Lazard: Complex Emerging Markets Debt May Raise Costs and Stall Restructurings
By Karin Strohecker
Impact of Complex Debt Structures in Emerging Markets
LONDON, June 11 (Reuters) - Increasingly complex debt in the world's emerging markets could raise borrowing costs and delay debt restructurings, advisory firm Lazard said on Thursday.
Growth of Intricate Debt Instruments
The proliferation of intricate debt, whether loans backed by collateral or bonds linked to economic growth or exports, has exploded since 2020, driven by aid cuts by rich nations, high borrowing costs and risk aversion due to everything from COVID-19 to Russia's invasion of Ukraine.
Lazard’s Warning on Complexity
But top advisory firm Lazard has warned in a paper published on Thursday that the shift - praised by some investors as an innovative way to diversify borrowing - could come with a sting in the tail.
Call for Simplification
"We need to simplify the whole thing, because it is becoming really complex, and inevitably, at some point, the borrowing countries will pay the price of that," said Pierre Cailleteau, managing director at Lazard.
The shift is particularly pronounced in smaller, riskier nations known as "frontier" economies.
Examples of Complex Debt in Practice
Some complex instruments emerged to speed up debt restructurings, for example in Zambia, where bond payouts were linked to improvements in debt sustainability, and in Sri Lanka, where they were tied to GDP performance.
Meanwhile, Angola, Nigeria and Senegal have tapped total return swaps — effectively borrowing against their own debt — as an alternative to international bonds.
Risks and Concerns Highlighted by International Institutions
The IMF has warned these can be opaque and complicated liabilities.
Uncertainty over whether multilateral lenders retain preferred creditor status - which shields them from losses when countries default - adds to the concerns.
"The combination of a lack of clarity on the hierarchy of claims and the introduction or the proliferation of those types of contingent instruments makes in fact the debt very difficult to analyze for the creditors, to determine where they are in the hierarchy of claims," Cailleteau said. "This is changing the dynamics of debt."
Zambia is in the process of buying back its contingent bond.
Push for Transparency and Market Implications
The World Bank has pushed for "radical transparency" on debt, and increasing debt complexity - especially the use of State Contingent Debt Instruments- has been a top agenda item at recent meetings of the International Monetary Fund and the World Bank in Washington.
Recommendations for Debt Transparency
Cailleteau said debt transparency should be mandatory in order to access financing from the IMF - typically the lender of last resort for countries in debt distress - and other multilateral development banks.
"We need to make transparency enforceable," said Cailleteau.
Investor Sentiment and Risk Pricing
He added the premium demanded by investors on emerging market debt was near record lows — a sign, he said, of "some degree of exuberance" that may be underpricing the risks.
(Reporting by Karin Strohecker; Editing by Chizu Nomiyama )
