Ready for the next storm? Debt (crisis) management discussed at the UNCTAD and Paris Club

28 November 2017 by Bodo Ellmers

St George’s, the capital of Grenada. Photo: Katchooo/Flickr

The number of poor countries that are in debt crisis is increasing rapidly, as is the share of public revenue that southern governments need to divert from essential services to pay down debts. The international community is awaiting the storm with remarkable silence: only peacemeal steps have been taken in 2017 on the multilateral level in the areas of effective institutions for debt crisies prevention and resolution. The 2017 UNCTAD Debt Management Conference that took place in Geneva from 16th to 18th October and the Paris Forum the day after provided a glance on what is to come.

United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

Debt Management Conference took place in an environment where the debt crisis is moving southwards again. While the “transatlantic crisis” has dominated academic and political discourses in recent years, the response of Northern central banks has facilitated lending to developing countries and driven up debt levels there. 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.
reports that three more low income countries have gone into debt distress this year (Chad, Gambia and South Sudan, joining Grenada, Mozambique, Sudan and Zimbabwe), whilst the number of countries in debt distress or at high risk has increased to 28, from 15 in 2013. And the irresponsbile lending and borrowing party is not over yet, as more hot money is searching for higher yields. Just one category of debt, the issuance of sovereign bonds by developing countries, reached US$ 133bn in 2016 and is expected to rise further this year, essentially doubling the level from 2015.

Whither development finance

Development finance experts such as Prof. Jan Kregel from the Levy Instute (and the University of Tallinn) and Prof. Nelson Barbosa from the Sao Paolo School of Economics challenged the hegemoic paradigm that underdeveloped countries have to borrow from abroad to finance their development, and rather pointed to the risks associated with such a strategy. The UNCTAD’s own Stefanie Blankenburg pointed to the increasing occurrence of debt crises in recent decades and, after the lending boom, developing countries may face a new bust cycle as both debt to GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
ratios and debt service Debt service The sum of the interests and the amortization of the capital borrowed. ratios have increased massivly since 2013. The volume however is not the main or only problem, stressed Blankenburg: concerns are growing over the new composition of debt that is a “treacherous mix” of private and public debts (some of which hidden as contingent liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). ) that are denominated in foreign as well as domestic currencies and owed to domestic and foreign creditors. There is currently no debt workout mechanism that could unravel and deal with such a mix.

And Northern governmentsare doing their best to make things even more complicated: OEFSE’s Karin Küblböck mapped the many instruments which with foreign actors drive poor countries’ debt levels further up. This is the predictable consequence of their desire to turn billions in grants into trillions of new debt through “blending” instruments, or as critics say: to create new investment opportunities for capital from the North. The G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). ’s Compact with Africa and the EU’s External Investment Plan are just the newest of these initiatives.

The state of state-contingent debt

On the debt crisis prevention side, some hope that the introduction and enhanced use of state-contingent debt instruments could provide some kind of buffer to avoid economic shocks or natural catrastrophies leading to defaults. Countries are starting to experiment with GDP-linked bonds or debt instruments that contain ‘hurricane clauses’, for example. These are debt instruments for which repayment conditions automatically change when a certain event happens, e.g. a drop in commodity prices or a natural catastrophe. They are seen as “market-based” debt crisis prevention tools, in absence of an effective debt workout mechanism that affected countries could use.

Interestingly, international organizations such as the IMF and World Bank World Bank
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.

expect governments to issue such bonds, and private investors to buy them. Critical observers have however already highlighted that the IMF’s and World Bank’s own loans are not state-contingent, neither are those of bilateral official creditors, which recently lead to the perverse situation that in the aftermath of hurricane Irma, Antigua and Barbuda made payments to the IMF, and Cuba made payments to its Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

creditors. CSOs also flagged that problem when we addressed the Paris Club’s “Paris Forum” shortly after the UNCTAD conference, where state-contingent debt was also discussed.

Making the most of soft law?

As it takes a little more time than needed to develop insolvency laws and orderly procedures to restructure the unsustainable debt of sovereign debtors, the UNCTAD conference also debated what can be done with existing soft law mechanisms. There is no lack of these: the UNCTAD Principles on Responsible Lending and Borrowing, the Basic Principles on Sovereign Debt Sovereign debt Government debts or debts guaranteed by the government. Restructrings and the G20 Guidelines on Sustainable Finance are just some examples. Legal scholars such as Matthias Goldmann noted that the direct impact of soft law on court decisionss is somewhat limited, they can however impact indirectly, by influencing policy, which later becomes a reference for courts.

That soft law principles can only be a start was also highlighted by Jubilee USA’s Eric Lecompte. He flagged that better debt workout mechanisms are badly needed, and cited the US insolvency law’s Chapter 9 and 11 as legal models for multilateral legislation. He also said that the urgent need to address the debt sitation in the Caribbean would offer an opportunity to test innovative debt workouts. There is certainly no lack of ideas and cooncepts for policy- and decision-makers to pick up, and put into practice.

Source: Eurodad



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