Fitch: Suspension of debt payments to MDBs a risk to ratings

The suspension of sovereign debt payments owed to multilateral development banks would be negative for MDB ratings unless they were fully compensated by their shareholders, Fitch Ratings says. 

The G20 and Paris Club called for MDBs to 'explore the options for suspension of debt service payments' when they announced a coordinated debt relief initiative by official bilateral creditors for the poorest countries that request forbearance.

The bilateral creditor initiative would see interest and principal payments suspended from May until at least the end of 2020. But delays of principal or interest payments on an MDB sovereign loan lasting more than six months would lead Fitch to classify the MDB's full exposure to this sovereign as impaired. In line with Fitch's supranationals criteria, such a delay would affect an MDB's credit profile through three key metrics. 

First, the impairment of sovereign loans would constitute a breach of the MDB's preferred creditor status, which gives repayment of loans to MDBs priority in a sovereign debt crisis.  Secondly, the ratio of impaired loans to gross loans, a key measure of credit risk in MDB asset portfolios, would increase. Thirdly, the suspension of debt payments would also adversely affect the MDB's cash flows and liquidity.