I. A Call for a Global Response.

The Covid-19 pandemic is a global threat. The virus has indeed shown no care for national borders, it has spread all around the world, taking everywhere a high toll both in terms of human lives and “GDP.” Under the economic standpoint, they said that this is “the worst economic fallout since the Great Depression.” However, like a health crisis hits “weaker” people hardest, an economic crisis hits worse those countries that were more “vulnerable” already before. Consequently, though we are all “on the same boat” there are some who are experiencing worse consequences.

This becomes clear if one considers that all countries have adopted more or less the same measures to tackle the Covid-19 pandemic, i.e. containment measures, support to health system to purchase medical equipment and increase intensive care units, support to enterprises and households through tax deferral, wages, cash transfers to the poorest people, loans, guarantees, etc., central banks have cut interest rates and enhanced liquidity in the economic system.

The effectiveness of the measures, however, has changed depending on the specific economic conditions of each country. Some countries are more disadvantaged than others and cannot make it on their own. As Joseph Stiglitz said “in the world’s advanced economies, compassion should be sufficient motivation to support a multilateral response. But global action is also a matter of self-interest. As long as the pandemic is still raging anywhere, it will pose a threat – both epidemiological and economic – everywhere.” A general call for a global response has been raised from all over the world. Consequently, during the meeting held on March 26, 2020, the G20 leaders committed “to do whatever it takes and to use all available policy tools to minimize the economic and social damage from the pandemic, restore global growth, maintain market stability, and strengthen resilience”. Supra-national institutions have been requested to “take the stage” and “to do whatever it takes.”

II. The European Union’s Response.

A convincing example in this sense has come from the European institutions.

During the meeting that took place in July 17-21, 2020, European leaders elaborated a comprehensive recovery package of  1,824.3 billion Euros, by combining the multi-annual financial framework and an extraordinary recovery effort, the so called Next Generation EU. More in detail, the European Commission will be authorized “to borrow funds on behalf of the Union” on the capital markets, and the proceeds will be then transferred, trough grants (390 billion) and loans (360 billion), to the Member States according to the national recovery plans drafted in compliance with the country-specific recommendations. This is an innovative tool that marks an unpredictable step forward in relation to the principles that govern financial assistance within the European Union.

The European Court of Justice in the Pringle case stated, inter alia, that a strict conditionality must be a prerequisite of any financial assistance, i.e. no financial assistance is granted unless the beneficiary State adopt “austerity measures.” Next Generation EU, on the contrary, is based on a “new” concept of conditionality. Conditionality implies “compliance” with the European targets. Consequently, each Member State will prepare its national recovery and resilience plan (consistent with the country-specific recommendations and contributing to green and digital transition); such plan shall be assessed by the European Commission (then, the European Council is requested to approve such an assessment by a qualified majority); and the funds will be made available only “subject to the satisfactory fulfillment of the relevant milestones and targets.” The “new” conditionality, consequently, should underpin a sustainable growth.

Such development in the way in which conditionality should be intended is definitely to be welcomed. Experience proved that conditionality aimed at compelling States to adopt “austerity measures” almost never worked, States subjected to “adjustment plans” hardly have ever “got back on track.”

III. The Scenario Outside of Europe.

Outside of Europe, however, the scenario is not encouraging. The economic conditions of the “poorest countries” (such as the countries across Africa, Latin America and much of Asia) have worsened since the beginning of the pandemic, many of them are no longer able to service their sovereign debt. The IMF reported to have already responded to calls for emergency financing from more than 100 countries. Copying with Covid-19 has been particularly burdensome for such countries, and recovery will be no different.

The poorest countries indeed were not able to adopt incisive containment measures because many people there live in poverty-stricken slums where social distancing is impossible. Their particularly weak health systems are completely unsuitable to care all the huge amount of infected people; they have neither enough resources to support the health system, enterprises and households, nor “powerful” central banks that could provide monetary stimulus. The poorest countries, definitely, cannot make it on their own. The “whatever it takes” promised in the G20 declaration seems only a deceitful slogan as far as those countries are concerned.

On March 25, 2020, the IMF Managing Director Kristalina Georgieva called on bilateral creditors a stay on repayment from the poorest countries, and on April 15 the G20 upheld such request. The adoption of such a measure is not a particularly “merciful” action. The poorest countries were (and are) at a crossroad, they must choose between repaying their debts or taking care of the population. A stay on payment is the first – and most obvious – measure that over-indebted countries take when they are no longer able to service their debt, and very often they take it “unilaterally”, without negotiations with creditors. Being in a “state of necessity,” is likely that the poorest countries would have imposed a moratorium anyway. In this respect, Stiglitz pointed out that “the real choice” for creditors is “between an orderly or a disorderly stay, with the latter scenario inevitably resulting in severe turbulence and far-reaching costs to the global economy.” Consequently, the stay on repayments is a measure also to the interest of creditors.

It is worth noting that in addition to the above, the IMF has also enhanced its financing toolkit. Specifically, the IMF has doubled access to the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI) – these are “emergency tools”; and it has approved a third credit facility, i.e. the Short-term Liquidity Line (SLL). The RFI and the SLL, however, are only available for those countries which have strong fundamentals and good track records. The RCF, a credit facility created under the Poverty Reduction and Growth Trust (PRGT), provides instead a rapid concessional financial assistance to low-income countries facing an urgent balance of payments need.

Leaving aside the SLL (which only presupposes “moderate balance of payments difficulties” – obviously this is not the case of the poorest countries), both the “emergency” credit facilities (i.e. the RCF and the RFI) require that applicant countries’ debt is sustainable or at least on track to be sustainable (though there is no need that a full-fledged program is in place). If the debt is not sustainable (or is not on track to be sustainable), applicant countries may consider approaching their creditors and negotiating a restructuring of their sovereign debt. Also, in order to evaluate if debtor countries are pursuing appropriate policies to address the crisis, the IMF may take into account any debt restructuring operations underway and their prospects for success.

Debt sustainability is indeed a key safeguard for the IMF resources. The IMF lending policy presupposes that recipient members are in a position to repay their loans, the risk is otherwise that in future the IMF will not have funds enough to support other countries in need. Such a requirement, however, might be an issue for the poorest countries. A pandemic is not the “most appropriate” situation to get the indebtedness under control, especially for those countries that already in the pre-Covid period had arrangements in place with the IMF.

On the other hand, the IMF under its charter is not permitted to simply write off debts. What the IMF can do is to provide debt relief to the poorest countries to cover their IMF repayment obligations through grants made available from the Catastrophe Containment and Relief Trust (CCRT), a trust fund financed by resources that include donors contributions. In April 2020 the IMF included between the cases in which grants could be used the “exceptional balance of payment needs arising from Covid-19 pandemic.” Moreover, a fundraising campaign is running in order to request grants from a broader range of donors and to extend the duration period of the debt relief (from 6 months to up to 2 years).

Is that all, or there is something else that the IMF can do to help the poorest countries?

IV. The “Special Drawing Rights”

A measure that many deem appropriate to challenge this Covid-crisis is a new allocation of “Special Drawing Rights” (SDRs). The SDRs are an international reserve asset, created by the IMF in 1969, to supplement its member countries’ official reserves. Just like central banks can print their own currency, the IMF can create SDRs.

Each IMF member owns an amount of SDRs corresponding to its quota of participation in the IMF.

Simply put, SDRs are “rights to obtain” a certain currency, by way of example U.S. Dollars or Euros. The IMF members can either keep such supplementary reserves “frozen” i.e. in the form of SDRs or convert them into usable currency by selling them (in whole or in part) to another “freely-chosen” IMF member or to a “designated” IMF member (the IMF, indeed, may also “designate” a purchaser). The value of the SDRs is based on a basket of five currencies (i.e. the U.S. Dollar, the Euro, the Chinese Renminbi, the Japanese Yen, and the British Pound sterling).

Under its charter, the IMF can proceed with new allocations of SDRs in order to “avoid economic stagnation and deflation”, taking into account “a collective judgement that there is a global need to supplement reserves, and the attainment of a better balance of payments equilibrium, as well as the likelihood of a better working of the adjustment process in the future.” On the contrary, the IMF can cancel SDRs in case of “excess demand and inflation in the world.” A new allocation can be resolved upon only by the vote of at least 85% of the total votes held by the IMF members. In this respect, it is worth noting that the United States own a voting right equal to 17,45%, i.e. they have a “blocking position.”

A new allocation of SDRs may be a “blessing” for the poorest countries. Their economy is basically dependent on trades: through exports they earn foreign currency (the so-called “hard currency”, i.e. Dollar, Euro, etc.), and with those foreign currencies they purchase goods for their citizens (as “new” items now should be added to current expenditures, i.e. medical equipment). Since trades have fallen (and the corresponding income is lost), through an increase of SDRs the poorest countries may “find” the liquidity they need to better cope with the health crisis and underpin recovery.

It is worth noting that a new allocation of SDRs was made in 2009, as a tool to tackle the financial crisis of those years. Why should the same tool not be used now? Some experts however are against this option. Since a new allocation of SDRs is equivalent to printing money, they argue that in a context of a weakened demand, the measure may cause inflation. The objection can be however easily ruled out. We are in the middle of a pandemic with a harsh economic fallout, it is not the right time to put brakes on spending.

The crucial point is however how a new allocation should be “used.” According to the IMF charter, the amount of SDRs that a country would obtain from a new allocation is not related to its actual needs, but to the participation quota that such a country has in the IMF. Consequently, the “firepower” of the new allocation of SDRs would per se benefit more the richest countries than the poorest ones, which, on the contrary, are those more in need.

Some have argued that countries may also agree on a different distribution of a new allocation. Such an option would be too complex, it implies strong negotiations and it cannot be ruled out that certain countries would push to reduce or exclude allocations to other countries that are not in line with their “geopolitical view.”

An option which seems rather easy is that the richest countries lend (on concessional terms) or donate part of their allocations to the poorest countries. Even better – as Stiglitz proposed – would be if richest countries lend or donate their allocation of SDR directly to “a trust fund dedicated to helping poorer countries”, such as the PRGT (as it already happened in the past) or the CCRT. A trust fund may indeed have a more global outlook than single countries and employ the liquidity deriving from the SDRs in favour of those countries that are actually most in need.

As far as such a proposal is concerned, there is a hypothesis that has remained rather unexplored so far. The trust fund that has received the SDRs may use them as guarantee in order to issue “bonds” and raise financings on the capital markets. Once the funds have been raised, they will be channelled, in part as grants in part as loans, through programs aimed at tackling Covid-19 crisis and underpinning recovery. A “conditionality” should be attached to the assistance, it may consist in complying with the recovery programs that the trust fund has resolved to support. Payments will be made in installments upon satisfactory fulfillment of the milestones and targets previously set.

Essentially, what the European institutions and European countries have “realized” that Next Generation EU should be seen as a kind of “leading case,” which I deem might also be replicated “globally.” One may object that European countries had to strive a lot before reaching an agreement on the “recovery package.” A converging point would be even more difficult if all the IMF members should gather “around the table”. However, since we are “confronting a crisis like no other,” a “whatever it takes” strategy must be actually put in place and not simply left “as a slogan.”

Every pandemic in the past acted as a driver to change the world. I hope that the global community would not lose the opportunity to create a “better” world with less disparities between countries.

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Gregorio Salatino practices law in Italy where he established his own law firm “Avv. Gregorio Salatino – Studio Legale” (www.salatinolex.com/t-en). He has been enrolled in the register of the trusted lawyers of the Embassies of the United States, Canada and Belgium that are located in Rome. During the years 2018-2019 he carried out a research project on the topic “The Restructuring of Sovereign Debt” at the Max Planck Institute for Comparative Public Law and International Law, Heidelberg (Germany). He is a member of the board of editors of the legal journals “Giurisprudenza Commerciale” and “Diritto del Commercio Internazionale.”