Coping with unsustainable debt
The increasingly complex puzzle of debt restructuring
Atradius Economic Research – April 2024
Summary
Summary•

Low- and middle-income countries still face debt problems. Several of them have fallen into default in the past three
years. The G20 Common Framework was created to support these countries with their debt issues. However, debt
restructuring in this initiative is slow.

•

Debt restructuring has become increasingly complex due to the diverse creditor base. The creditor composition haschanged over time, with the most significant developments being the increased share of China and bondholders inexternal debt.

•

China has a different approach towards problematic debtors than the Paris Club countries which complicates
restructuring negotiations. It is also difficult to get bondholders on the same page and to get their proposals
approved by the official creditors.

•

The complex creditor landscape has made debt negotiations longer and more difficult. The restructuring issues incountries like Zambia, Ghana and Sri Lanka underline this. Despite various initiatives to improve this, a solution is
not yet in sight.

A series of adverse developments have increased the debt
problems of vulnerable countries. The Covid-19 pandemic
and the Russian invasion of Ukraine led to disrupted
global supply chains, higher inflation and rising interest
rates. These external shocks came on top of policy failuresand other domestic problems, creating a perfect storm formany countries. In the past three years, the number ofsovereign debt defaults in developing countries totalled
18, outstripping the total over the previous two decades.
More may follow in the coming year as 20 countries
eligible to borrow from the World Bank’s International
Development Association (IDA) are at high risk of debt
distress.
The problematic situation does not apply to all debtor
countries. There is no general debt crisis as in previous

periods since many countries are well positioned to copewith the challenging environment. Many low-income andseveral middle-income countries, however, are in avulnerable position. Spurred by previously low interest
rates, high investment needs and a lack of domestic
revenues, debt in many poor countries has risen to
worrying levels. According to the World Bank, IDA-eligible
countries saw their total externally financed debt rising by
109% between 2012 and 2022, reaching a record USD 1.1
trillion. The increase was almost twice as fast as the 58%
increase seen in middle-income countries. As a result, thedebt-servicing costs on public and publicly guaranteed(PPG) debt for low-income countries are expected to riseby as much as 40% in 2023-2024, consuming asignificant share of government revenues.1 The Fed is
expected to start monetary easing later this year, which
could provide some relief. However, the low interest rateenvironment as before the pandemic is not coming back.2
Moreover, because more than a third of that debt isfinanced at variable interest rates, the number ofcountries ending up in a debt crisis easily can increase
further in the coming years.
Figure 1 Strong increase of countries with debt problems
Number of IDA-only countries by debt distress classification
60
9
13

25

12
1

15

22

14
1

8

8

27

26

16

18

4

3

10

8

6

5

5

5

22

23

22

20

23

24

of lending by Paris Club countries, which fell from 28% to
10% of total loans granted to public borrowers over thesame period. During the Covid-19 pandemic, new debt
commitments to low- and middle-income economies from
China decreased – in line with lower total newcommitments to these countries, as we describe below.
However, this does not change the fact that developing
countries currently borrow more from China than fromthe group of 22 Paris Club countries.
Figure 3 China has overtaken the Paris Club countries when it
comes to lending to DSSI countries

50

14

24

14
1

32

30

20

21

23

24

20

20

6

5

4

5

8

7

20
10

13
1

40

0

Nov. Aug. Jan. Apr. Sep. Jan. Nov. Sep. Jun. Aug. May Feb.
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Low risk of debt distressModerate risk of debt distressHigh risk of debt distressIn debt distress

Source: IMF

If a country is in or close to an external debt crisis, it is
now more difficult to find a solution than before.
Negotiations about debt restructuring take more time andsometimes fail to even get started. It is the emergence of
new creditors that plays an important role in this.

New lenders take prominent roleAt first glance, the creditor composition of long-term
public and PPG debt in the last 10 years has not changed
much. In 2022, IDA-eligible countries borrowed 50% frommultilateral institutions, 29% from bilateral official
creditors and 21% from private lenders. In 2012, these
creditor groups accounted for 56%, 33% and 10%
respectively. Apart from the doubling of share of private
creditors, the changes are limited. However, if we delve
further into the data, two developments stand out.
Figure 2 No big changes of public debt creditor composition at
first sightFirst, China's share within the group of bilateral creditors
has risen sharply. In 2006, Chinese official creditors
provided just 2% of PPG debt, but by 2020 this had risen
to 18%. The increased share of China came at the expense
1

World Bank International Debt Report 2023
The IMF, for example, mentions in its recent World Economic
Outlook that low-income countries’ interest payments are

2

Atradius Economic Research 2

Second, IDA-eligible countries have increasingly issued
bonds, driving the doubling of the share of private
creditors in long-term public and PPG debt. The share ofEurobonds increased from 3.8% in 2012 to 13.5% in 2022,
after having peaked at 13.9% in 2021. Before thepandemic, IDA-eligible countries benefitted from thefavourable global monetary conditions. Due to the lowinterest rates, many countries issued bonds for the firsttime or issued multiple times (Ghana, Zambia). Compared
to domestic interest rates, the rates on Eurobonds werelower. Due to the underdeveloped domestic markets,
domestic interest rates were high, resulting in highinterest payments. Countries, like Ghana, replaced
expensive domestic government paper by internationalbonds to reduce the interest burden on the budget. Whilethese lower interest rates were attractive, the shift tointernational bonds also made these countries more
vulnerable to changes in market sentiment, increasing therefinancing and exchange rate risk. This change of market
sentiment happened when the pandemic came aroundand subsequently the war in the Ukraine. Most developing
countries lost their access to the international capital
market and were faced with a sharp increase in borrowing
costs. In Sub-Saharan Africa, where bond issues rose
sharply until 2018, countries lost market access in 2020.
It was only in January 2024 that an African country (Côted’Ivoire) issued a Eurobond again.
It should also be noted that total long-term debt flows to
low- and middle-income countries declined sharply in
2021 and 2022. In fact, new commitments to publicborrowers reached their lowest level since 2011. The main
driver was a fall in commitments from private creditors,
with the decline from bondholders being the largest. Bondestimated to average 14.3 percent of general government
revenues in 2024, which is about double the level 15 years ago.

issuance by public and private sector borrowers fell
sharply in 2022 due to the rising global interest rates,
credit rating downgrades for several borrower countries
and overall increasing risk aversion.
While bilateral and private creditors were cautious with
their lending activities during the uncertain global
economic environment of the last few years, themultilateral institutional creditors stepped forward as
lenders of last resort. The World Bank and othermultilateral development banks provided a record
USD 115 billion in new financing in 2022, making them
the primary source of new financing for developing
countries that year. This seems to bring back old times,
when multilateral institutions played a central role insolving or at least mitigating the debt problems ofvulnerable countries.3 However, multilateral institutions
no longer have the decisiveness they used to havebecause a large part of the debt involved in restructurings
is in the hands of the new creditors.

because of fear of negative consequences for theirsovereign external ratings as applying to the DSSI could
signal a deteriorating creditworthiness. However, rating
downgrades due to participating in the DSSI did not
happen. Some were placed on negative watch by credit
rating agencies, but overall DSSI participation did not
trigger severe adverse markets reactions.5 On thecontrary, sovereign bond spreads even decreased forsome countries.
Figure 4 Despite DSSI relief, debt issues arose for somecountries

DSSI: temporary relief
During the Covid-19 pandemic, the G20 provided atemporary debt relief to low-income countries throughthe suspension of debt-service payments to official
creditors. This initiative, the Debt Service Suspension
Initiative (DSSI), ran from April 2020 until the end of
2021. It provided participating countries with somebreathing room to increase spending on health andsupport for the most vulnerable households. It was in fact
required that participating countries used these freed
resources to soften the impact of Covid-19 pandemic.
Countries were also obliged to work closely with the IMF
and the World Bank, which were monitoring thesecountries.
The DSSI comprised of a suspension of interest andprincipal payments to official bilateral creditors. Althoughprivate creditors were asked to participate on comparable
terms, only one did.4 But most DSSI borrowers were also
hesitant to request forbearance of private creditors. Many
feared the potential consequences for their sovereign
credit ratings and future market access.
All IDA countries and least developed countries (LDCs) as
defined by the United Nations that had no arrears to the
IMF and the World Bank were eligible for the DSSI. Of the73 eligible countries, 48 have participated and requested
support from official bilateral creditors. Most of themcame from Africa. According to the IMF, an estimated totalof USD 8.9 billion in debt-service payment was suspended
from May 2020 to December 2021. Less than the USD
12.9 billion initially projected.
Not all eligible countries were eager to participate in the
DSSI. For some, like Nigeria and Honduras, the DSSI relief
was rather limited due to the low level of official bilateral
debt. Others, like Ghana and Benin, did not participate
3

Most prominent initiatives in the past have been the Heavily
Indebted Poor Countries Initiative (HIPC) and the Multilateral
Debt Relief Initiative (MDRI), launched by IMF and World Bank in
1996 and 2005 respectively.
4
A national development bank participating as a private creditor,

Atradius Economic Research 3

Although the DSSI did support countries, it was only atemporary liquidity solution as it provided a suspension ofdebt-service payments. Debt suspension received in 2020
was rescheduled with a one-year grace period and fouryear repayment period. Debt suspension provided in 2021
was also rescheduled to a one-year grace period, but fiveyear repayment period. All countries are already repaying
the DSSI relief. This creates an extra burden on
governments that already have excessive debt-service
payments in the coming years due to their elevated debt
levels. Especially when these suspension of debt
payments were relatively high.
As said, the DSSI only solved the liquidity issues and did
not address the emerging solvency problems in countries.
Of the DSSI participating countries, several have total
public debt levels above 100% GDP and have a large shareexternal debt. For many, debt repayments could becomechallenging because of these elevated public debt levels
and the related high debt-service repayments – especiallytaking into account the high interest rates globally anddomestically. The rising borrowing costs and the lack ofaccess to international capital markets have raised therefinancing risk and default risk for many indebted
countries.

Common Framework: patience needed
To address the more structural debt issues or the
protracted liquidity issues, the IMF and the G20, together
with the Paris Club, introduced the Common Framework(CF) in November 2020. The CF goes beyond the DSSI, but

Joint IMF-WBG Staff Note: DSSI Fiscal Monitoring update,
September 2021
5
IMF working paper, debtor (non) participation in Sovereign Debt
Relief: a real option approach, September 2023

some argue not far enough. Debtor countries can request
a debt treatment of all G20 official creditors under the CF.
These creditors include the more traditional members of
the Paris Club, but also new creditors like China and India.
Next to this, the CF requires a comparable treatment fromprivate creditors to ensure a fair burden sharing. A CF
debt treatment is accompanied by an IMF programme.
Only four countries have requested debt relief under the
CF so far: Chad, Ethiopia, Ghana and Zambia. Progress isvery slow with the only country successfully negotiating adebt restructuring being Chad. Although each of thesefour countries has its own challenges, the complex debt
structure is something they have in common. Thechanged creditor base is clearly visible in these countries.
Commercial debt to banks (Chad, Zambia) and Eurobonds(Ghana, Zambia) have become increasingly important.
There is also the increasing role of new creditors like
China (Zambia, Ethiopia). On top of the complex debt
structure, domestic issues are also slowing progress(Ethiopia, Zambia). Ethiopia originally requested debt
relief in early 2021, but due to the civil war, this process
delayed. After reaching a bilateral debt-service suspension
with China in September 2023, Ethiopia agreed with its
official bilateral creditors a suspension of debt payments
until 2025 in November 2023. This debt relief from theParis Club is contingent on Ethiopia securing an IMF loan
by March 2024, which is yet to be agreed on. Ethiopia
missed an interest payment on its international bond at
the end of 2023 and formally entered a default situation.
Figure 5 Varying debt composition countries under Common
Framework

Chad, the first country to reach an agreement under theCF, had to restructure a commercial collateralised debt
held by many banks and funds. A large private creditor
agreed to reprofile part of the debt service due in 2024
and official creditors will contribute if this is not sufficient.
For Ghana, a domestic debt restructuring was added to
the requirements under the CF as it was deemed too largeof a burden. Ghana defaulted on its Eurobonds inDecember 2022 and applied to the CF in April 2023, after
it completed restructuring its domestic debt. A principle
agreement with their official creditors was reached in
January 2024. But still, the country needs to startnegotiations with the bondholders.
Zambia is a case-in-point of how difficult the process ofrestructuring is under the CF. After defaulting on its
Eurobonds in November 2020, Zambia requested debt
relief under the CF in January 2021. After three years ofAtradius Economic Research 4

Box: High domestic debt is a complicating factor
Sometimes domestic debt can present too large aburden to be excluded from restructuring. In many
low- and middle-income countries, domestic debt has
increased over the past years. Many countries havemade efforts to develop a domestic capital market tobroaden its creditor base, but some have also relied too
heavily on domestic sources when external financing
options dried up, especially during the pandemic. Facedwith a decline in official bilateral lending and loss ofcapital market access, governments have been
increasingly issuing domestic bonds. On average
domestic debt has higher interest rates and shorter
maturities, raising the borrowing costs and rolloverrisk. The increase in domestic debt can be a trigger for
default. For instance, when Ghana requested a debt
restructuring in December 2022, public debt wasalmost 90% of GDP with the share of domestic debt
48% of GDP. Ghana requested an IMF programme in
July 2022, but needed to restructure its domestic debt
before IMF approval. This was completed by mostfinancial institutions in February 2023. Although
important for restoring economic stability, debt
restructuring is generally disruptive for the economy. It
can be even more disruptive to financial stability, asbanks and pension funds will incur losses on theirholdings, especially when restructuring domestic debt.

negotiations, it looked like an agreement was finallyreached. At least, until the official creditor committee
rejected the restructuring deal the Zambian government
reached with a number of private Eurobond holders
because of breaching the comparability of treatment
principle. Eventually, a revised deal was agreed between
Zambia and its bondholders which was approved by China
and other official creditors. It looks like there is finallylight at the end of the tunnel for Zambia. But still, it needs
to agree terms with other commercial creditors like
Chinese banks.
When applying to the CF, both debtor and creditor
countries need patience. With Chad being the only country
to reach a debt deal so far and Zambia’s negotiations
taking three years, the G20 Common Framework does notappear to be working properly. Due to the protracted
nature and complexity of the process, other highly
indebted countries could become increasingly reluctant toparticipate in the CF.
Some countries that could participate in the CF do indeed
pursue bilateral negotiations instead, as we have seen
recently with Malawi, Djibouti and Laos. Malawi isnegotiating with commercial and official creditors outside
the CF. Djibouti suspended debt payments to its major
creditor China in December 2022 and is currently
negotiating with its creditors, following the path ofAngola. In 2020, Angola restructured part of its Chinese
external debt when it faced debt issues. It seems that for
countries with one creditor, in most cases China, abilateral restructuring might be more efficient than one
with all creditors under the same conditions. Moreefficient does not always mean that it is more favourable
for the borrowing country. Laos, for example, willprobably reach an agreement with China on payment
deferments to support fending off a default later this year.
However, as happened before, China’s support will be inexchange for access to strategic assets and resources,
such as minerals and hydropower plants, and broader
trade and investment opportunities.

Figure 6 Laos mainly borrows from China, while Sri Lanka
owes relatively more to bondholders

Sri Lanka: ongoing debt negotiations
Difficult negotiations on external debt are also taking
place for countries that got into trouble due to financial
mismanagement and political instability. Here too, thecomposition of the debt by creditor plays an importantrole. A notorious case is Sri Lanka which, despite being a
middle-income economy, defaulted on its debt in April
2022. External shocks such as the Covid-19 pandemic andterrorist attacks contributed to a sharp rise of public debt.
But long-term mismanagement of public finances isplaying a much more significant role than thesecoincidental developments. Since the end of the civil war
in 2009, the government chose to finance a series ofmajor infrastructure projects with the help of Chineseloans, while at the same time rejecting grants and projects
from other countries.6 Moreover, in addition to bilateralfinancing for investments in ports, energy, and transport,
the Sri Lankan government also binged on internationalsovereign bonds, issued at relatively high coupon rates.
When Sri Lanka defaulted, about one third of its foreign
debt was in the hands of bondholders, while China, Japan,
the ADB and the World Bank each held 9% to 13%.
Over the course of 2023, some light began to appear at
the end of the tunnel. Sri Lanka reached a preliminary
approval for debt restructuring from its bilateral creditorsand secured board-level agreement to access the IMF's
Extended Fund Facility (EFF) of USD 2.8 billion. In
addition, the economy is performing better again thisyear, after two consecutive years of contraction. Sri
Lanka, however, is not out of the woods yet. Adverse
consequences of the financial crisis such as tightmonetary and fiscal policies are holding back private
consumption and business investment. Moreover,uncertainty about the debt situation will continue as theactual debt restructuring process is likely to last until theend of the year. Negotiations are difficult because a broadarray of creditors is involved, including China, India, Iran,
Kuwait, Saudi Arabia and Pakistan. As a result, Sri Lanka is
expected to remain in default the remainder of the year,with external debt service suspended. Meanwhile, theupcoming presidential and parliamentary elections in
October mean that political instability will persist in aperiod that the government must implement unpopular
IMF-backed austerity policies. As a result, little needs tohappen before social unrest will force the current
government to postpone or delay the implementation of
the much-needed IMF reforms.

6

Thamashi De Silva, Simon Commander and Saul Estrin, 2022.

Atradius Economic Research 5

Pakistan: recurring refinancing issues
Another middle-income economy coping with an external
debt problem is Pakistan. The country has not defaulted,
and probably will not in the near-term future. However,negotiations about debt restructuring will probably beneeded because Pakistan’s export earnings are too low tomeet future debt obligations. Here too, the government
invested heavily in infrastructure projects, with China
playing a major role in providing loans that pushed up the
public debt level. Currently, the situation has somewhat
stabilised, with the IMF and Pakistani authorities having
reached a staff-level agreement on the final review of anine-month Stand-By Arrangement (SBA). An important
positive consequence of the IMF support is that it has
encouraged other creditors to lend financial assistance toPakistan. China, Saudi Arabia and the UAE, along with theWorld Bank and the Asian Development Bank were willingto provide Pakistan with loans which have averted adefault for the time being.
For Pakistan the outlook is therefore probably better thanfor Sri Lanka, but here too the mix of further debt
negotiations and an unstable political situation is an
important risk factor. The SBA has been concluded
positively mainly because the government last year
implemented IMF-backed policy reforms such as a
substantial increase in electricity and gas tariffs and tightmonetary policy to combat high inflation. Further
measures are necessary to get IMF support in the form of
an EFF to maintain external solvency. However, it isuncertain whether this will work. In February 2024, a
coalition government took office after controversial
elections. The government can rely on the military forpolitical support, but it has only a slim majority inparliament and is unpopular among broad sections of the
population. Political stability will remain tenuous,
especially if austerity measures further feed discontent
among the population. If the coalition does not survive orif the government is unable to keep the IMF on board, arenewed financial crisis is in the cards again. Apart from
that, support from other creditors is uncertain as well.
Negotiations to reschedule part of the foreign debt will
have to start in short term and China is likely to be a key“What lies behind Sri Lanka’s collapse?”, blogs.lse.ac.uk.

part of that effort.

could enhance prompt and effective debt solution.

China versus the Paris Club

No solution in sight yet

The above shows that the emergence of new creditors
has made debt restructuring negotiations more difficult
than in the past. This is mainly due to China’s increasingrole and its different approach to lending and debt relief. A
comprehensive study that makes use of various sources
says this approach concerns three aspects.7 The first one
is that China puts more emphasis on creditor protection
against default than other countries. For example, China
requires borrowers to set up a special account to settle
the borrower's debt obligations, which enhances theseniority of Chinese lenders' claims and shifts the burdenof providing debt relief onto other creditors. Moreover,when debtor countries have run into problems, China
shows little willingness to implement any haircuts. A
second requirement is that borrowers must keep theterms of loan contracts and debt restructuringconfidential. And finally, China is preferring bilateralsolutions for debt problems instead of joining a
multilateral approach.

Countries that have experienced, or have come close to,
debt default in recent years are faced with complex
coordination between a range of different creditors. In
many cases, China and bondholders are prominently at
the table, in addition to traditional creditors, and comewith their specific interests and own approach. The G20
Common Framework, where all creditors do participate,has its shortcomings and funding remains difficult for
countries participating in this initiative.

This last point seems to be the fundamental reason forthe difficult negotiations. China does not participate in the
Paris Club, which facilitates coordination among publicbilateral creditors, while this body is part of the previously
common regime in which the IMF used to play the central
role. China is the third largest shareholder within the IMF,
but the country’s absence from the Paris Club is making it
difficult for the IMF to respond rapidly to borrowers in
distress. China’s differences with both the IMF and theParis Club countries over debt transparency and burden
sharing in restructuring increases the time needed tonegotiate a programme with the IMF for those countries
that have borrowed from China. Practice shows that theuncertainty associated with long negotiations translates
to additional costs for the borrower. As long as there is noagreement, access to capital markets is not available anddoors to other creditors mostly remain closed.

Private creditors are no easy negotiating partners
When bondholders are part of a debt restructuring it is
becoming even more complex, not only one holder has asay, but several need to agree on the terms. Already thiscan take quite some time, but in the debt restructuring
seen under the G20 Common Framework an important
shortcoming is that any bondholder proposal negotiatedwith the debtor government remains subject to approvalof official creditors. We saw this happening with Zambia’s
debt restructuring when an initial deal with bondholders
wasn’t approved by China, the largest creditor, because it
appeared to favour private creditors. Currently, official
creditors are first in determining how much debt
restructuring is needed and private creditors need tofollow on comparable terms.

This has made negotiations longer and more difficult. As
the IMF has put it recently: “Today's more complex
creditor landscape makes coordination a challenge.” A
case-by-case approach is now common practice, since theexternal debt composition differs across countries, andborrowing countries make different choices about which
creditors they ask for a solution to their debt problems.
The current restructuring issues in several countries
however show that this approach is far from ideal.
Various initiatives have been set in motion to improve thesituation. One of these is the Global Sovereign Debt
Roundtable (GSDR), meant to find common groundbetween multilateral lenders, Paris Club and non-Paris
Club bilateral creditors, private sector lenders andborrowing countries, and co-chaired by the IMF, WorldBank and G20 presidency. The GSDR wants to tackle theproblem fundamentally by trying to build greatercommon understanding among key stakeholders involved
in debt restructurings, for example on information sharing
and the role of the multilateral development banks inrestructuring processes. The initiative goes to the heart ofthe problem, but given the major differences thatcurrently exist, there is still a long way to go before there
is a well-functioning coordination mechanism for debt
restructuring. The IMF has also launched reform proposals
which mainly focus on accelerating and relaxing its own
procedures. The reforms would allow the IMF to provide
financing if negotiations with creditors have not yet been
completed. Borrowing countries will benefit from this, butwhether this will lead to a faster conclusion of thenegotiations remains uncertain. Despite these initiatives, astructural solution to the problems surrounding debt
restructuring is not yet in sight.

Afke Zeilstra, Senior Economist
afke.zeilstra@atradius.com+31 20 553 2873
Bert Burger, Principal Economist
bert.burger@atradius.com+31 20 553 2872

Because the share of bondholders in defaulted debt is solarge nowadays there should be early and simultaneous
engagement by debtor countries with all creditors. This

7

Ferry, Lauren L. and Alexandra O. Zeitz - China, the IMF, andAtradius Economic Research 6

Sovereign Debt Crises, October 17, 2022.

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