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Burdens that can’t be passed on

The Paris Club of official bilateral creditors is promoting the view that holders of sovereign bonds should take their share of the burdens when borrowers need rescuing from default. Jerome Booth argues that this burden-sharing dogma flies in the face of insights that can be gleaned from history and conflates what is essentially politically-motivated lending with market-driven lending. It will, he argues, inevitably damage the debtors it is ostensibly designed to help

       

In the past couple of years the relationship between holders of emerging-market bonds and the official sector has changed from one of mutual beneficial co-operation to one of greater antagonism.


The actions that led to this state of affairs emanated from the official sector and have been driven by the desire to cut foreign aid budgets, though this motivation is not fully transparent. Effectively, bond investors are being encouraged to contribute to the resolution of emerging-market balance-of-payments crises by assenting to bond restructurings. Although bond markets can and do design their own voluntary solutions to such crises, the official sector's involvement is unwelcome and unnecessary. It is detrimental to good faith between bondholder and debtor and compromises future access to private-sector capital for the debtor.


In addition to the fact that the current policy is misguided, uncertainty about how much the official sector will meddle in private-sector relationships with emerging-market sovereign issuers in the future hangs heavy on the market.



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