Overleveraged countries obtain a standardized payment pause right

The G20’s Global Sovereign Debt Roundtable initiative is transforming the management of sovereign debt crises. No more ad hoc negotiations: temporary payment suspensions are becoming an institutionalized procedure to protect the social budgets of financially distressed countries.

The essentials

  • The G20 Common Framework has treated only a few countries with limited results
  • A growing number of countries face high risk of overleveraging according to the IMF in early 2025
  • Ethiopia has been waiting five years for a definitive restructuring of its debt
  • The new mechanism aims to reduce the political stigma of payment suspensions

The Common Framework fiasco reveals the urgency for reform

The track record of the G20 Common Framework, launched in 2020, illustrates the ineffectiveness of current mechanisms. In five years, this initiative has treated only four countries — Ethiopia, Zambia, Ghana, and Chad — with disappointing results. Ethiopia, the first country to request this procedure in January 2021, is still waiting for a definitive restructuring of its external debt.

This paltry proportion is explained by the heaviness of multilateral negotiations and the absence of standardized procedures.

The Zambian case illustrates these dysfunctions. Despite declaring default as early as 2020, the country only obtained an agreement in principle in June 2023, after three years of grueling negotiations with its Chinese and Western creditors. In the meantime, social investments fell considerably.

Many countries threaten to slide into insolvency

The urgency extends far beyond the four countries treated by the Common Framework. This massive deterioration particularly affects sub-Saharan Africa, where a significant share of countries have high debt-to-GDP ratios.

The causes of this spiral are multiple. American interest rates, which have risen in recent years, have increased the burden of servicing debt denominated in dollars. At the same time, the share of private creditors in African debt has increased, complicating negotiations through their geographic dispersion.

Sri Lanka offers a striking glimpse of this deterioration. The country was dedicating a major share of its fiscal revenues to debt service before its default in May 2022. The social consequences were immediate: shortages of medicines, prolonged power outages, high food inflation. Several years later, despite an agreement with the IMF, social spending remains well below pre-crisis levels.

Faced with these repeated failures, the G20’s Global Sovereign Debt Roundtable is developing a new institutional framework. The objective: to transform payment suspensions from stigmatizing crisis tools into standardized and predictable procedures. This approach is inspired by safeguard mechanisms for private enterprises, transposed to the sovereign scale.

The major innovation concerns explicit protection of social budgets. Unlike traditional structural adjustment programs, the new mechanism guarantees a minimum floor for health and education. This clause responds to recurring criticisms about the social impact of restructurings.

China accepts to play the multilateral game

Chinese adherence represents a decisive turning point. Beijing, which has become a major bilateral creditor with significant amounts lent via the Belt and Road Initiative, long favored bilateral negotiations. This strategy allowed it to impose its conditions — notably prioritizing infrastructure — without coordination with other creditors.

The change in approach is explained by the accumulation of defaults. A significant number of overleveraged countries are major beneficiaries of Chinese loans. Pakistan, Angola, and other countries must renegotiate substantial amounts of their external debt.

These difficulties are pushing Beijing toward greater cooperation. China has accepted the principle of “comparable treatment”: its restructuring conditions now align with those of Western creditors to avoid cross-subsidization. This convergence facilitates multilateral negotiations and accelerates agreements.

The Ghanaian example illustrates this evolution. After months of deadlock, the tripartite agreement recently signed between Accra, its private creditors, and China provides for a substantial reduction in the debt stock. In return, Ghana commits to maintaining its social spending and limiting new borrowing.

Private creditors still resist collective negotiations

While Sino-Western coordination is progressing, the integration of private creditors remains problematic. They hold a significant share of African debt but often prefer to play for time to avoid discounts. Their strategy: wait for public creditors to assume the bulk of losses before accepting marginal reductions.

The Zambian file illustrates this asymmetry. While China and the Paris Club accepted substantial reductions, holders of Zambian eurobonds conceded only limited reductions. This difference in treatment generates persistent tensions and complicates the finalization of agreements.

To circumvent this resistance, the new mechanism introduces automatic collective action clauses. Once a qualified majority of creditors accepts a restructuring, the agreement is imposed on all, including the reluctant ones. This procedure, inspired by bankruptcy law, aims to neutralize “hold-out” strategies that currently paralyze negotiations.

Argentina experimented with these clauses during its 2020 restructuring. This experience demonstrates the mechanism’s effectiveness in accelerating resolutions.

The stakes extend beyond Africa and reach developed countries

The standardization of debt procedures no longer concerns only emerging economies. Italy or Japan, with very high debt-to-GDP ratios, could theoretically trigger these new mechanisms in the event of a crisis. This potential universality changes the nature of the debate and reinforces the legitimacy of the device.

The Greek example of 2010-2018 shows the damage of improvised management. Without clear procedures, the adjustment stretched over many years with several successive rescue plans. The social cost was dramatic: high unemployment, steep GDP decline, significant emigration of qualified youth. An automatic mechanism could have significantly reduced this duration according to retrospective IMF estimates.

The new procedures aim precisely to avoid these “lost decades.” In the event of triggering, the payment suspension is automatically accompanied by a recovery plan over a limited duration, versus several years currently. This acceleration protects productive investments and limits the generational impact of crises.

The challenge remains the political appropriation of these mechanisms. Leaders are reluctant to trigger procedures perceived as an admission of failure. Hence the importance of destigmatization: presenting these pauses as normal management tools rather than sanctions. The analogy with sick leave in labor law guides this communication. No one considers a medical certificate as a personal failure — the objective is to apply the same logic to states experiencing temporary financial difficulty.