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European Parliament sounds the alarm over developing world debt crisis

Added 17 Apr 2018

This article has been originally published in EurActiv.

The number of poor countries facing major debt crises has doubled since 2013, and only 1 in 5 are now considered to be at low risk of crisis. With some countries in the midst of crisis and others on the brink, meeting the Sustainable Development Goals (SDGs) remains a pipe dream, writes Mark Perera.

The debt burden of developing countries has been rising fast, both in absolute terms, and in relation to economic indicators such as GDP, export earnings, and government revenue – trends are driven by a number of factors.

Monetary policy decisions in advanced economies introduced in the wake of the global financial crisis, including by the European Central Bank, triggered a lending boom to the developing world.  Falls in commodity prices have since badly hit countries reliant on commodity export earnings.

Meanwhile, the profile of creditors has evolved. Even the least developed countries are increasingly contracting high-interest loans from private creditors, meaning a more fragmented creditor base, higher debt service costs and a greater exposure to market risks.

There is also a continued lack of transparency surrounding lending to poor countries; compounded by the potential threats to public finances posed by public-private partnerships (of which the European Commission and EU member states have been strong supporters) and other, often hidden, state guarantees.

Are the current means to deal with debt crises sufficiently able to handle this evolving picture? Given that there have been over 600 cases of sovereign debt restructuring since 1950, debt crises are nothing new, but our ability to resolve them definitively is self-evidently lacking.  Indeed, it can take decades to resolve crises, causing untold misery for citizens.

The piecemeal and ad-hoc manner in which crises are managed reflects the absence of an international regime governing restructurings.  While rules exist in many countries to deal with bankrupt companies or individuals, similar rules do not exist for countries.

Debt restructuring takes place in different, often informal forums: for example, the Paris Club for some bi-lateral sovereign lenders from the developed world, or the London Club for some private lenders.

And there are no systematic rules governing when and how restructuring by these fora is triggered. Generally, negotiations are driven by narrow creditor interests, not by the development needs of debtor countries.

Previous efforts – most recently at the UN in 2015 – to establish a binding international framework for orderly, predictable debt restructurings have met with strong opposition from some EU governments and other powerful countries that host major financial centres, in particular, the USA.

The European Parliament’s new resolution on debt sustainability in developing countries squarely addresses this obduracy, challenging EU states to pick up the 2015 discussions and forge a path towards a set of multilateral rules to manage debt restructuring in a timely, fair, and sustainable manner.

Beyond the macroeconomic logic for such a permanent system, EU leadership on the issue would demonstrate political commitment to promoting an international rules-based system built on stronger multilateral cooperation. This is a principle meant to guide the EU’s external action and it is explicitly emphasised in the 2017 European Consensus on Development.

The Parliament also rightly identifies the shared responsibility of creditors and debtors to ensure debt stocks in poor countries are manageable: all the more critical when development finance orthodoxy is increasingly embracing private capital.  The shocking case of Mozambique, where 2bn USD lent by Credit Suisse among others – was wasted or disappeared completely – is a stark reminder that irresponsible lending and borrowing still often goes unpunished. Meanwhile, the consequences of a debt crisis are borne heavily by the citizens in developing nations, who pay installed economic development and erosion of their human rights.

The Parliament is now calling for ‘binding and enforceable’ instruments to be introduced to govern sovereign financing, and for EU member states to build on transparency commitments that they have already made at the international level, such as in the Addis Ababa Action Agenda.  The EU and its member governments are also urged to adhere to the UN guiding principles on foreign debt and human rights in their bilateral lending, and when acting within international institutions.  This includes pushing the IMF to adopt a human rights-based approach when assessing the sustainability of developing countries’ debt burdens.

Eurodad has long been calling for such reforms and this timely intervention by the European Parliament must be a trigger for the Commission and member states to act: ignoring the warning signs of a growing developing world debt crisis is no longer tenable.  The Commission should begin by setting in motion the drafting of a white paper on developing country debt sustainability, as the Parliament suggests. It is important to emphasise that the EU itself is part of the problem when it comes to debt crisis risks in developing countries.  The provision of development aid in the form of grants is increasingly being replaced by risky loans, or by instruments such as those of the new European External Investment Plan that use the EU’s official aid money to leverage debt-creating private investments in the Global South. That being so, the EU must take responsibility to ensure that debt crises can be prevented or solved quickly where prevention has failed.

EU countries can already begin pushing the agenda forward this very week at the Spring Meetings of the IMF and World Bank, and later this month, at the 2018 UN Financing for Development Forum.  A simple step would be to commit, for example, to sponsoring international discussions on establishing a debt restructuring mechanism, building on existing UN work.

Unsustainable debt burdens risk jeopardising the entire 2030 Development Agenda, to which the EU has firmly committed itself.  With 12 years left, and a developing world debt crisis already in motion, that commitment needs urgently to be acted upon. The European Parliament has this week laid down the gauntlet for the European Commission and member states: it’s now up to them to pick it up.