In a surprising turn of events, the restructuring deal between the Zambian government and bondholders is now facing uncertainty as disagreements over the treatment of official sector creditors come to light. While an agreement-in-principle had been reached between the government and bondholders after months of challenging negotiations, the International Monetary Fund (IMF) requested certain adjustments to ensure compatibility with its targets and parameters.
However, the bigger issue lies with the treatment of government creditors, primarily China, who argue that they are being offered a worse deal compared to bondholders. This has raised concerns about the violation of the “comparability of treatment principle” in sovereign debt restructurings, which states that official sector creditors cannot be treated less favorably than private creditors. Consequently, the bondholder committee has decided to publicly express their disappointment and concern, stating that the restructuring deal, which has taken three years to reach, may now unravel.
The committee emphasizes that their revised agreement-in-principle provides more debt relief to the Zambian government compared to the recommendations of the Official Creditor Committee (OCC). They argue that their proposal meets IMF program parameters and debt sustainability targets, contrary to the OCC’s interpretation of the comparability of treatment criteria. However, the OCC claims that the revised proposal does not align with the memorandum of understanding (MOU) agreed upon between the OCC and the government.
The lack of transparency and consensus among OCC members regarding the requirements for compliance with the comparability of treatment principle has created frustration among bondholders. Furthermore, the OCC’s demand for higher debt relief from commercial creditors than deemed necessary by the government and the IMF raises concerns about inter-creditor equity and undermines the credibility of the Common Framework.
Unfortunately, these disagreements have led to additional delays, making it challenging to resolve the situation promptly and implement a restructuring agreement within the required timeframe. The bondholder committee remains willing to proceed with the revised agreement if a way can be found to obtain OCC support or if an alternative path for debt restructuring can be pursued.
1. What is the comparability of treatment principle in sovereign debt restructurings?
The comparability of treatment principle states that official sector creditors should not be treated worse than private creditors in debt restructurings.
2. Why are bondholders and government creditors clashing in Zambia’s debt restructuring?
Bondholders and government creditors, primarily China, are clashing due to concerns that government creditors are being offered a worse deal compared to bondholders, violating the comparability of treatment principle.
3. What are the consequences of the disagreements between bondholders and government creditors?
The disagreements have led to uncertainty and potential unraveling of the restructuring deal. It may also undermine the credibility of the Common Framework and create inter-creditor equity issues.
4. What is the stance of the bondholder committee?
The bondholder committee expresses disappointment and concern over recent developments and emphasizes that their revised proposal provides more debt relief to the Zambian government compared to the recommendations of the Official Creditor Committee.
5. What is the next step in the debt restructuring process?
The bondholder committee remains ready and willing to implement the revised agreement if a way can be found to obtain the support of the Official Creditor Committee or explore alternative options for debt restructuring.