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Zambian President Edgar Lungu shakes hands with Chinese leader Xi Jinping in Beijing. Zambian President Edgar Lungu shakes hands with Chinese leader Xi Jinping at the Great Hall of the People, in Beijing, Sept. 1, 2018 (pool photo by Nicolas Asfouri via AP).

Zambia’s Looming Default Is Only the Start of a Global Reckoning With Debt

Thursday, Oct. 29, 2020

With its economy in trouble from a high public debt burden as well as the COVID-19 pandemic, Zambia’s government recently suspended interest payments on some sovereign bonds. The country is already in arrears on some of its debt—including $183 million in official bilateral loans from other countries and $256 million from commercial banks—and has asked for a six-month suspension on interest payments from the holders of its $3 billion in Eurobonds, which are denominated in foreign currencies. These bondholders are due to make a final decision on Zambia’s request in mid-November, but a substantial portion of them have so far indicated an unwillingness to provide such a payment holiday.

While Zambia has been portrayed as the first pandemic-related default, the country’s debt burden was significant prior to the arrival of COVID-19. Zambia’s borrowing surged over the past decade, with loans from bilateral creditors—especially China—for infrastructure projects, and from private bond markets for general consumption. Zambia’s 10-year Eurobond issue in 2012 carried an interest rate of around 5.6 percent, a relatively low rate for a “frontier market” country. But its debt burden increased dramatically in subsequent years, and by mid-2019, the Eurobonds issued in 2012 were trading at a yield of 20 percent, suggesting dramatically higher borrowing costs if Zambia sought new credit. In August 2019, a joint International Monetary Fund-World Bank debt sustainability analysis warned that Zambia was in a perilous position: Interest payments on its debt had become quite substantial, analogous to charges on a high-interest rate credit card. ...

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