Stephen Paduano is a senior economist at the Finance for Development Lab and a fellow at the University of Oxford. Martin Kessler is the Executive Director of the Finance for Development Lab. Jules Devie is a senior research analyst at the Finance for Development Lab.
For some, the city of light. For others, the city of love. For readers of Alphaville, of course, it is the city of sovereign debt.
Since the 1956 restructuring of Argentina, the French Treasury has served as secretariat of the “Paris Club,” a group of advanced economies that coordinates sovereign debt restructurings. By consequence of the Paris Club, Paris serves as the stomping ground of finance ministries’ sovereign debt tsars. This week those tsars — as well as the sovereign advisers that try to influence them and the hedge funders that try to decipher them — descended on Paris for the Club’s annual meetings.
In recent years, the annual meetings have put on a show. The restructurings of Chad, Ethiopia, Ghana, Sri Lanka, Suriname, and Zambia came with heavy doses of geopolitics, palace intrigue, and recondite finance. Yet as no new restructuring has been initiated since Ghana’s in 2022, which wrapped in 2024, this week’s meetings had much less to offer.
That is odd. There are eight low- and lower-middle-income countries that are at high risk of insolvency and twenty that are at high risk of illiquidity. In a better world, the illiquid ones would notify their creditors of the need to reprofile, and the insolvent ones would notify their creditors of the need to restructure. All would proceed briskly to the Paris Club.
Alas, none of them have. And few of them will. Why?
We see three reasons. First, the market for frontier debt has become soft and strange, allowing countries to refinance when they would otherwise likely be forced to restructure. Second, there has been a peculiar resurgence of the “bond bogeyman,” a pronounced and misplaced fear of dealing with bondholders. Third, the Paris Club is not the player it once was. China has become the largest official creditor, and attempts to integrate it into the global debt architecture have fallen short.
Soft and Strange Markets
Pressure on frontier markets has been growing. Many countries experienced a fiscal and balance-of-payments deterioration as they subsidised and imported fuel and fertiliser during the Iran War. Old debts are also coming due — $180bn in 2026 alone — and elevated rates create rollover risk. For the poorest countries, foreign aid has dried up, blowing holes that amount to half of some governments’ budgets.
The outlook is grim. But markets are not.
While yields on frontier markets’ Eurobonds have risen, that rise has been driven by the underlying risk-free rate. It has not been driven by an increased risk premium for frontiers themselves, even as their fundamentals have deteriorated. Frontier market spreads have become remarkably tight at 330 basis points, nearing historic lows.
Some content could not load. Check your internet connection or browser settings.
This is hard to explain. Some countries are net oil exporters, and booming oil revenues might inform the tightening of bonds issued by the Republic of Congo (−300bps), Angola (−94bps) and Cameroon (−163bps).
Yet oil importers tightened too. Honduras tightened by 37bps, Laos by 100bps, Tunisia by 43bps, and Rwanda by 93bps as the war weighed on their balance of payments. Why? We have no real idea. Laos, for one, is insolvent. It should have restructured long ago.
This appetite for frontier debt has enabled issuances at high, but not prohibitive, rates. Being able to tap a doting market, even when under pressure, allows countries to avoid debt treatments when they might otherwise seek them.
Bolivia provides an example. It was reeling before the war. It had depleted its reserves and faced $1.6bn in repayments through 2026. It said it would cut spending but didn’t. It said it would devalue its currency, a necessary step to generate current account surpluses, but hasn’t. The Iran War lit a match under Bolivia’s problems. As a net energy importer, it was vulnerable to a shock. The removal of fuel subsidies several months earlier exposed the people to that shock directly. The people took to the streets.
Markets, however, did not seem to mind.
In May Bolivia issued a $1bn, five-year bond with a 9.75% coupon. Expensive and inadvisable, but not prohibitive. Its bonds sank as the political situation worsened, but have since giddily rebounded. Bolivia is once again promising investors a fiscal adjustment and an IMF programme. Both appear out of step with protesters’ demands. Nevertheless, markets will believe, and fund, what they wish — and Bolivia may avoid a debt treatment.
If some countries are too risky for normal Eurobonds, or if they prefer cheaper financing than what capital markets can offer, capital still finds a way to flow in. Total return swaps or other collateralised financings have pumped financing into Senegal, Angola, Nigeria, Ecuador, Colombia and Argentina in recent years. In their simplest form, they entail posting local-currency government bonds as collateral to receive a smaller dollar loan from a bank. Much to its own detriment, more than €1bn in total return swaps have helped keep Senegal from a trip to the Paris Club as well.
The Bond Bogeyman
Senegal has become the poster child of the world’s upside-down “holdout debtor” problem. While this holdout behaviour may be enabled by total return swaps, it is driven by something deeper: a fear of restructuring, and a pride in avoiding it.
For some governments, avoiding a restructuring by imposing all of the adjustment on citizens (through higher taxes and lower spending) rather than sharing that adjustment with creditors (through a restructuring) might be understandable. Some governments prefer austerity, after all.
Yet this presumably could not be said for Senegal. The government was elected on ambitious promises, not austerity. It only opted for the latter by refusing to restructure. Spending on health, education and other essential services has been crowded out by the government’s decision to prioritise payments to external creditors.
Senegalese officials seem to fear negotiating with bondholders and take great pride in staying current on debt service. Both feelings are woefully misplaced.
Bondholders are not the vigilantes or vultures of the past. Particularly since the emergence of Collective Action Clauses (CACs), which severely limited the influence of holdout creditors, bondholders are largely bogeymen, conjuring fears that should not exist. Moreover, in the recent restructuring cases — Zambia, Sri Lanka and Ghana — wrangling official creditors took more time and effort than wrangling bondholders.
Some might protest this assessment of bondholders and point to Ethiopia. In recent months, bondholders have threatened to sue the government for full repayment of a defaulted $1bn Eurobond. Yet Ethiopia is more complicated than a case of old-fashioned vigilantism.
Ethiopia signed a deal with its official creditors in July 2025. This paved the way for a deal with bondholders, which it reached in January 2026. But during that lag, the IMF’s analysis for Ethiopia changed. The country’s growth prospects improved, and its need for debt relief had technically been reduced. As a result, bondholders offered a shallower restructuring that was in line with the IMF’s new analysis. Ethiopia accepted it. The official creditors, however, rejected it. Thus the bondholders sued.
It is not easy to place the blame in Ethiopia’s case. Are bondholders to blame for offering a shallow deal that was in violation of ‘comparability of treatment’? Are bilateral lenders to blame for insisting on negotiating first and refusing to accept the consequence of that insistence? Is the IMF to blame for flip-flopping on its analysis?
Lessons will be learned from Ethiopia. Chief among them, as Brad Setser and Sean Hagan called for in Alphaville some two years ago, is the need for “parallel” rather than “sequenced” negotiations. Had negotiations occurred all at once — rather than bilaterals going before bondholders — there would have been no lag between IMF analyses that enabled different deals.
One lesson that should not be learned, however, is that bondholders have returned as vigilantes. They haven’t.
A global debt architecture with Chinese characteristics
In Ethiopia, as elsewhere, China served as the co-chair of the official creditor committee. And under their co-leadership the flexibility and pragmatism that were once a strength of Paris Club dealmaking have been replaced by a rigid application of rules.
Before rejecting a deal between bondholders and Ethiopia, China rejected a deal between bondholders and Zambia. When bondholders reworked the Zambia deal, China rejected it again.
As the world’s largest bilateral creditor, China has supplanted the Paris Club as the most important official actor in restructurings. Instead of seeking restructurings, China’s borrowers have learned some very Chinese ways of handling debt issues.
Some content could not load. Check your internet connection or browser settings.
In 2024, Angola was facing pronounced liquidity pressures. Oil output had staggered, prices were falling, and a three-year moratorium on debt service to China had expired. A reprofiling was likely needed, and Angola said it was exploring an IMF programme. It did neither.
Instead, it negotiated with China to release collateral (oil revenues) that had been posted against China’s oil-backed loans. This provided liquidity relief, but it was not enough. A few months later, Angola entered into an expensive total return swap. A few months after that, Angola was hit with a $200mn margin call on the swap. Needless to say, it was not a good workout.
More recently in Kenya and Mozambique, China swapped dollar-denominated debts for yuan-denominated debts. This allowed borrowers to refinance at cheaper yuan rates — given the 200bp interest rate gap between SOFR and China’s Shanghai Interbank Offer Rate and Loan Prime Rate. The currency conversion provided liquidity relief, but not the deeper debt relief that these countries need. In April, Fitch downgraded Mozambique, considering a restructuring of its Eurobond “probable.”
Countries are learning how to deal with China: extend-and-pretend, negotiate a collateral release, refinance rather than restructure, and so forth. But in the process, they are mislearning how to deal with their debt.
The Paris Club at 70
Aside from the muted activity at this year’s annual meetings, the Paris Club also had a birthday to celebrate. Turning 70, the club has a long life and uncertain future to reflect on.
Today the global debt architecture is under strain, and the Paris Club ought to do something about it. Aversions to restructurings are not a new problem, but it has become clear that markets are pricing a low-default equilibrium that combines perpetual austerity on the domestic front with extend-and-pretend refinancings internationally. This course is unsustainable.
Some countries need to restructure, but the financing available to avoid restructurings has grown. The perceived cost of restructuring has also increased. At the same time, China plays too great a role for the Paris Club to lead as it once did — and China does not like to restructure.
Nevertheless, the Paris Club maintains the legitimacy and deep expertise to drive progress. It can learn from mishaps like that in Ethiopia to implement reforms to the Common Framework. It can inspire more confidence in borrowers to proceed with restructurings where they are required. And, hopefully, it can continue to do the patient, difficult diplomacy of integrating China into the global debt architecture.
Further reading:
— How to speed up sovereign debt restructuring (FTAV)
