February 17, 2021 (MLN): A request by a sovereign for rescheduling of its external bilateral debt under the new “Common Framework for Debt Treatments beyond the DSSI” (CF) is unlikely to be compatible with a rating higher than 'CCC', without confirmation that the Common Framework in general or in a specific case will not lead to private-sector involvement. This reflects Fitch Ratings' view that it is very likely that a participating government's debt to the private sector will also be restructured.
The CF is a new instrument of the G20 and the Paris Club for dealing with sovereign debt vulnerabilities of low-income countries announced by the G20 and the Paris Club. The CF explicitly requires debtor countries to seek comparable treatment by private-sector creditors. There is still some uncertainty, not least because exceptions are possible and because debtors would typically prefer to exclude private-sector debt from a restructuring. However, previous Paris Club agreements have typically required private-sector participation.
A restructuring of debt to bilateral creditors in itself would not constitute a sovereign default, while a restructuring of debt to the private sector in the context of the CF is likely to meet Fitch's definition of a distressed debt exchange (DDE) and lead to a 'Restricted Default' rating.
In assessing which countries may request a Common Framework treatment, the IMF's Debt Sustainability Analysis and the need for IMF funding are key, as a CF treatment will always be accompanied by an IMF programme. Additional factors that could influence access to the CF (including private-sector restructuring) are whether there are policy issues that would make negotiating an IMF programme difficult or whether countries rely heavily on international market access, which could be disrupted by private-sector restructuring.
