M-RCBG Associate Working Paper No. 248

Sovereign Debt Restructuring with China at the Table: 
Forward Progress but Lost Decade Risk Remains

Gregory Makoff
Théo Maret
Logan Wright

Introduction

Sovereign debt restructuring deals have not been smooth sailing over the last few years. They have moved slowly, been marked by bickering between China and G7 stalwarts, and the outcomes have been inconsistent. Recent policy innovations, however, have successfully accelerated the pace at which deals are being completed —that’s the good news. The bad news is that China remains highly reluctant to grant permanent debt relief. Deals are coming faster, but debt relief may be insufficient to avoid repeat restructurings. This is deeply unfortunate in the post-Covid-19 context, with many lower income countries at or near debt distress (World Bank 2024 at 18).

The first part of this paper explains this recent history. We explain how the architecture of sovereign debt restructuring has evolved over the last four years in response to China’s objections to the traditional rules and procedures of the Paris Club and the IMF. After a short introductory section on China’s overseas lending boom, we review disputes over the procedures applied in the restructuring of the debt of Congo Brazzaville (2018–2019), Suriname (2021–2023), and Zambia (2020–2024). Then we review the policy innovations announced between 2022–2024 to resolve these disputes. We suggest that faster motion in recent debt restructurings is a direct result of this successful policy process, China’s pressure leading to positive procedural changes.

The latter part of this paper addresses a remaining challenge: China’s general unwillingness to grant permanent debt relief. This creates the possibility that the international restructuring architecture will be run to prefer debt maturity extension and avoid granting debt relief. This risks a repeat of the “lost decade” of the 1980s, when write-downs were systematically avoided, and many countries were trapped in serial restructurings until debt relief was finally granted in the Brady plans of the 1990s. We discuss this topic in two parts, first addressing China’s complex institutional setting, then explaining China’s policy, legal, and economic constraints to granting debt relief.

We conclude by recommending that China establishes a sovereign debt asset management company to centralize management of its problematic sovereign loans, an idea borrowed from the playbook China used in the 1990s to clean up its commercial banks. The idea would be for the new agency to take over all the problematic loans from China Development Bank (CDB) and China Eximbank. This would provide significant institutional efficiency, allow better high-level oversight, facilitate superior data management, and allow China to more flexibly respond to the exigencies of future international sovereign debt negotiations.

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