The Proposals for a sovereign debt work-out procedure for countries experiencing sovereign debt difficulties are not new. Since 1990, a number of different ideas have been tabled. Kunibert Raffer of the University of Vienna has proposed the internationalisation of Chapter 9 of the US bankruptcy code. Latin American economists, Alberto Acosta and Oscar Ugarteche have tabled the idea of a permanent ‘Sovereign Debt Arbitration Tribunal’ (TIADS) under the aegis of the United Nations. In 2001, the IMF’s Anne Kreuger put forward the idea of a ‘Sovereign Debt Restructuring Mechanism’ (SDRM) to be administered by the IMF. Most recently, Christoph Paulus and Steven Kargman outlined their proposals for a Sovereign Debt Tribunal which should be empowered to examine not just cases of unsustainable debt but also the legitimacy of individual creditor claims.
None of these detailed proposals has ever been implemented. In fact, the issue has slipped off the international public policy debate over recent years due in part to the agreement and implementation of international debt relief schemes such as the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI). But the issue of how to reform international processes connected to the fair and efficient resolution of sovereign debt problems has not diminished. On the contrary, it has become even more urgent in the context of the recent global economic downturn and the increase in sovereign debt ratios which have inevitably accompanied this.
In November 2009, UNCTAD Secretary General Supachai Panitchpakdi warned that developing countries’ debt burdens would increase by over 17% this year. This seriously damages countries’ economic growth prospects, he said, and threatens governments’ abilities to invest in achievement of the Millennium Development Goals (MDGs). In its 2009 Least Developed Countries (LDC) report, UNCTAD also pointed to serious concerns over the unsustainably high debt burden in 49 LDCs. The IMF also estimated that should ODA and FDI inflows decline by 30% relative to the levels seen in 2008 – and the short-fall is fully replaced with public external (non-concessional) borrowing – this will add 4% of GDP to low-income countries’ debt burdens over just one year. If as some analysts predict, the effects of the global recession play-out for a few more years to come, this will substantially increase the poorest countries’ vulnerabilities to debt default.
Worryingly, the response of the international community to the estimated US$350 and US$635 billion shortfall in external finance in 2009 alone has been to step up the level of new loans extended to developing countries. In April 2009, the G20 agreed to funnel an additional US$500 billion in resources to the IMF with substantial increases in funds for the multilateral development banks. In 2009, World Bank loans will be up 54% on the previous fiscal year. The G20 also announced an additional US$250 billion in support for trade finance over the next two years. As EURODAD’s recent “ Debt in the Downturn ” report revealed, between September 2008 and September 2009, 32 countries had reached agreements with the IMF for a total of US$170 billion in new debt. Non-concessional loans made up the bulk of the new lending at US$ 167.5 billion of the total. Concessional finance amounted to just US$2.5 billion. This approach shores up substantial liabilities for countries in the future.
EURODAD and many of its member organisations have long advocated for the creation of a fair and transparent debt work-out procedure at the international level. We have consistently argued that current measures to deal with sovereign debt problems are seriously deficient.
The issue is gaining new political momentum. In this context, EURODAD believes it is vital to set out what it believes to be core principles for a fair and transparent sovereign debt work-out procedure at the international level. A debt work out mechanism will not only serve to deal with debt ex post, but will also discipline lenders and promote more responsible lending and borrowing ex ante.
This paper outlines ten principles which EURODAD believes are the essential components of such a mechanism. We urge policymakers to initiate an inter-governmental initiative on the principles set out in this document and should aim to establish – within a specified timeframe – such a procedure at the international level. Given recent pressures on many countries due to the global economic downturn, the moment could not be more opportune.