Alan Beattie © 2022 The Financial Times Ltd.
Alan Beattie
Supporting businesses during lockdowns due to the Covid pandemic, protecting households from rising energy prices and financing the huge investment costs of the ecological transition: the finances of governments around the world are under strain. extraordinary pressure. It’s hard enough for rich economies to afford this. In low- and middle-income countries, the trickle of debt defaults threatens to become a deluge.
In general, the poorest countries managed their fiscal affairs quite well in the years before the Covid pandemic. But spending to deal with a series of crises has created immense pressure at a time when rising US interest rates are driving up the cost of borrowing in capital markets and through banks. The average ratio of public debt to gross domestic product (GDP) in emerging markets has risen from 5% before the pandemic to 67%, and the International Monetary Fund (IMF) estimates that it will increase in the coming years. Demand for publicly supported concessional financing (or grant aid) has increased accordingly.
“The obsession with maintaining the credit rating of the multilateral development banks could be counterproductive. Why not change your risk assessments and capital adequacy standards?
There is a movement underway, gaining momentum among the major G20 economies, to increase the lending power of the Multilateral Development Banks (MDBs) and thus their firepower. This involves changing banks’ risk assessments and capital adequacy standards, relatively small adjustments that can have a significant impact on lending capacity. The technical details are in a report commissioned by the G20.
An Italian central bank document estimates that the four main MDBs — the International Bank for Reconstruction and Development (IBRD, the World Bank’s commercial arm), the Asian Development Bank (AsDB), the African Development Bank (AfDB) and the Bank Inter-American Development Bank (IDB)—could increase their collective reserve lending capacity from US$415 billion to US$868 billion without hurting their triple-A credit rating. If they wanted to go further and accept a credit rating one notch higher low, AA+, its lending capacity could skyrocket to nearly $1.4 trillion. The New Development Bank, created by the BRICS countries, has done it with its credit rating and is a strong advocate for others to follow suit.
This seeming miracle involves a lot of technical details, but it is based on the idea that the agencies underestimate the extent to which the MDBs are backed by their status as preferred creditors in case of default and their capacity (not yet activated) to raise “callable capital”. ” of its shareholders in times of stress. Banks need to persuade rating agencies to take a more favorable view and rely more on their own judgments of capital adequacy.
That said, increasing MDB leverage cannot be just a technical exercise. Banks must be sure that shareholders are willing to wholeheartedly back their decision and advocate on their behalf with bond investors, credit rating agencies and potentially nervous legislatures.