Does it make sense to enter into difficult sovereign debt plea discussions with the vultures of finance amid the COVID-19 pandemic, which is causing significant economic damage around the world?
Argentina, South America’s second largest economy behind Brazil, has a US$500-million payment approaching on April 22 to bondholders, which, if missed, will trigger a month’s deadline, until a bailout or default occurs. The COVID-19 pandemic crisis makes a default on sovereign debt more likely than not.
Argentina is asking its bondholders for a grace period to set up the conditions for economic growth, which will allow it to allocate some of its extremely limited resources for paying its debt, starting at 0.5% interest rate and gradually making its way to 4.5%, putting the average rate to 2.33%.
Coming back home, the Nigerian Government is not seeking a suspension of interest payments from its Eurobond holders, but looking for other alternatives like debt relief from the Chinese. The oil price wars triggered by the Saudis and Russians, coupled with COVID-19 pandemic shutting off global economic demand, has further impoverished the country, causing it to seek aid from unlikely avenues.
“We have not considered investors of our commercial paper,” Finance Minister, Zainab Ahmed, said. “If it happens anywhere, if it’s something that would work, then we will look at it.”
Nigeria’s Eurobonds account for $10.86 billion or 39% of external debt as at April 7, 2020. The country paid $771 million in interest on its Eurobonds last year compared with $329 million in debt service to multilateral creditors, according to the country’s Debt Management Office.
Michael Nwakalor, a Macroeconomist at CardinalStone Research, in a phone chat explained the challenges in getting a suspension on payment for its sovereign debts
“No doubt, Nigeria needs as many funds as it can get to cushion the impact of the twin shocks it currently faces. On debt relief and restructuring, this is more likely to come from multilateral organizations like the World Bank and AFDB. Going the route of Argentina, by seeking to restructure and suspend repayments on private debt may have devastating consequences on Nigeria’s credit ratings and reputation. Creditors may now have to factor in the possibility of debt suspensions in crisis situations.”
According to him, If the FGN is able to get debt suspensions on immediate repayments for bilateral and multilateral debt, which makes up c.60% of the country’s external debt, that should provide some fiscal space even though a high domestic debt (67% of total debt) will still have to be managed.
Nwakalor buttressed more points on why it’s hard for Nigeria to get such bail out.
“Restriction of private debt repayments of the Argentina may be considered a default by rating agencies and it is clearly difficult to get private bondholders to collectively agree to accept stipulated terms as it may mean losses for savings of individuals, who are being hit by the crisi,” he added.
Creditors know they need to concede, as they are faced with two options: giving up future profits, or entering into decades-long litigation that is costly and unwanted.
Wale Okunrinboye, an Investment Analyst, Sigma Pensions Limited, in an email, explained why it might not be a bad idea for Nigeria to ask for a suspension of interest payment. He stated:
“A request for suspension of Eurobond payments, as admirable as it might sound under the present circumstances, would be a tough sell at this time as private investors would be required to swallow uncompensated losses during a difficult time.
”It is important to understand that private investors invest in Eurobonds to meet investment needs or defense liabilities. As such, asking them to suspend payments could trigger portfolio losses leading to fresh market turmoil in the EM Eurobond debt space, as well as adversely impact future access for African countries. As such, I do not think this request is likely to receive favorable attention.”
He explained that Eurobond debt is held by a wide list of disparate creditors that makes it difficult to obtain collective agreement on debt relief. Okunrinboye added that realistically, Nigeria can push for multilateral/bilateral creditors to provide suspension or cancellation of interest payments over this period and hope for quick resolution of the covid-19 outbreak.
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