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Africa’s Most Indebted Countries Caught in a Vice Between Creditors and Credit Ratings Agencies

Yasuyoshi CHIBA / AFP

Chad, Zambia, and Ethiopia are among a growing number of African countries seeking debt relief under the G20’s common framework (CF) and while that might provide some temporary relief, one of the world’s largest credit ratings agencies warned on Tuesday that it’s going to come at a potentially steep price.

Fitch Ratings agency said on Tuesday that any government that participates in the common framework arrangement is at risk of a credit downgrade if the debt restructuring impacts obligations owed to private creditors like bondholders. “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,” said Fitch.

This is exactly the reason why Kenya hesitated to join the G20’s Debt Service Suspension Initiative last May and is now confronting a downgrade as it moves forward with debt restructuring as part of the CF.

Any hit to a country’s credit rating makes it much more costly for that state to borrow money in private capital markets.

Kenya, like Zambia and Ethiopia, is also engaged in talks with both Chinese and multilateral creditors that have, so far, only agreed to defer debt repayments for periods ranging between 6 months and 3 years. At this point, there are no meaningful discussions underway about canceling substantive portions of these countries’ debts.

While calls in both Africa and the United States are growing louder for the International Monetary Fund to issue new Special Drawing Rights that would provide struggling African treasuries with badly-needed liquidity, there’s very little chance that such a move would get past Republican opponents in Washington, D.C. GOP legislators have made it very clear that they would move to block any effort to issue new SDRs on the grounds that it would provide unrestricted money to China and other U.S. rivals.

So, between the credit ratings downgrades, China’s unwillingness to write off some of its commercial loans in Africa, bulging private creditor obligations, and the low probability that the IMF will be able to inject large amounts of fresh capital, the options are dwindling for a growing number of treasuries across the continent.

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