The Evolving Nature of Developing Country Debt and Solutions for Change

18 August 2016 by Bodo Ellmers

CC - Flickr - AK Rockefeller

This Eurodad discussion paper analyses the evolving nature of developing country debt and solutions for change. It aims to identify relevant reform processes on an international level, and more practically to keep progressive actors that want to drive change informed about existing opportunities.

The nominal debt burden of developing countries has reached the highest level ever seen. While relative debt burdens decreased between 2000 and 2010, these trends have reversed in 2011. Since then debt is on an upward path, when measured in relative terms.

Most striking is the change in debt composition and debt instruments being used. Public debt in developing countries is increasingly being borrowed from private lenders. And private lenders have changed too: Bonds have replaced loans as a predominant form of private lending.

The evolving nature of debt implies that the new debt crises will be different from the last. The old debt regime that the 2030 development agenda inherited has never been fully able put loans to work for development, to prevent debt crises, or to resolve them in a fair, speedy and sustainable manner. The bad news is: the situation is getting worse.

In an era when debt came predominantly from official creditors, there were some institutions that were developed specifically to deal with this issue, even though they were very slow, dominated by creditors and, as a result, created a lot of harm along the way.

Some lenders introduced safeguards to prevent harm, however, these lenders are providing a decreasing share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of finance. An increasing share of credit is not covered by any effective form of regulation. It falls into a regulation gap. The debt landscape has changed substantially while the modernisation of institutions to prevent and resolve debt crises has not kept up.

The evolving nature of debt requires up-to-date solutions for a development effective debt regime and for debt crisis prevention and resolution that must be able to reach the whole debt stock Debt stock The total amount of debt . The good news is: this is not news.

Substantial conceptual work has already been done on what a development effective debt regime for the 21st century could look like.
The United Nations (UN) Human Rights Council has adopted Guiding Principles on Debt and Human Rights that attempt to embed the debt regime in a human rights framework.

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

) Principles on Promoting Responsible Lending and Borrowing provide a model for how to increase the development effectiveness of loans, safeguard people and development and prevent debt crises.

To resolve debt crises in a fair, speedy and sustainable manner, several attempts have been made at both 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.
and the UN to create an insolvency regime, or debt workout mechanism, for sovereign debtors.

What mainly remains to be done is to strengthen these initiatives, overcome political deadlocks and put these proposals into practice. In all of these cases, citizen action will have a key role to play.

Download the report

Source: Eurodad




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