Debt rescheduling refers to restructuring the terms of an existing loan or bond in order to extend the repayment period. It may mean a delay in the due date(s) of required payments or reducing payment amounts by extending the payment period and increasing the number of payments.
Debt rescheduling is one way to provide a borrower with relief when needed due to an economic downturn or another unforeseen events such as job losses, illnesses and so on and so forth. A lender is likely to work with a borrower to reschedule a debt because rescheduling represents a better option for the lender than default.
While debt rescheduling with China can help with our credit problems, the fact remains that it is not always for every country. The country needs to possess the right qualifications and sometimes, the right political attitude and temperament for it.
This government’s need for Chinese debt rescheduling has been triggered by consistently poor macroeconomic policies, leading to a build up of vulnerabilities. And this has been compounded by political and institutional factors.
Zambia is actually now nearly getting into a position of “debt intolerant,” in that we are less able to sustain our high levels of debt to GDP without defaulting. Increasing negative market perceptions, too, may have influenced the need, timing and occurrence of this Chinese debt restructuring. When markets perceive a government as less likely to repay in the future, this can rapidly raise its borrowing costs and, therefore, the likelihood of default.
And under extreme circumstances, a sudden change in investor perceptions may even act as a default trigger. Debt crises and restructurings can be self-fulfilling and caused by contagion. In case of a “debt run” or the effective exclusion from capital markets, we may have no alternative but to halt payments. This risk is especially high when we start facing large rollover risks.
The structure of our debt portfolio has also impacted the need for and timing of these debt rescheduling negotiations with China.
These may also have implications for liquidity, as well as solvency conditions and, therefore, the decision to seek a restructuring of debt with China. However, it is certainly not easy to assess our sovereign debt portfolio risks, especially with these generalised financial stress we are going through. While often the decision to restructure or not depends on a
combination of factors, we cannot ignore the currency composition of our debt. Debt issued in foreign currency makes us vulnerable to exchange rate shocks and currency mismatches because the government collects most of its revenue in kwacha. We also have the issue of floating rate on some of our debt. A high share of floating rate debt can increase the likelihood of severe debt distress due to the impact of interest rate shocks on our average borrowing costs.
We don’t think much attention was paid to the maturity structure of our debt. This government was in a hurry to get money and little attention was given to many important factors. But it is a well known fact that longer average maturity implies less rollover risks and, therefore, a lower likelihood of debt distress when credit markets shut down. However, the costs and consequences of debt restructurings should be carefully considered and compared against the alternative of not restructuring. There may be reputational spillovers from sovereign restructurings on other parts of the economy, in particular foreign direct investment and access to credit. It is a well known fact that countries that undergo a debt restructuring typically see a
drop in private sector access to external credit.
The debt rescheduling the Zambian government is negotiating with the Chinese are debt write-offs and as such will not result in debt reduction. It merely delays total repayments. This will push the burden to future Zambian governments and generations. It will be the future generations paying for today’s extravagance, reckless expenditure and corruption – the enrichment of today’s rulers through kickbacks, cuts, bribes.
Debt rescheduling refers to restructuring the terms of an existing loan or bond in order to extend the repayment period. It may mean a delay in the due date(s) of required payments or reducing payment amounts by extending the payment period and increasing the number of payments.
Debt rescheduling is one way to provide a borrower with relief when needed due to an economic downturn or another unforeseen events such as job losses, illnesses and so on and so forth. A lender is likely to work with a borrower to reschedule a debt because rescheduling represents a better option for the lender than default.
While debt rescheduling with China can help with our credit problems, the fact remains that it is not always for every country. The country needs to possess the right qualifications and sometimes, the right political attitude and temperament for it.
This government’s need for Chinese debt rescheduling has been triggered by consistently poor macroeconomic policies, leading to a build up of vulnerabilities. And this has been compounded by political and institutional factors.
Zambia is actually now nearly getting into a position of “debt intolerant,” in that we are less able to sustain our high levels of debt to GDP without defaulting. Increasing negative market perceptions, too, may have influenced the need, timing and occurrence of this Chinese debt restructuring. When markets perceive a government as less likely to repay in the future, this can rapidly raise its borrowing costs and, therefore, the likelihood of default.
And under extreme circumstances, a sudden change in investor perceptions may even act as a default trigger. Debt crises and restructurings can be self-fulfilling and caused by contagion. In case of a “debt run” or the effective exclusion from capital markets, we may have no alternative but to halt payments. This risk is especially high when we start facing large rollover risks.
The structure of our debt portfolio has also impacted the need for and timing of these debt rescheduling negotiations with China.
These may also have implications for liquidity, as well as solvency conditions and, therefore, the decision to seek a restructuring of debt with China. However, it is certainly not easy to assess our sovereign debt portfolio risks, especially with these generalised financial stress we are going through. While often the decision to restructure or not depends on a
combination of factors, we cannot ignore the currency composition of our debt. Debt issued in foreign currency makes us vulnerable to exchange rate shocks and currency mismatches because the government collects most of its revenue in kwacha. We also have the issue of floating rate on some of our debt. A high share of floating rate debt can increase the likelihood of severe debt distress due to the impact of interest rate shocks on our average borrowing costs.
We don’t think much attention was paid to the maturity structure of our debt. This government was in a hurry to get money and little attention was given to many important factors. But it is a well known fact that longer average maturity implies less rollover risks and, therefore, a lower likelihood of debt distress when credit markets shut down. However, the costs and consequences of debt restructurings should be carefully considered and compared against the alternative of not restructuring. There may be reputational spillovers from sovereign restructurings on other parts of the economy, in particular foreign direct investment and access to credit. It is a well known fact that countries that undergo a debt restructuring typically see a
drop in private sector access to external credit.
The debt rescheduling the Zambian government is negotiating with the Chinese are debt write-offs and as such will not result in debt reduction. It merely delays total repayments. This will push the burden to future Zambian governments and generations. It will be the future generations paying for today’s extravagance, reckless expenditure and corruption – the enrichment of today’s rulers through kickbacks, cuts, bribes.