June 15, 2020 / 5:23 PM / 17 days ago

Extension of G20 debt freeze may make PSI mandatory: JP Morgan

LONDON (Reuters) - The Group of 20 wealthy economies may make private sector involvement mandatory if they extend debt payment holidays for the world’s poorest countries beyond this year, analysts at JP Morgan said.

Roughly half of an eligible 73 low income countries have applied for the G20’s COVID-19 crisis Debt Service Suspension Initiative (DSSI).

A number of African governments are requesting an extension of the period beyond the end of 2020, to possibly 2022, but there has also been pressure for more private sector involvement (PSI) beyond a pledge in May of “case-by-case” help.

“The lack of support from the private sector under the current DSSI would have disappointed G-20/Paris Club countries, and as a consequence they may make private participation mandatory for any country looking to postpone debt service obligations beyond 2020,” JP Morgan analysts said in a note.

The G20 debt standstill offer is open to the world’s poorest and least-developed countries, as defined by the World Bank and the United Nations, provided they are current in their debt service payments to the World Bank and the IMF.

Some countries have been reluctant to seek such relief out of concern it could harm their credit ratings and access to international capital markets.

Big multilateral lenders, such as World Bank and the African and Asian Development Banks, which have provided roughly a third of low income African countries’ $325 billion external debt, are also in the G20 spotlight to provide relief.

They too are wary about losing their top credit ratings if their coveted “preferred creditor” status is undermined, but JP Morgan, whose analysis is closely followed by debt markets, suggested there could be a workaround.

“The multilateral agencies could explore an arrangement where eligible countries pay debt service as scheduled, in the understanding that those funds are immediately re-disbursed to the paying country,” it said, adding that could limit the risks.

The Jubilee Debt campaign has estimated the cancellation of poor countries’ debt payments, including to private creditors, would free over $25 billion for the countries this year, or $50 billion if extended through 2021.

Reporting by Marc Jones; editing by Barbara Lewis

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