Emerging markets are facing an impending debt crisis that will be more difficult and “messier” to resolve than previous crises, as countries that tapped the bond market “at a record pace” over the past decade are now under immense economic pressure from the covid-19 pandemic, Colby Smith and Robin Wigglesworth write for the Financial Times.

The road ahead will be tough, to say the least: “The withdrawal of money [from EM funds] is greater and more sudden than in 2008, the economic shock is huge and the path to recovery more uncertain than it was after the last crisis,” says former head of EM debt at Pimco, Ramin Toloui. Compounding the problem is an increased difficulty for borrowers to reach a debt restructuring agreement with their creditors, which are now mostly “a multitude of bond funds” as opposed to banks and governments.

Complication #1- The threat of vulture funds, which threaten to sue sovereign borrowers in the middle of a debt crisis and demand that these governments repay their full debts, rather than undergoing debt restructuring. With the threat of a lengthy and costly legal battle, governments sometimes opt to pay these funds the full amount — as long as they remain a minority — and the funds come out on top. After one fund managed to eke out USD 2.4 bn from the Argentinian government 15 years after it defaulted, analysts are now concerned that we could see a wave of imitators that would worsen the looming debt crisis.

Complication #2- EM governments themselves are reluctant to ask for debt restructuring for fear of a credit rating downgrade that would make it difficult for them to tap debt markets again in the future, Jonathan Wheatley writes for the salmon-colored paper. These concerns are not baseless: Ratings agencies Moody’s, S&P and Fitch have signaled they would “have little choice but to downgrade a sovereign issuer the moment it requested a standstill and would probably regard any renegotiation of terms as a default.” The emerging consensus is also that debt restructuring wouldn’t actually be that helpful in the long run — governments won’t be any better positioned to repay their debts a few months down the line than they are today.

Enter the Paris Club, which may be about to put its weight behind an expanded debt moratorium to more than just the poorest countries and beyond the G20’s initial six-month period, Paris Club Chair Odile Renaud-Basso said, according to Bloomberg. While Renaud-Basso says the club is “confident” China will agree to pause debt repayments, he says that middle-income EMs likely also need debt relief or restructuring agreements. China has received several debt relief requests from countries that received loans from its banks under the Belt and Road Initiative, with the majority coming from African countries, where lenders doled out USD 461 bn in loans since 2013.