Liberia signs historic debt deal

Earlier this month, the Government of Liberia signed an historic agreement that wrote off some $1.2 billion in commercial debt. Impressively, the Government was able to purchase this debt -- held by private foriegn creditos, such as banks and hedge funds -- at a steeply discounted rate of 97%. According to my colleague Steve Radelet, who has played an instrumental role over the past two years in securing the debt buy-back, this is the "deepest discount ever negotiated on developing country commercial debt." The deal amounts to an enormous victory for Liberia.

According to Steve's recent blog post, much was at stake in the deal.

"The amount of debt was huge – nearly twice Liberia’s GDP, far more than the country could ever repay. And many of the creditors had legal judgments or other recourse that could have derailed the process and led to delays, litigation, or the seizure of Liberia’s meager assets. The negotiations have been unfolding for two years, and at many points it was far from clear that the deal would be successful."

Steve Radelet with President Sirleaf

Steve goes on to explain the origins of the commerical debt buildup and the key steps that had to be taken to arrive at the debt deal. In highlighting the key factors that underpinned the successful deal, Steve notes:

1. The official debt reduction process known as "HIPC" imposed restrictions limiting a country like Liberia from paying more than a very small percent of the face value of debt without undermining the HIPC debt process.
2. President Sifleaf's international reputation and credibility made a big difference.
3. The liquidity-constraint financial institutions were more eager to accept readily available cash from the debt deal in the wake of the global financial crisis.

Liberia is not out of the woods quite yet. Just two years ago, Liberia had the highest debt ratio (compared to GDP and exports) in the entire world. Thanks to several important milestones in reducing multilateral and bilateral debt since 1997, this debt burden is slowly but surely being eased. According to Steve's analysis, "with this week’s commercial debt buyback, Liberia’s total foreign debt is down to $1.7 billion, a reduction of over $3 billion. You can see the Liberian Ministry of Finance official data on debt here, which they released earlier today. Most of the remaining debt will be wiped out when Liberia reaches the HIPC Completion Point, hopefully later this year or early next year."

President Sirleaf reflected on what this debt write-off will mean for Liberia: "The successful resolution of this inherited debt, which had ballooned through interest and penalty charges during a period when my country was wracked by civil war, is an important step on our road to recovery. This puts us on a firmer footing to attract investment and accelerate economic growth.”

Congratulations to Liberia.