Key facts
- Lazard stated that the growing complexity of emerging market debt could increase borrowing costs and delay restructurings.
- The firm pointed to a rise in intricate debt instruments like collateral-backed loans and growth-linked bonds since 2020.
- Concerns exist regarding the transparency and hierarchy of claims, making debt analysis difficult for creditors.
- Complex instruments have been used in countries like Zambia and Sri Lanka to facilitate debt restructurings.
- Lazard's managing director, Pierre Cailleteau, called for mandatory debt transparency for countries seeking financing.
- Investor premiums on emerging market debt are near record lows, potentially indicating underpriced risks.
Advisory firm Lazard has warned that the increasing complexity of debt in emerging markets could lead to higher borrowing costs and prolonged debt restructuring processes. The firm noted a significant rise in intricate debt instruments, such as collateral-backed loans and bonds linked to economic growth or exports, since 2020. This trend has been fueled by factors including reduced aid from developed nations, elevated borrowing costs, and heightened risk aversion stemming from global events like the COVID-19 pandemic and the conflict in Ukraine.
Pierre Cailleteau, managing director at Lazard, stated that the growing complexity necessitates simplification, as countries will ultimately bear the consequences. This shift is particularly evident in smaller, riskier 'frontier' economies. Some of these complex instruments, including those tied to GDP performance or debt sustainability improvements, have been employed to expedite restructurings, as seen in Zambia and Sri Lanka. Angola, Nigeria, and Senegal have utilized total return swaps, a practice the IMF has identified as potentially opaque and complicated.
Further concerns arise from the uncertainty surrounding the preferred creditor status of multilateral lenders, which typically protects them from losses during defaults. Cailleteau highlighted that the lack of clarity on the hierarchy of claims, combined with contingent instruments, makes debt analysis challenging for creditors and alters market dynamics. Zambia is currently in the process of repurchasing its contingent bond.
The World Bank has called for 'radical transparency' in debt, and the increasing complexity of debt, especially State Contingent Debt Instruments, has been a prominent topic at recent IMF and World Bank meetings. Cailleteau suggested that debt transparency should be a mandatory requirement for accessing financing from the IMF and other multilateral development banks. He also observed that investor premiums on emerging market debt are near historic lows, indicating a potential underpricing of risks due to 'some degree of exuberance'.