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According to S&P Global Ratings, sovereign defaults will become more common over the next decade as poorer countries face significant debt burdens and the legacy of high borrowing costs.
Even though global interest rates are now falling, and countries such as Zambia and Sri Lanka are finally emerging from bankruptcy, many countries still have little means to service their foreign currency debt and little access to capital.
“Due to higher debt and an increase in financing costs for hard currency debt. . . Governments will default on foreign currency debt more often in the next decade than in the past,” the rating agency said in a report.
The warning comes as many countries try to get out of the bankruptcy fray to strike deals with increasingly diverse groups of creditors, and access enough relief to avoid another debt crisis.
Debtor countries including Kenya and Pakistan have narrowly avoided default thanks to new IMF bailouts and other loans this year. But in fact, they are still locked out of the bond markets to refinance their debts, given the double-digit borrowing costs that many comparable governments have to pay.
Ghana emerged from bankruptcy this month when it completed a restructuring of its US dollar bonds, with creditors imposing a 37 percent writedown. Earlier this year, Zambia ended a four-year restructuring saga, while Sri Lanka’s new government is expected to soon finalize a deal to end bond defaults in 2022.
Ukraine also completed the restructuring of more than $20 billion in debt – the largest since Argentina in 2020 – replacing a suspension of payments granted after Russia’s large-scale invasion in 2022.
However, Zambia, Sri Lanka and Ukraine have agreed to increase payments on their restructured bonds if they meet economic targets in the coming years, further complicating the question of how much aid they will ultimately need or receive.
Countries that have gone through debt restructuring have lower ratings than in the past, according to Frank Gill, Emea secretary of state at S&P Global Ratings. “That points to the possibility of repeat defaults.”
The level of defaults also depended on countries’ budget choices and the extent to which they could attract capital from abroad, such as foreign direct investment, to help plug current account deficits, Gill added. But there were few signs of a big increase in the latter, he said.
While there was no early warning sign of a sovereign default, S&P Global Ratings said, the report found that governments spent an average of a fifth of their revenues on interest payments in the year before they stopped servicing debt.
Countries facing large debt-to-reserve ratios next year include the Maldives, which recently secured a bailout from India, and Argentina.
Argentina’s government has said it can find the dollars to meet about $11 billion in foreign bond payments next year, despite limited access to global markets, pressure on reserves and looming IMF payments. loans.
Last month also President Javier Milei approved a decree that allows maturing debts to be converted into new debts at market interest rates without prior approval from the legislator.
Over the next decade, the rise of such buybacks and similar operations meant that “the nature of defaults is likely to become a lot more unconventional,” said Giulia Filocca, senior sovereign ratings analyst at S&P.
“Increasingly, we are seeing buybacks that may not look like a bankruptcy,” but which the agency may classify as a distressed exchange if done to avoid a full bankruptcy, she said.
