The Preferred Creditor Status glut – The search for loss absorption in Africa

Lazard's Policy Paper “The Preferred Creditor Status glut – The search for loss absorption in Africa” analyses the delicate trade-off between the need to provide debt relief to over-indebted countries and the need to protect as much as possible international public lenders with government shareholders and a policy mandate.

In recent years, financing flows in direction of low-income countries have been dominated by Multilateral Development Banks, while commercial lenders have retrenched. As a result, there have been several situations of sovereign debt restructuring with several creditors claiming to be immunised thanks to their Preferred Creditor Status and refusing to contribute financially to the resolution of countries facing debt distress. This leaves much of the burden on other creditors.

Lazard argues that a pragmatic solution can be found, acknowledging that, faced with situations of considerably diminished debt repayment capacity, the PCS is more a relative than an absolute notion. Also, some contribution to the debt sustainability effort, if well calibrated, may not undermine the empirically founded claim, by those institutions, that their actual losses are much lower than the credit quality of their portfolio would suggest. In other words, that there are special in the eyes of their borrowers and shareholders.