Moody's rating agency argues that a downgrade for countries seeking debt relief is inevitable because it is the creditors' committee that decides on restructuringregardless of the will of the government in relation to the private sector.

In an interview with Lusa, the director of the sovereign risk analysis group at Moody's, Marie Diron, explained that when a country joins the Common Framework for debt treatment beyond the Debt Service Suspension Initiative (DSSI), it relinquishes the decision on which creditors will have to participate in the restructuring, with the creditors' committee having the last word.

"Although the Ethiopian government has been very clear about the willingness to continue to honor commitments to private creditors and use the Common Framework only to increase liquidity, when they signed the accession they agreed to a paragraph that says that all creditors will be treated equally, which implies a loss of control as the decision passes to the creditors' committee," explained Marie Diron, when asked whether it is possible to join the Common Framework and not suffer a downgrade.

"The decision lies with the creditors' committee, and while the government may intend to maintain financial commitments with the private parties, it is the committee that decides the form of restructuring," said the director at Moody's, which downgraded Ethiopia's 'rating' this month following the delay in meetings with creditors.

"In March, the 'rating' was B2, under review for downgrade, and since then there have been no major developments in the meetings, so we have downgraded to Caa1, two levels down, because the fact that it takes time for the committee to meet and agree on the restructuring suggests that the risks of losses have increased for private creditors," the analyst explained.

On the inevitability of a rating downgrade following adherence to this debt restructuring modality, Marie Diron said that this only does not happen if the rating is already so low that it already incorporates the likelihood of losses for creditors.

"If the 'rating' is high, then it is likely to lead us to upgrade our opinion on credit quality, but if it is low it has already incorporated the level of uncertainty regarding payments to creditors," he said.

The DSSI is an initiative launched by the G20 in April last year that guaranteed a moratorium on debt payments from the most indebted countries to the most developed countries and multilateral financial institutions, with an initial deadline of December 2020, but which was successively extended until the end of this year.

This initiative only suggested that countries seek private sector debt relief, whereas the Common Framework, approved by the G20 in November, states that private creditors must be approached, although it does not say explicitly what happens if there is no agreement between debtor and creditor.

Three African countries (Chad, Ethiopia and Zambia) have applied to join this framework, but several analysts believe that more countries will have to join due to their difficult financial situation, although there is resistance from countries that will automatically see their rating downgraded if they go ahead with a restructuring of their private debt, making it difficult for them to access the market and finance the development of their economies.

The proposal presented by the G20 and Paris Club in November is the second phase of the DSSI, launched in April, and which was widely criticized for not forcing private parties to participate in the effort, as it would pave the way for indebted countries to default on official and bilateral creditors (countries and multilateral financial institutions) and continue to service private debt.

This Framework aims to bring all the debt players into the field, including China's private and public banks, which have become the largest lenders to developing country governments, particularly those in Africa.