Private investors profiting from $200 billion of bond debt in climate-vulnerable developing countries

Private investors in rich nations are profiting from nearly US$200 billion of the most challenging form of sovereign debt that has been issued by just 28 developing countries, many of which are highly vulnerable to the impacts of climate change, according to new analysis released by IIED ahead of next week’s annual World Bank and International Monetary Fund (IMF) meetings.

Heavy debt burdens are a major brake on lower-income countries’ ability to tackle the climate crisis, which they have done little to cause and to which they are often more vulnerable than wealthier nations. Many countries have sunk deeper into debt as a result of COVID-19, food price rises and war in Ukraine.

Although debt has been on the agenda at meetings of the G20 this year, there’s been little progress in reforming global financial systems to address it.

IIED analysed the outstanding external sovereign hard currency bond debt of 53 countries that had a 'sub-Investment Grade' (also known as 'High Yield') rating from public ratings agencies. Of these, 28 were either least developed countries (LDCs) or lower-middle income countries, which owed a total of $173.2 billion in outstanding bond debt.

While ownership of bond debt is often opaque and difficult to pin down, researchers believe a significant majority of this $173.2 billion is owned by institutions in rich countries, such as investment funds, mutual funds and private banks. The LDCs’ share of this debt totals $20.7 billion.

In its latest available published assessment from September 2020, JP Morgan, which manages the benchmark sovereign bond market index, estimated total 'emerging market' bond debt of this kind at $1.29 trillion, of which more than 80% was owned by 'developed market' institutions. For the countries in our analysis, the proportion is likely to be higher.

Unlike loans extended by multilateral banks or through bilateral deals, these kinds of bonds are owned by many different investors whose goal is to maximise their profits.

Tom Mitchell, executive director of IIED, said: “Restructuring these kinds of bonds is extremely difficult because most private investors will only accept reduced profits when countries officially default, a lose-lose for both parties.  

“That makes it even more important for the international community, including the IMF and World Bank, to do all it can to address the spiralling debt burdens of countries on the frontlines of the climate crisis.

“People are already losing their lives and livelihoods to increased flooding, wildfires and heatwaves. We know worse is to come and the most vulnerable nations need the fiscal space to be able to prepare.”

Many of the countries in our analysis are in regions that have suffered extreme floods, droughts and other disasters in recent months and years.

Whereas the public sector, through schemes like the Debt Service Suspension Initiative, has made some efforts to acknowledge the problems developing countries are facing, private bondholders have yet to meaningfully engage in debt relief for poorer nations amid the growing debt crisis. IIED believes this needs to change.

Lower-income countries are most vulnerable to painful bond debt restructurings where, without a bankruptcy process to fall back on, they are forced to navigate challenging legal structures and aggressive investors which can combine to drag out sovereign debt crises, as in the case of Sri Lanka.

Mitchell added: “By restructuring multilateral and bilateral loan debt owed by the poorest nations, which is the lower hanging fruit, wealthy nations can give struggling governments time and fiscal wiggle room to deal with holdout hedge funds and other institutions that make bond debt so difficult to tackle.”