* Chad seen as test case for new debt relief initiative
* President’s death casts doubt over speed of debt overhaul
* Failure to secure deal this year could deter other countries
By Joe Bavier and Karin Strohecker
JOHANNESBURG, May 5 (Reuters) – Political turmoil in Chad has cast doubt over the Central African oil producer’s efforts to agree relief on its nearly $3 billion debt burden, widely seen as a test case for a global plan to help the world’s most indebted countries.
Six months ago, the Group of 20 (G20) major economies launched a common framework designed to help governments to overhaul the debt they owe to official and commercial creditors after the COVID-19 crisis sent the burdens of many developing countries spiralling.
The plan aims to offer a long-term fix rather than the temporary relief of an earlier 2020 debt service suspension initiative (DSSI).
However, ratings agencies warned that doing so could lead to downgrades and only three countries – Zambia, Ethiopia and Chad – have requested relief under the framework.
Without a case proving the framework can secure smooth debt restructuring, others are likely to shy away, exacerbating pressures on the world’s most vulnerable economies.
“If countries see the costs but don’t see the benefits, why would they go for it?” said Daouda Sembene at the Washington-based Center for Global Development (CGD).
“That’s why it’s critical to have that first win. And time is of the essence,” said Sembene, who previously represented West and Central Africa on the International Monetary Fund (IMF) executive board.
Debt restructuring talks in Zambia – Africa’s first pandemic-era sovereign default – have been bogged down by tensions between Chinese lenders and Eurobond holders.
Ethiopia’s situation is unlikely to warrant a full-blown restructuring, observers said.
Chad, whose commercial external debt is concentrated in one unlisted loan seemed an obvious candidate.
“Chad is the only realistic chance there is to prove that the common framework can actually work,” said one emerging markets investor.
TURMOIL AND DOUBT
But progress has been far from swift and could slow down further following the death in April of President Idriss Deby, who ruled the West African oil producer for three decades.
Chad reached a provisional agreement on an IMF programme – considered a necessary step for debt restructuring – in January but it has yet to be approved by the IMF board.
Investors told Reuters that many were surprised a memorandum of understanding between the government and official creditors had not yet been signed.
G20 and Paris Club creditors – including China, France, India and Saudi Arabia – backed N’Djamena’s common framework request after they met for the first time on April 15.
Five days later Deby was killed in a battle with rebels, plunging Chad into political turmoil and throwing the future of the debt talks in doubt.
“To benefit from the common framework, they must first sign onto a programme with the IMF,” a senior French official told Reuters. “With the current political situation, this question is a bit delayed.”
Chad’s finance ministry did not respond to questions about the future of the debt restructuring.
Bypassing the constitution, a military council took power after Deby’s death, and appointed his son, General Mahamat Idriss Deby, as head of state.
Recent moves to restore some civilian rule have done little to calm violent protests. The opposition rejected the appointment of a transitional government on Sunday, denouncing it as a continuation of an old order they hoped to erase and raising the prospect of more unrest.
Rebels in the north remain a threat.
“The risk has obviously increased – both in risk from rebels and the risk from popular unrest,” said one creditor. “But there is hope that the debt restructuring can get back on track.”
A successful restructuring will need not only agreement from official creditors but will also mean private creditors will have to accept losses.
Around 40% of Chad’s $2.8 billion external debt at the end of 2019 was commercial, comprised mainly of an oil-backed loan from Swiss commodities trader Glencore.
Trading at just over half its face value before Deby’s death, the loan was lately quoted at 40 cents on the dollar, indicating added pressure and expectations of a writedown.
Under the G20 framework, official creditors are meant to agree among themselves on the depth of any concessions on their debt. The terms are then translated into a proposal for private creditors.
Several people familiar with the situation said Glencore, which already restructured the loan twice, would resist terms considered too harsh and is likely to expect those past concessions to weigh favourably into any decision on haircuts.
Glencore declined to comment.
“The way they see it they can help a bit, but ultimately they are not subject to public and multilateral pressure, and since they have security on the loan they will inevitably get paid,” the emerging markets investor said.
The G20, reluctant to renew its debt service suspension programme beyond 2021, will want a success story for the common framework by year-end.
That will likely work in Chad’s favour.
“If it was only Chad involved, I’d say it could take a long time to resolve this,” said the CGD’s Sembene. “But the Chadians aren’t going to be alone in this. They’ll have the G20 also wanting to get a deal done.” (Reporting by Joe Bavier in Johannesburg and Karin Strohecker in London, additional reporting by Julia Payne in London, Ange Aboa in Abidjan and Mahamat Ramadane in N’Djamena; editing by Emelia Sithole-Matarise)
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