Africa and beyond attractive investment destinations again.” 

Read the full article here.

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