The Importance of Debt Consolidation During COVID-19

Debt Consolidation

The importance of debt consolidation is not lost in the current economic climate. According to a recent survey, 45% of Americans are in debt, relying on savings to make ends meet. Unfortunately, many added more debt without a clear plan. 

Taking advantage of the G20 debt relief initiative

In May, Kenya announced it would not participate in the G20 debt relief initiative, saying it was too restrictive. To counter the impact of the COVID-19 pandemic, it has since changed its mind. According to the World Bank, the G20’s Debt Service Suspension Initiative (DSSI) could provide up to $11.5 billion in payment relief.

The COVID-19 pandemic has increased global fiscal pressure. Advanced economies have adapted to this new fiscal norm, but low-income countries have remained vulnerable. The international community has sought to address their concerns through DSSI, but the G20 DSSI may not be enough. Taking advantage of this initiative means negotiating a new debt restructuring with your official lenders.

The G20 DSSI also provides some relief for countries that are not Paris Club members. It also extends debt relief beyond those members of the Paris Club. China is the most critical new official creditor and has agreed to act on equal terms as the other countries. The G20 debt relief initiative could mean a massive boost for African countries. And it would also free up $20 billion to support health services.

Adapting issuance techniques to reduce mispricing

During a financial crisis, debt managers from different loan consolidating companies, like Priority Plus Financial, may seek to increase issuance flexibility and provide less notice to the market. They must communicate and situate their changes within an operational framework with defined parameters. Market participants must understand why an issuer is making these changes and their implications. 

The Covid-19 crisis will disrupt the existing workflows of financial institutions and will force them to wait for production before attempting to issue new bonds. As a result, these governments may need to supplement their just-in-time issuance practices with just-in-case. Several scenarios have been considered and tested in major simulation exercises, including those conducted in OECD countries.

Precautionary cash buffers should be used carefully and cautiously, although the underlying market conditions must be assessed. In addition, it may be prudent to draw down most of the buffers before COVID-19-driven financing needs exceed them. In these situations, drawing down precautionary cash buffers is the appropriate bridge to re-established equilibrium. In other cases, higher funding costs may indicate a temporary dislocation in market functioning and lower demand for government bonds. Again, this assessment should be based on market intelligence, investor dynamics, and prevailing conditions.

Monitoring existing contingent liabilities

One of the challenges facing government finance departments is determining whether they are adequately monitoring existing contingent liabilities. Contingent liabilities are expenses that may become due in the future. HM Treasury has developed a framework for assessing a department’s contingent liability risk. This framework requires departments to complete a checklist before committing. In addition, this framework will help them determine if their existing contingent liability exposures are reasonable and appropriate.


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