Why international arbitration cannot solve the public debt problem of developing countries

11 October 2011 by CADTM


Summary of the position of the CADTM international network

Table of Contents

Introduction

I.International arbitration : from theory to practice

1)Limitations of international arbitration over debt
a- Limits of the ad hoc tribunal
b- Limits of the TIAD

2)The political risks of arbitration

a- Creation of jurisprudence detrimental to the population
b- Confining citizens to the role of mere witnesses to their countries’ indebtedness

II.The need for States to take unilateral action regarding public debt

1)The immediate suspension public debt reimbursement with the freezing of interest

a- Primacy of human rights obligations over debt payment
b- Economic consequences of a moratorium on the payment of public debt

2)Setting up a public debt audit

a- The sovereign competence of the State authorities
b- The link between the audit and human rights
c- The advantages of a debt audit
d- The right of States to declare the nullity of public debt

III.Summary Table

b- The international tribunal on sovereign debt (TIAD)

Conclusion

Nota Bene :
This CADTM position paper is not final (the member organisations of the CADTM network have not all been consulted). A long, definitive version of this paper is currently being drafted. We use the term “debtor” to refer to the countries of the South to facilitate understanding of the text, although the CADTM holds the view that, on the contrary, it is the South that is creditor for the North. We use the term “debt campaign” to refer to international “civil society” organisations that are working on the issue of Third World debt. The male gender is not used for reasons of discrimination but solely with the aim of lightening up the text.

 Introduction

The so-called “developing” countries are still experiencing the effects of the debt crisis which began in 1982. They continue to devote a considerable portion of their budgets to the reimbursement of their internal and external public debt to the detriment of social expenditure, and to the application of measures dictated by the international financial institutions (IFI).

The debt problem is also affecting the countries of the North. Governments are using this alibi to implement budget austerity policies, which are very similar to the structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
plans (SAP) imposed on developing countries by the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
and the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

(freezing or reduction of public service salaries, increased VAT, reduction of social sector budgets, laying-off of civil servants, a wave of privatisations, etc.).

Another point in common with the South: IMF interference (with the support of the European Commission) which is affecting certain European Union countries. This is all quite clear therefore: from the North to the South, austerity measures and the loss of State sovereignty are intimately linked to the public debt mechanism (to varying degrees between the most developed countries and the developing countries, which are more seriously affected).

Given the situation, it is urgent to attack the root of the problem by breaking the vicious debt circle. From the standpoint of the CADTM network, the abolition [1] of all illegitimate debts [2] constitutes a fundamental step towards delivering development to the South and liberating the North, like the South, from the diktat of donors (mainly the IFIs and financial markets). What is important is also to forestall, through an ongoing debt audit, the risk of creating new illegitimate debts.

Certain networks that have been studying the debt of developing countries (AFRODAD, EURODAD) have proposed setting up a “transparent” and “equitable” international arbitration on developing-country debt, by insisting on the independence of the arbitration panel. In fact, current treatment of the external public debt of the countries of the South is solely dependent on the creditors within the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

, the IMF and the World Bank (two institutions in which the creditors from the North still hold the majority of voting rights). With this arbitration proposal, these debt campaigns hope to guarantee a certain degree of impartiality and to involve “civil society” [3]. They have proposed two types of arbitration mechanisms:

“ad hoc arbitration: This is an informal procedure which, unlike the second proposal (TIAD), is not conditioned by the ratification by the parties (creditors and debtors) of a new international treaty. If political will exists on both sides, the parties (creditors and debtors) will appoint the arbiters directly and establish the rules they must apply to resolve the dispute. The essential criterion will be the extent to which the debt is “bearable”, but the issue of the legitimacy of the debt could also be considered, provided that the parties agree on this notion. According to this proposal, the victims of the debt must be able to be heard by the arbitration tribunal.”

International tribunal on sovereign debt Sovereign debt Government debts or debts guaranteed by the government. (TIAD): Unlike ad hoc arbitration which does not require the creation of a new structure, this proposal entails creating a Permanent Court of Arbitration on State debt, which would be placed under the aegis of the United Nations so as to guarantee (a priori) its independence. Creation of the TIAD obviously involves several stages: negotiation, signature and ratification of a new international treaty establishing the TIAD. As in the case of ad hoc arbitration, all States experiencing serious reimbursement problems could go before the tribunal. Here again, we encounter the notion of debt “bearability” and the possibility of raising the issue of the legitimacy of the debt. “Any matter brought before the TIAD should concern only external public debt. The victims of the debt must be able to be heard by the Tribunal.”

As far as the CADTM network is concerned, arbitration cannot resolve the public debt problem of the developing countries. Like the Jubilé South network, we believe that the governments of the South and of the North should immediately take unilateral actions: suspend payment of the public debt (with freezing of interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. ), audit the public debt and repudiate/write off all illegitimate debts. Such unilateral acts are legitimate under international law.

This position paper is meant to be constructive and forms part of the debate that has been conducted several years now by global debt campaigns. The aim, therefore, is to exchange views to consolidate the position adopted by the international movement against debt and to identify areas of convergence among its various components. Options for further areas of agreement are proposed in the conclusion.

Comments may be sent to Renaud Vivien, Coordinator of the Law Group of CADTM Belgium, at the following address: renaud at cadtm.org


 I) International arbitration on debt : from theory to practice

1)Limits of international arbitration on debt

a- Limits of ad hoc arbitration

Fundamental limitations:

One can reasonably doubt the real determination of governments of creditor countries to break away from the existing framework for treating with the debt of the countries of the South, in spite of certain political statements made in favour of arbitration. In fact, this is currently the predominant trend in the process for the management of external public debt within the Paris Club, the IMF and the World Bank, where the countries of the North (main creditors of the developing countries) still hold the majority of voting rights. The rich creditor countries therefore have no interest in relinquishing this privilege in favour of arbitration. However, it is not certain either, that the leaders of the debtor countries want to resort to arbitration, as long as they also benefit from the current debt management mechanism [4].

If several creditors were to agree to seek ad hoc arbitration, stock would then have to be taken of the balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of political power in the process (in particular, the rules to be applied by the arbiters since they are to be decided jointly by the debtor and creditor) which risks strongly turning to the creditor’s advantage. In fact, the informal nature of the ad hoc process actually heightens this risk.

Lastly, the “bearability” of public debt, a decisive criterion in the two arbitration proposals, is problematic. On the one hand, the notion of “bearability” fits perfectly into the current system in which the most important factor is a country’s capacity to reimburse while continuing to incur further debt to international donors. On the other hand, as far as the CADTM is concerned, debt cancellation ought not to be conditioned solely by a State’s reimbursement problems. We rather prefer the criterion of debt legitimacy. In this way, any State, whether in the North or South, is legally entitled to repudiate its illegitimate debts, even it were able to reimburse them (see point II. 2). Furthermore, we categorically reject the notion of “bearability” as defined by the IMF and the World Bank [5], and we stress that meeting basic human needs is the paramount obligation of all States. This obligation to respect human rights takes precedence over all other State obligations (including reimbursement of debts), according to the United Nations Charter and the UN’s independant Expert on debt, Cephas Lumina [6].

Technical limits :

Creditors and debtors are not on an equal footing. In fact, the financial cost of arbitration, particularly legal fees (fees to be paid to lawyers, arbiters, experts, etc.) are proportionally much higher for the countries in the South than for the creditors in the North. In reality, the possibility for countries from the South to resort to arbitration remains limited.

The right of appeal cannot be exercised, as is allowed in other arbitration bodies.

The right of the people to be heard by the Tribunals, as envisaged by debt campaigns (through hearings with “civil society” representatives), is altogether insufficient because the population has a passive role. These hearings are really more of a symbolic nature. We suggest instead the active involvement of citizens through a debt audit for their countries. This point on the audit will be further developed in Part II. In addition, we have reason to doubt the public nature of the process since confidentiality is usually the rule in arbitration.

b- Limits of the TIAD

Obstacles to setting up the TIAD:

The doubts expressed earlier regarding the political will to resort to ad hoc arbitration are even stringer concerning the creation of the TIAD. Let us recall, in fact, that an arbitration mechanism was proposed, unsuccessfully, in 1944 by Henry White, Head of the United States delegation, during the Bretton Woods Conference which led to the birth of the IMF and the World Bank. Another more recent example is the rejection in 2003 of the proposal by Anne Krueger, Deputy General Manager of the IMF (2001 - 2006). These two examples clearly show that neither the United States, nor the IFIs, nor the financial milieux are prepared to agree to an international arbitration mechanism for debt.

A permanent arbitration tribunal under the aegis of the UN does not guarantee independence or impartiality. The UN can also be influenced by the balance of power among States. Of course, there is the principle of equality in certain bodies (such as the General Assembly) but there is pressure, and the buying of votes, etc. In addition, certain non democratic institutions (such as the IMF, World Bank or even the Security Council) are part of the UN. It’s no use idealising the UN therefore, although the United Nations General Assembly is currently the best international decision-making framework.

Ratification of the international Treaty establishing a permanent court of arbitration on debt will necessarily entail a very long process involving three phases: negotiation, signature and ratification of the Treaty. For example, the International Convention on Economic, Social and Cultural rights (IESCR) signed in 1966 only came into force in 1976. We wish to stress that most of the States ratified it long after that date [7]. However, urgent action needs to be taken immediately on the public debt of States, given the burden it represents for the populations. It must be noted that a State could always refuse, at the last moment, to ratify the Treaty establishing a TIAD.

If the TIAD were to be created, nonetheless, thanks to an adequate number of ratifications, the progressve positions of the debt campaigns in faveur of the TIAD would not all be included in the final agreement negotiated. We need to remember that the rules outlined in the treaty, which the arbiters will use to reach a verdict, must necessarily be accepted by the debtors and creditors. This will obviously lead to the conclusion of an a minima agreement, the product of the balance of political power between creditors and debtors, which will only bind the States parties to the agreement and the private creditors, provided that the headquarters of the private creditors is located in these States and that the Treaty specifies that the rules will apply to these private creditors. With regard to multilateral debt (owed to the IMF, World Bank, and the African Development Bank, etc.), the TIAD’s competence to examine this type of debt is even more uncertain. In fact, it seems difficult to imagine that these institutions would relinquish their management of developing-country debt (as they do through the HIPC Heavily Indebted Poor Countries
HIPC
In 1996 the IMF and the World Bank launched an initiative aimed at reducing the debt burden for some 41 heavily indebted poor countries (HIPC), whose total debts amount to about 10% of the Third World Debt. The list includes 33 countries in Sub-Saharan Africa.

The idea at the back of the initiative is as follows: a country on the HIPC list can start an SAP programme of twice three years. At the end of the first stage (first three years) IMF experts assess the ’sustainability’ of the country’s debt (from medium term projections of the country’s balance of payments and of the net present value (NPV) of debt to exports ratio.
If the country’s debt is considered “unsustainable”, it is eligible for a second stage of reforms at the end of which its debt is made ’sustainable’ (that it it is given the financial means necessary to pay back the amounts due). Three years after the beginning of the initiative, only four countries had been deemed eligible for a very slight debt relief (Uganda, Bolivia, Burkina Faso, and Mozambique). Confronted with such poor results and with the Jubilee 2000 campaign (which brought in a petition with over 17 million signatures to the G7 meeting in Cologne in June 1999), the G7 (group of 7 most industrialised countries) and international financial institutions launched an enhanced initiative: “sustainability” criteria have been revised (for instance the value of the debt must only amount to 150% of export revenues instead of 200-250% as was the case before), the second stage in the reforms is not fixed any more: an assiduous pupil can anticipate and be granted debt relief earlier, and thirdly some interim relief can be granted after the first three years of reform.

Simultaneously the IMF and the World Bank change their vocabulary : their loans, which so far had been called, “enhanced structural adjustment facilities” (ESAF), are now called “Growth and Poverty Reduction Facilities” (GPRF) while “Structural Adjustment Policies” are now called “Poverty Reduction Strategy Paper”. This paper is drafted by the country requesting assistance with the help of the IMF and the World Bank and the participation of representatives from the civil society.
This enhanced initiative has been largely publicised: the international media announced a 90%, even a 100% cancellation after the Euro-African summit in Cairo (April 2000). Yet on closer examination the HIPC initiative turns out to be yet another delusive manoeuvre which suggests but in no way implements a cancellation of the debt.

List of the 42 Heavily Indebted Poor Countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoro Islands, Congo, Ivory Coast, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia.
Initiative), especially as the United States can, by itself, oppose arbitration on debts owed to the IMF and to the World Bank, owing to their right to veto in both institutions.

Attention must also be paid to the reservations that States can issue in ratifying the Treaty and which will therefore limit its scope. If we take the example of the IESCR, Belgium introduced a reservation that strongly limits the scope of Article 2 of the Treaty which forbids discrimination “based on race, colour, gender, language, religion, political opinion or any other type of opinion, national or social origin, wealth, birth or any other situation”. In fact, Belgium reserves the right, through this reservation, to not “automatically guarantee the same rights for foreigners as for its nationals [8].

Obstacles after the setting-up of the TIAD:

States parties to the treaty can also withdraw from it at any time. The TIAD would then no longer be competent to arbitrate disputes in which these States are involved. Such withdrawals would also diminish the representativeness of the TIAD and threaten its legitimacy. For example, the United States no longer recognises the competence of the International Court of Justice (ICJ) to adjudicate in contentious matters concerning that country. This is as a result of a ruling against the United States in the case of “Military and paramilitary Activities in and against Nicaragua” in 1986.

The proposal of the debt campaigns considers the TIAD to be competent only for external public debts, which is insufficient because of the burden represented by the internal public debt of developing countries (about three times the public external debt). Furthermore, external and internal public debts are closely linked one to the other, due to the transfer of the external debt towards the internal debt piloted by the IFIs.

Finally, as in the case of ad hoc arbitration, the right to appeal the verdict of the TIAD is not guaranteed; the financial cost of an arbitration process places the debtor countries at a disadvantage and participation by the population, victim of the debt, in resolving this problem is hugely insufficient, even illusory.

2) Political risks linked to arbitration

a) Creation of jurisprudence detrimental to the population

As we have seen, the rules that the arbiters will apply to reach a verdict are the outcome of negotiations between creditors and debtors. However, given the current balance of political power at the international level, these rules are likey to be created to the detriment of the peoples in the South, owing to the solidarity existing among rich creditors, particularly within the Club de Paris, and the submissive attitude of certain leaders from the South who personally benefit immensely from the debt mechanism. In this context, the legal concepts advanced by the debt campaigns, such as “odious debt” and “illegitimate debt”, will certainly not be accepted by the majority of the rich creditors or even put forward by certain governments in the South. We certainly remember the World Bank’s hostility to the odious debt doctrine, in its September 2009 report titled: “Odious debt: some considerations [9]”. The same holds for other legal arguments including unexplained enrichment, fraud, abuse of rights, equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. , goodwill Goodwill The difference between the assets on a company’s balance-sheet and the sum of its tangible and intangible assets. When one company takes control of another company, the acquiring company generally pays a price that is higher than the value of the net assets. Goodwill generally consists of intangible elements, such as brands, which are evaluated subjectively. , etc.

In addition to the controversy surrounding the notions of “odious debt” and “illegitimate debt”, note must also be taken of the quasi-general hostility of creditors to establish a link between debt and human rights. Below is an excerpt from an interview from the current UN independant Expert on external public debt, which took place in 2009: “the States in the North believe that the debt problem is not at all linked to human rights, that it is purely economic and should therefore be treated outside of the Human Rights Council and the UN General Assembly. The World Bank officials whom I consulted hold differing positions. Some categorically reject the human rights-based approach, preferring to focus exclusively on the economic dimension of the debt [10].

If an arbitration mechanism were to be set up, the peoples of the South would most certainly be the major losers. This is because the arbitral sentences risk, on the one hand, legitimising the debts qualified as “odious” and “illegitimate” by social movements, other “civil society” organisations or by the government that highlighted them (via an audit). The government of the indebted country should therefore respect the ruling and reimburse these debts, to the detriment of the basic needs of its population. On the other hand, these sentences will constitute a body of international jurisprudence which will serve as a source of inspiration to settle future disputes. Applied thus, (to the benefit of the creditors due to the current balance of political power) the rules will not encourage responsible loans policies as recommended by certain debt campaigns.

b) Confining citizens to the role of mere witnesses to their countries’ indebtedness

Like Jubilé South, the CADTM believes that: “The evaluation and non-payment by developing countries of illegitimate debt derives fundamentally from sovereignty. An arbitration tribunal cannot call into question the rights of the people themselves to act against the conditions and instruments of oppression [11]”.

However, action in respect of debt implies prior understanding of the debt mechanism as an instrument for the transfer of financial resources from the South to the North, and as a tool of political domination over people. The people must realise that they are actually the real creditors. The debt has already been reimbursed several times over by the developing countries whereas the North has still not settled its historical, social and ecological debt to the South.

To that end, debt campaigns have an important role to play in sensitizing the populations, by articulating the polical demands (on debt and the economic system, in general), highlighting concrete examples of illegitimate debts generated, for instance, by useless “white elephants” projects. The aim is to engender popular mobilisation against repayment of the debt, the end of conditionalities and, more broadly, providing alternatives to the capitalist system. So, by entrusting the public debt problem to an arbitration tribunal, we are pushing the population into the background.

 II. The need for States to immediately take unilateral actions regarding debt

Unilateral acts are recognised by international law. They derive from the sovereignty of States. Unilateral acts include (1) the suspension of debt payments with the freezing of interest, (2) a debt audit and, (3) repudiation/cancellation of debt.

1Immediate suspension of the reimbursement of public debt with the freezing of interest

a- Primacy of human rights obligations over debt payment

Suspending the reimbursement of public debt (external and internal) is not enough. This must be combined with the freezing of interest. At the legal level, the immediate suspension of the payment of public debt (with the freezing of interest) is based on the supremacy of human rights obligations over financial obligations (like the reimbursement of public debts). In the light of the debt burden, States (creditors and debtors) must, therefore, immediately suspend their reimbursement in order to comply with their international commitments such as the Universal Declaration of Human Rights of 1948 (UDHR), the Charter on the Economic Rights and Duties of States (1974), the Declaration on the Right to Development (1986) or the Convention on Economic, Social and Cultural Rights (IESCR) of 1966.

b- Economic advantages of a moratorium

Here we will use two States as examples to demonstrate the economic advantages of a debt moratorium. The first State is Argentina, which issued the most important moratorium in history, while the second is South Africa which yielded to the pressure of creditors and foreign investors and reimbursed the odious debt inherited from the Apartheid regime.

Following a unilateral moratorium proclaimed in 2001 on debt bonds in the sum of nearly 100 billion dollars, Argentina, finally renegotiated these instruments at 45% of their value in March 2005. By not paying its debt, Argentina managed to achieve economic growth (an annual growth rate of 8 to 9% between 2003 and 2010) [12].

Had South Africa simply issued a ten-year moratorium on reimbursement of the debt accumulated by the Apartheid regime (odious debt), the government would have saved 8.9 billion dollars. Instead of doing that, the South African government yielded to the threat that it would be denied access to the money markets in the event of repudiation, and therefore reimbursed the apartheid regime’s debt of some 10 billion dollars. In return, South Africa received only 1.1 billion dollars in external aid over the ten years following Nelson Mandela’s election as president [13].

The lesson to be learnt from this comparison is clear: it is in the financial interest of States to refuse to yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. to the threats of the financial markets. This conclusion is shared by Joseph Stiglitz in a collective work published in 2010 by the University of Oxford: “Both the theory and practice suggest that the threat of closing off access to credit was probably exaggerated”.

Eduardo Levy Yeyati and Ugo Panizza, two economists who worked for the Inter-American Development Bank (IDB), presented the results of their detailed research on default on payments involving some forty countries. One of their main conclusions is as follows: “The periods of default on payment mark the beginning of economic recovery”. We can’t say it any better [14].

This suspension of debt payment must be accompanied by a refusal to apply the conditionalities dictated by creditors as the liberalisation of capital movements. On the contrary, States need to establish strict control and tax financial transactions heavily. For the duration of the moratorium, States should also audit their public debts to strengthen their argument with a view to repudiating all the illegitimate debts and beginning legal proceedings against those responsible for the debt.

2)Setting up a public debt audit

By analysing every loan contracted by the countries concerned, in order to indicate the circumstances that surrounded the conclusion of the loan, the intended use of the funds, how they were actually used, and the attendant conditionalities, the debt audit will answer the three following questions: i) How much does the country actually owe? ii) To whom and for what? (for which development project)? iii) What is the environmental, social, and economic impact of the conditionalities linked to the debt? By answering these questions, the audit will reveal the corrupt practices and embezzlement of the ruling class in the indebted country, as well as the responsability of the creditors in the embezzlement activities.

a- Sovereign competence of state authorities

According to international law, the determination of the legal or illegal nature of external debt falls within the competence of state authorities. In his 2009 report, Cephas Lumina, the UN’s independent Expert on external debt, encourages all States to conduct debt audits. The audit can be carried out by the executive, legislative or judicial branch of the government. We will now look at a recent example of an audit which was unilaterally conducted by a government from the South, namely Ecuador.

Ecuador: Seven (7) months after being elected, Rafael Correa, the President of Ecuador, decided to have an analysis done of his country’s debt and the conditions in which it was contracted. To this end, a debt audit committee comprising 18 experts, including CADTM, was set up in July 2007. A report, submitted after 14 months of work, revealed that many loans had been granted in violation of basic rules. In November 2008, the new government, using this report as support, decided to suspend the repayment of its debt which was made up of bonds due to mature either in 2012 or 2030. Finally, the government of this little country emerged victorious in its wranglings with the North-American bankers, holders of the debt bonds. Ecuador bought back, for less than 1 billion dollars, debt bonds worth 3.2 billion dollars. This helped Ecudor’s state treasury to save around 2.2 billion dollars in debt stocks, to which must be added the 300 million dollars in annual interest over the period 2008-2030. In this way, Ecuador saved a total of more than 7 billion dollars. This provided the government with fresh financial resources to be able to increase social sector spending on health, education, social aid and the development of communication infrastructures.

The idea of debt audits is also gaining in popularity in the North. In Belgium, on 29 March 2007, the Senate adopted a resolution [15] on debt, which called on the government to set up an audit of Belgium’s debt to developing countries, which are neither LDCs (Least Developed Countries Least Developed Countries
LDC
A notion defined by the UN on the following criteria: low per capita income, poor human resources and little diversification in the economy. The list includes 49 countries at present, the most recent addition being Senegal in July 2000. 30 years ago there were only 25 LDC.
) nor HIPC countries, so as to determine which part of it was odious and to subsequently cancel it. The resolution called for a moratorium to be immediately established for the LDCs and HIPC countries.

Now in the countries of the North, the public debt crisis is also demanding an audit of this debt which has been contracted by the governments of rich countries. In fact, a substantial portion of this debt was not contracted in the general interest of the populations and constitutes, as in the case of countries in the South, an instrument by which to impose austerity plans, which lead to the violation of the rights economic and social rights of the populations.

b – The link between debt audits and respect for human rights

The audit is linked to rights enshrined in several major international law texts such as the Universal Declaration of Human Rights (UDHR) adopted by the UN in 1948, or the IESCR. Article 21 of the UN Declaration states that “Everyone has the right to take part in the government of his country, directly or through freely chosen representatives”. We need to stress that all UN Member States must adhere to this declaration. Article 19 of the IESCR establishes the freedom of expression: “everyone has the right to freedom of opinion and expression”. Almost all States have ratified this international treaty. The audit corresponds, therefore, to a requirement for democracy and transparency. All citizens have the right to know and to demand accountability from their governments.

c- Advantages of the debt audit

The audit facilitates understanding of the debt process by revealing, in particular, the illegitimate part of the debt and the complicities involved in the composition of the debt, both within a country and outside of it.

It therefore clearly shows the laundering of debts which are often concealed behind debt restructuring. Let us take the example of the Democratic Republic of Congo (DRC), the former Zaïre. From 2002, the trio, Paris- IMF - World Bank, organised the laundering of the DRC’s odious debt, inherited from the Mobutu dictatorship, by restructuring the arrears left by the dictator.

An audit also makes it possible to highlight the “nationalisation” of private debts, as occurred in Argentina and Chile in 1982-1984, in Mexico in 1995, in Indonesia and South Korea in 1998. Note that in the North, after the global economic crisis in 2007, States also absorbed debts from private banks, through various “bail-out” plans.

Lastly, the audit provides arguments which put the indebted country in a position of strength against its creditors to force a reduction of its debt, as demonstrated in the case of Ecuador in 2009, or to repudiate a part of its debt, as Paraguay did in 2005. In 2005, Paraguay acted unilaterally by repudiating an illicit debt. On 26 August 2005, the Government of Paraguay issued a decree notifying that it refused to reimburse a public debt of 85 million dollars, which it claimed was contracted fraudulently.

The debt audit also constitutes a tool of democratic control over a country’s debt policy so as to prevent the creation of a new cycle of illegitimate debt. The CADTM recommends an ongoing audit of the debt, as provided for in Ecuador’s Constitution.

d- The right of States to declare the nullity of public debt [16]

Paraguay is not an isolated case. Several governments in History have refused to pay debts inherited from the preceeding regime, arguing that it only involved that particular regime, not the State. The principle of the continuity of the State, which entails the transmission of debts to successor regimes, is not absolute because it is limited by the general principles of international law (including equity, good faith) or by the doctrine of odious debt. The doctrine is also a source of public international law, according to Article 38, paragraph 1 of the ICJ Statutes [17].

The government of a debtor or creditor country has the right, therefore, to declare the nullity of a public debt. Take the case of Norway. In 2006, the Norwegian government took steps to unilaterally and unconditionally cancel the debts of the following five countries: Ecuador, Egypt, Jamaica, Peru and Sierra Leone. These debt cancellations, which are not taken into account in ODA ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
(Official Development Aid public), represent a total of some 80 million dollars. A sovereign decision to cancel / repudiate a debt falls into the category of unilateral acts which are sources of international law. In the matter “of German interests in Polish Upper Silesia [18], the ICJ has also indicated that the unilateral sovereign act is a source of law and particularly an act that engenders international obligations or creates law. We are obviously in favour of unilateral acts that promote the protection of human rights.

Consequently, the suspension of debt payment (with the freezing of interest), the setting-up of a debt audit and the repudiation/cancellation of illegitimate debts (which can stem from the results of the audit) are legal acts that produce effects, which are not conditioned by the acceptance of another State (creditor) or any other subject under international law.

 Summary Table of the major differences between arbitration and audit

Ad hoc arbitrationTIADAudit
What are the conditions required for setting up arbitration and a debt audit? The creditor and the debtor can immediately seek ad hoc arbitration, provided that there is the necessary political will soit on both sides. The TIAD can only be established at teh end of a long prcess between the creditor and debtor States (negotiation, signature, ratification of the treaty establishing the TIAD and its Rules). Setting up an audit is dependent only on the political will of the debtor or the creditor. The country’s executive, legislative or judicial body can unilaterally and promptly audit the public debt.
Who determines the rules applicable to debt? The creditor and debtor need to agree on the rules to be applied by the arbiter. The balance of political power inherent in the negotiations is very likely favour the creditor. Notions such as odious debt and illegitimate debts have little chance of being accepted. The rules decided by the parties to the dispute are not solely of a legal nature. Here, emphasis is placed on the criterion of “bearability” of the debt. However, what exactly is a “bearable” debt?

The rules to be applied by the arbiter will be specified in the Treaty establishing the TIAD. The balance of political power inherent in the negotiations is very likely favour the creditor. Notions such as odious debts and illegitimate debts have little chance of being accepted. The rules decided by the parties to the dispute are not solely of a legal nature. Here, emphasis is placed on the criterion of “bearability” of the debt. However, what exactly is a “bearable” debt|The body in charge of the audit determines the rules. The notions of odious and illegitimate debts have a greater chance of being accepted. Other legal arguments such as unexplained enrichichment, abuse of rights, equity, good faith, etc, can also be used. This is dependent on political will and therefore on pressure from the population.
For the CADTM, the criterion of the “legitimacy” of the debt is paramount. A debt which is described as “bearable” but is illegitimate must be cancelled.|
|What are the debts involved?|It all depends on the number of creditor countries that agree to submit to arbitration. The debtor country must therefore manage to convince a maximum of creditors to resort to ad hoc arbitration.|The external public debts of a debtor country to its creditors provided that they are linked by the Treaty establishing the TIAD.|
It is the debtor or the creditor who unilaterally decides on th earea for application of the audit. The audit can therefore involve all the public debts of a State (external andinternal) as in the case of Ecuador.|
|What is the financial cost of the process?|It entails legal fees (lawyer fees, payment of arbiters, etc) as well as logistical coats. It is proportionally much higher for the debtor country. Creditors and debtors are therefore not on an equal footing.|This also involves lawyers’ fees. These are proportionally much higher for the debtor country. Creditors and debtors are therefore not on an equal footing.|The audit can be carried out by public servants assigned to this task for the required period and with free assistance from NGOs specialised in debt, jurists, economists, etc.|
| What is the role of the population in indebted countries in the process? |
The process takes place in the debtor country but the confidentiality which is absolutely necessary in arbitration matters limits information provided to the population. Hearings are envisaged for “civil society” representatives. The populations are therefore merely spectators in the process.|The process takes place in the relevant country or at the TIAD headquarters.
Hearings for “civil society” representatives must be organised.
The populations are therefore merely spectators in the process.|Citizen participation depends on the composition of the audit. Committee. As far as the CADTM is concerned, the Committee must comprise members of the “civil society” (social movements, trade unions, etc) from the indebted country and representatives of international NGOs, as was the case for the audit in Ecuador. According to the UN independent Expert on debt, Cephas Lumina, the audit correspond to a civil and political right (right to demand accountability, right to participate, right to take part in the management of your country’s public affairs, etc.)|
| Is the process impartial enough? |The informal framework for ad hoc arbitration increases the risk of political pressure being exercised by the creditor on the debtor (sometimes with the complicity of government of the debtor country which also benefits from the debt mechanism).

Rules set in this way to settle the dispute over the debt therefore risk favouring the creditor.|The formal aspect (under the aegis of the UN) of the process reduces the political pressure exercised by the creditor on the debtor (sometimes with the complicity of the latter).

The UN is not necessarily a guarantee of independence and impartiality. It can be influenced by the balance of power among States.|The audit derives from the sovereign competence of a state’s public authority. For the CADTM, the audit Committee must be mixed, as was the case in Écuador. That audit Committee was made up of representatives of the State of Ecuador, and national and international civil society. It bears noting that the criticisms of bias made by certain personnes regarding Ecuador have been refuted in the 3rd report of the UN independent Expert on debt, Cephas Lumina.|
| What are the results? |The parties must apply the arbitral rulings, in compliance with the 1958 New York Convention on the recognition and application of foreign arbitral sentences.

However, the absence of legal security (linked to the informal aspect of the ad hoc arbitration procedure), combined with the case-by-case method, risks limiting the scope of arbitration. In fact, if an initial sentence is too unfavourable to the creditor, it is highly likely that the other creditors will not accept arbitration for the portion of the portion of the debt that concerns them.

Conversely, if the arbitral sentence obliges the debtor to repay illegitimate debts, it wouldset a negative precédent for other indebted countries.|The parties must apply the arbitral sentences arbitrales, in compliance with the 1958 New York Convention for the recognition and application of foreign arbitral sentences.
These arbitral sentences will create international jurisprudence on the debt which risks being highly detrimental to other debtor countries.|The audit enables the following:
- identification of the illégitimate, odious, illicit portion, etc. of the debt;
- detection of complicity within countries and outside of them.
- revelation of debt laundering.
- demonstration of the nationalisation of private debts
- provision of arguments which place the indebted country in a position of strenght against its creditors, to force a reduction of its debt as demonstrated in the case of Ecuador in 2009, or to répudiate a part of its debt, as Paraguay did in 2005.
- constitutes a tool for democratic control over a country’s debt policy, so as to avoid the creation of a fresh cycle of illégitimate debts.

Implementation of the conclusions of the debt audit (repudiation/cancellation of illegitimate debts; legal action against those responsible for fraudulent debt, etc) depends on the political will of the government of the debtor country.

It must be noted that the repudiation/cancellation of illegitimate debts (which can be revealed through the audit) is a legal act with consequences, which are not conditioned by the acceptance by another State (creditor) or any other subject under international law.|

 Conclusion

The CADTM network believes that international arbitration on debt can only be fair and effective if human rights take precedence over the right of creditors and if the citizens of the indebted countries are not confined to being mere witnesses. Nonetheless, the current balance of political power in favour of creditors, as well as the limitations inherent in international arbitration, makes it impossible to establish such a mechanism.

For the time being, the CADTM is urging the suspension of debt payment, with the freezing of interest, and the setting-up, at the same time, of debt audits. These two demands should garner the support of all debt campaigns. In fact, the widespread violation of human rights on the world scale do not leave the Developing Countries any recourse other than to immediately suspend debt payment (with freezing of interest) to prevent the severe deterioration of the living conditions of their populations. As regards the demand for an audit, this seems to be shared by many organisations working on Third World debt [19]. In the same way that arbitration has favourable political support, debt audits have also been receiving increasing support. This is illustrated by the 2009 report of the UN independent Expert on debt, the case of the audit in Ecuador, and the Belgian Senate resolution of 2007.

By opting for the moratorium accompanied by a debt audit, the CADTM therefore adopted an ambitious and practical approach to the Third World debt problem. These two measures contribute to changes in the balance of political power, as evident from the Ecuador case. Audits are also important for mobilising populations to support the unconditional abolition of Third World debt and the payment of reparation by the major powers and rich creditors for all the ecological and historical suffering inflicted on the peoples of the South, under slavery and colonisation.

The CADTM will therefore continue its work alongside the other organisations working on debt, in the framework of the global campaign against Third World debt by acting on several levels: information sharing, awareness-raising, discussions with policy-makers, and legal expertise by refining the notion of “illegitimate debt” and facilitating legal action against the IFIs.

In fact, we are not disregarding the judicial option, which is necessary to move towards social justice. Let us remember, as well, that the debt audit can lead to legal action against those responsible for the illicit debt and donors, who financed projects and programmes which involved human rights violations. The audit can also be the basis for requests for legal assistance with a view to the restitution of ill-gotten gains which have found their way to the countries of the North.



Footnotes

[1Abolishing a debt means that the initiative can be taken either by the creditor country (cancellation) of from the debtor country (repudiation).

[3Ideally, this international arbitration mechanism should respect ten principes as laid down by the EURODAD network. See EURODAD, A fair and transparent debt work procedure : 10 core civile society principles, http://www.eurodad.org/uploadedFiles/Whats_New/Reports/Eurodad debt workout principles_FINAL.pdf?n=13

[4For a detailed analysis of the Club de Paris, read Damien Millet and Eric Toussaint, 60 questions/60 réponses sur la dette, le FMI et la Banque mondiale, CADTM-Syllepse, Liège-Paris, 2008, p 21.

[5The criterion selected by the IMF and the World Bank to determine the possible “unbearable nature” of a country’s debt is the ratio between the actual value of its debt and the annual sum of its exports. If this ratio is higher than 150 %, the debt is considered “unbearable”.

[6Renaud Vivien, Entretien avec l’Expert indépendant de l’ONU sur la dette externe : « J’encourage tous les États à mener des audits de la dette » http://www.cadtm.org/Entretien-avec-l-Expert

[9http://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1184253591417/OdiousDebtPaper.pdf There have been strong reactions to this report, which is not well done, and is biased and condescending towards the organisations which are working to find just solutions to the debt problem. .

[10Renaud Vivien, Entretien avec l’Expert indépendant de l’ONU sur la dette externe : « J’encourage tous les États à mener des audits de la dette » http://www.cadtm.org/Entretien-avec...

[11Alejandro Bendana, Répudiation et arbitrage, nécessité d’une approche intégrale?
http://www.cadtm.org/Repudiation-et-arbitrage-necessite

[12of course, using GDP growth rate to measure a country’s social progress is inadequate. This only gives an idication o fthe state of the economy

[13Consult the UNCTAD document by Robert Howse “The concept of odious debt in public international law

[14These elements are taken from the study by Eric Toussaint, Du Nord au Sud de la planète : la dette dans tous ses états (2ème partie) : Face à la dette au Nord, quelques pistes alternatives http://www.cadtm.org/2eme-partie-Fa...

[15Sénat, Doc. parl., 3-1507/6, 29 mars 2007

[16This sub-section is based largely on the text by Hugo Ruiz Diaz, La décision souveraine de déclarer la nullité de la dette publique (2008)

[18C.P.J.I., Serie A, Recueil, numero 7, page 13

[19 Le Manuel pour les audits de la dette du tiers-monde – Menons l’enquête sur la dette ! co-produced by the CETIM, AAJ, EURODAD, Emmaüs International, Jubilé Sud, la COTMEC, Attac Uruguay and the CADTM

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