Smart borrowing becomes a mess: Way forward for all the risks involved (1)

We do not have the luxury of time at this crucial moment of the country’s financial and economic history to look back and be asking how we got here or who caused it all, than to collaboratively and coordinately find pragmatic solutions to the nation’s debt cataclysm.

Definitely, if the country is to be guided not to fall into this mess again, such poignant concerns cannot be shelved so they will be dealt with subsequently. This one seeks to address nagging questions of many; as to whether the unavoidable debt exchange programme is the best possible option to be addressing the crisis swamping the nation. Attempt is herein made to provide alternative mechanisms that are mostly considered in addressing such crunches.

National debt architecture

Ghana’s estimated end of year(2022), debt to Gross Domestic Product(GDP) of 105 per cent is certainly an economic, social, and political issue weighing heavily on the shoulders of every Ghanaian. The imminent crippling domestic social and economic sequences would be depriving individuals and families the most basic elements of living hence the need for urgent and drastic steps in averting situation that may prevent the state from participating effectively in international activities such as trade. Without which there would be a further aggravation of suffering citizens. Ghana’s economic malaise has a domino knock-down effect on individual investors, creditor nations and institutions hence, my subscription to the suggestion that we are all in this muddle together, needing concerted efforts to steer through the stormy waters.

There are several categories of creditors, but what binds them is the impact of a debt crisis. Aside domestic creditors whom the state has spelt out mechanism to deal, are the multilateral agencies and bilateral lenders, providing different types of credit, either as aid in the form of a concession or on purely commercial terms. The debts of multi-lateral agencies, such as the International Monetary Fund(IMF) and its surrogates are, in case of default, renegotiated through the IMF, while that of bilateral and private commercial lenders are done through the Paris Club and London Club respectively. Investors funding brings its own particular and significant problems because they are amenable to swift capital flights, as the creditors could be geographically spread, and even anonymous in certain instances. Indeed, recent developments where external entities 40 per cent ratio to the country’s debt has dwindled to a near single digit, points to the significant problems of speed of light at which their securities can be withdrawn and its negative impact of weakening the local currency.

Different permutations could be involved in the new national debt architecture ,however, these articles seeks to focus on symbiotic win-win business-like solutions. The economic and social implications of appeals by the President on International stages and other various options will be discussed, along with sound principles upon which they are based.

Methods for debt collection

Whenever credit is provided, a relationship between creditor and debtor is generated with the creditor earning the right to repayment or to enforce same, with a contrary obligation on the debtor to repay. Debt default could lend to operationalisation of contractual remedies made in a prior arrangement with the creditor to take possession of an item of value belonging to the debtor in exchange for the debt. The second alternative includes court remedies such as levying execution or garnishee proceedings. If the debtor is simply unable to pay, the appropriate remedy is bankruptcy or insolvency proceedings. Another practical alternative is to renegotiate the loan with parties agreeing on a new contractual framework for repayment. Readers would therefore appreciate the route Ghana is journeying in the circumstances.

A temporary lack of liquidity or "cash-flow", rather than a pervasive shortage of working capital, could not be termed as insolvency. This draws a distinction between debtors who can afford to pay their debts in a nick of time and those who require ample time to raise funds. If Ghana is to be declared bankrupt or insolvent, there couldn’t be any better arrangement than an orderly distribution of her assets by way of payment to creditors on a pari passu or pro-rata basis. Hence, the need for cool heads or cooperation for the state to keep head above the current stormy waters. It is very crucial we all put our shoulders to the wheel in rehabilitating the debtor. In the event of bankruptcy, it is not only the creditor who is protected. There are other objectives to protect the debtor, and the community as a whole, having regard to what the legal people term as extra-curial regimes; namely, deeds of assignment, composition scheme, and deeds of arrangement.

Options in solving debt problem

In the 1970s, nations which couldn’t honour their debt obligations blatantly went unilateral in either declaring postponement (moratoria), rescheduling or simply refusing to pay. (You remember President Acheampong’s repudiation-with the unpopular phrase of we won’t pay!) Per the Brady Plan, commercial bank debt were exchanged for bonds and were more successful than the Baker Plan-which zeroed in on reducing sovereign debt.

These developments propelled a design to balance the economic interests of both creditors and debtors by ensuring that the creditors ultimately get some sort of repayment, while the debtor obtains some concessions, (that is to say, more time within which to pay.) There are other options purposefully designed to clear the debts, urgently as possible.

Debt reframing

Solution, termed as "debt-framing" gives the debtor breathing space however, the debt itself largely remains, and may even grow bigger in some instances. They include debt restructuring;trading in debts in the secondary market;debt-for-equity swaps;securitisation of debt, (debt conversions);privatisation and debt forgiveness. (The president with cup in hand and perhaps a recant of his Ghana Beyond Aid mantra has been globetrotting either trumpeting or asking for what is generally termed as the Paris Club Conversion, restructuring of the global financial architecture/resetting the global financial system, swapping of debts for climate initiatives and slavery reparations).

Debt restructuring, rescheduling

Ordinarily, an orderly management of the debt should be beneficial to both sides in helping the debtor not to sink further the economic tumult.

Restructuring usually involves the consolidation of many debt contracts into just a few, with the accompanying standardisation of their clauses, and same, becoming debt of the central bank with the sovereign's guarantee. It is also common to find restructuring accompanied by rescheduling, wherein new commercial bank loans and new IMF loans were granted together with postponement of capital repayments and arrangements for longer maturities for existing commercial bank loans. This method appears to circumvent the real problem and provide only a temporary solution.

Creditors to sovereign borrowers may not be interested in long-term relationships with debtor nation but insist on their contractual rights through court to frustrate the initiatives. Admittedly, there could be some legislative measures and some market practices such as the "collective action clauses" to discourage recalcitrant or dissenting creditors from doing it alone. Rescheduling remains, to a large extent a voluntary exercise, it does not guarantee a positive outcome either.

How strong is Ghana’s secondary market?

Having been in existence for 32 years,the Ghana Stock Exchange (GSE) is of age not to be buoyant for an efficient secondary market activities. With restructuring, many debts with different characteristics were to be streamlined into fairly standardised financial instruments capable of being widely traded. Rescheduling was necessary to facilitate trade in these "instruments," because it made them readily exchangeable as if they were commodities. It should be stated that rescheduling could only be considered as the mainstay of other propositions, rather than an answer to the debt problem in its own right.

The secondary market is expected to be the market for the states' indebtedness, in which the debts of the country would be traded. The sale-purchase transaction is usually at a heavily discounted price and this indeed is the main attraction for the purchaser of sovereign debt. The market ought to provide opportunities for commercial banks or other creditors to rid themselves of bad debt at some returns, however small.

In the same vain, it should afford speculators the opportunity to take chances on the repayment capabilities of the sovereign by whom the debts are owed.

There is inherent dangers with court actions by purchasers of sovereign debt in the secondary market though. A remarkable case, is often cited as the Dart case where, the Dart family bought Brazil’s debt at a huge discount of 60 per cent in 1993 and when Brazil requested to be allowed to convert one-third of its debt into bonds at much less than face value, the family refused and sued claiming accelerated repayment of both the principal and the interest but the court did not grant all their request.

Significantly, the secondary market has enormous advantage of providing liquidity for distressed loans. Lenders can commit to loans with the knowledge that the loans can be sold if it should become necessary. It is however pertinent to conclude on the emergence of vulture funds as running counter to the whole idea of market-based approach for debt crises’ resolution. (Vulture funds are investors that buy defaulted debt cheap and litigate against the issuer, demanding full payment thereby disrupting the whole restructuring process).