Covid-19 hurt public finances everywhere. Many emerging economies, however, were heavily indebted to start with. Forced to spend on tackling the pandemic, while tax revenues collapsed, they quickly piled up unsustainable debts. Now the bill is coming due, with incipient sovereign debt crises in Sri Lanka, Zambia and several other economies. Handling these looming defaults will test the International Monetary Fundnew creditors such as China and the whole rickety architecture of sovereign debt restructuring.

Sri Lanka illustrates the challenge. After slashing taxes in 2019, and suffering the evaporation of tourist revenues, its public debt now amounts to 110 per cent of gross domestic product — with $7bn in debt and interest payments due this year. It has a large budget deficit and financial markets will not lend more. This is a crisis of solvency, not just liquidity, and there is no way to muddle through. An IMF adjustment programme, accompanied by a debt restructuring, is the sensible way forward. The sooner Sri Lanka’s government accepts the inevitable, the less painful it will be.

To handle such situations is why the IMF exists. After a decade marred by its troubled programmes for Greece and Argentinathe Washington-based guardian of the international financial system needs to show it is still the natural port of call for countries such as Sri Lanka and Zambiathat it will demand the reforms needed to put their economies back on track, and that it will not lend without sufficient restructuring to make any remaining debts sustainable.

Zambia has already agreed in principle to a programme with the IMF, and been rewarded with a currency rebound and a dip in inflation. To draw down the loans, however, it needs to make progress on restructuring its $15bn in external debt. Doing so will depend at least in part on China, which has become over the last two decades a large creditor to emerging economies, via a multiplicity of state banks. Beijing rejects any suggestion that its lending creates a “debt trap” for emerging economies. Its willingness to accept a haircut in Zambia and in Sri Lanka, where China is also a significant creditor, will test whether that is true.

More widely, the challenge in any sovereign debt restructuring is to co-ordinate all creditors. Unlike in the past, when most were countries grouped in the Paris Clubor a few large international banks forming the London Club, there is now a plethora of private and official lenders. As the World Bank notes in its new World Development Report, the average country seeking a restructuring now has more than 20 distinct creditors, not including bondholders. They may include non-traditional lenders, such as trading houses that paid in advance for years of commodity deliveries.

What is needed is a modern equivalent of the Paris Club and the London Club: a framework where all creditors can get together and share the pain. In a tentative form, this exists. There is a G20 framework on debt restructuring to parallel the Paris Club for official creditors, while so-called Collective Action Clauses allow, in theory, for private bondholders to co-ordinate.

But these emerging institutions are not yet sufficient for their weighty task. A top priority, then, should be the resolution of any remaining China-Paris Club differences via the G20. Sovereign debt overhangs can weigh on growth for years and even decades. The only way to end them is for all creditors to accept comparable treatment. As the Covid-19 aftermath throws countries into default, they must find ways to do exactly that.