A new Eurodad report entitled “Sleep now in the fire: Sovereign Bonds and the Covid-19 Debt Crisis” provides new insights into the structure and holdings of sovereign bonds of developing countries.

The report analyses a total of 549 sovereign bonds outstanding as of January 2021. These are public listed securities under foreign currency and governing law issued by national governments of middle- and low-income countries to raise funds.

The research discloses the identity of 501 institutional investors from 31 countries which hold a total of US$ 169 billion in sovereign bonds of 62 developing countries. Investors in sovereign bonds are projected to receive a total of US$ 330 billion in debt payments over the next five years. This figure represents almost seven times the cost of ending the pandemic, estimated at US$ 50 billion by the IMF.

The top 25 investors in sovereign bonds, led by US-based asset managers such as BlackRock, PIMCO and AllianceBernstein, have a total of US$ 42.7 trillion in Assets Under Management. This figure is equivalent to four times the GDP of the 62 sovereign bond issuers that are covered in the report. This leads to an outsized disparity in the availability of financial, legal and technical resources that favours creditors to the detriment of sovereign debtors. The latter are at a structural disadvantage with respect to their creditors.

Author Daniel Munevar, a senior policy and advocacy officer at the European Network on Debt and Development (Eurodad) said: “Investors have amassed record profits collecting on sovereign bonds while hundreds of millions are suffering as a result of the pandemic. They are being forced to "Sleep now in the fire" by a dysfunctional sovereign debt architecture. Private creditors are profiting from this system. Without binding measures, they will continue to avoid entering into any debt relief programmes that could alleviate the suffering of the world’s poorest as they grapple with post-Covid-19 recovery.

“This research is an attempt to diagnose the root cause of this problem. Lack of transparency on public debt has made this a challenging process. However, it is clear that the structure of sovereign bond markets is a central part of this issue.”

The report provides a breakdown of currencies, coupons, maturities, governing laws, presence of Collective Action Clauses (CACs), underwriters and has identified bondholders across sovereign bonds.

It also identifies the following:

• Underwriting of sovereign bonds is highly concentrated. The top 10 underwriters, led by Citigroup, Deutsche Bank and JP Morgan, have participated in the issuance of 440 bonds, equivalent to 80.1 per cent of the total.
• The lack of measures to ensure the participation of these creditors in debt relief initiatives such as the G20’s Debt Service Suspension Initiative (DSSI) allows them to profit from risk while refusing to assume losses once they materialise.
• A substantial lack of transparency with regards to contracts and holdings of sovereign bonds. Despite being public contracts, these documents are gated behind expensive paywalls of commercial providers of such documents or are often not available. As a result they are effectively hidden from public scrutiny and accountability from and to relevant actors such as citizens, parliaments, unions or civil society organisations (CSOs).

The report concludes that much more must be done to increase transparency surrounding sovereign bonds and it calls for the introduction of a multilateral sovereign debt workout mechanism.

Recommendations include:

• The establishment of a public registry system for loan and debt data, including full disclosure of information on sovereign bonds.
• Improved regulations for disclosures of bond contracts and holdings by underwriters and investors such as investment banks and hedge funds.
• The adoption of a statutory approach for private creditor participation in debt relief under a multilateral sovereign debt workout mechanism.

Munevar added: “Unless we improve transparency and introduce mechanisms that compel private creditors to participate in debt relief, they will continue to profit from vulnerable countries’ debt, regardless of the human costs of the crisis. This is already a catalyst for mass unrest. Without concrete actions, we are at risk of a vicious cycle of instability and crisis across the globe.”

ENDS

Media contact: Julia Ravenscroft, Communications Manager at Eurodad: [email protected]/ +32 486356814.