For the last decade the Zimbabwean government has been in default on most of its debt, currently estimated to be around 7 to 9 billion US Dollar. It is not the first and will not be the last country in the world to default on external debt. Europe today shows that northern industrial countries can also become unable to meet all their debt service payments. Other more recent examples may include Cote d’Ivoire in February 2010 or Jamaica in 2010. Sovereign debt defaults have been normal phenomena for millennia.
However, there is no established law that enables the state to demand the cancellation of debt obligations. In case it would declare insolvency it will be seen as “unwilling” to pay, not as “unable”. In the context of developing countries, one can find the HIPC and MDRI initiatives, the Debt Sustainability Framework of the IMF and negotiation fora such as the Paris Club. But those instruments do not address state insolvency as recurring phenomena of national economies. Moreover, not having a good way of dealing with sovereign debt and a sovereign debt crisis, make sovereign debt crises likely to recur.
The report is the result of a project on “simulating” an alternative debt workout for a country case, in order to demonstrate that alternatives to traditional creditor-dominated procedures are actually possible. Zimbabwe as a currently over-indebted country has been chosen as an example to show an alternative debt workout process as an alternative to HIPC. The paper illustrates a flexible arbitration process that encompasses a sufficient debt reduction through a fair sharing of losses among all parties aligning the country’s total debts to its real capacity to pay. Such an arbitration process would be driven by the aim to restore Zimbabwe’s debt sustainability.
The illustration of how a flexible process as an alternative to the traditional debt relief processes could look like in Zimbabwe is based on the step-by-step guide developed by Jürgen Kaiser, Erlassjahr coordinator, “Resolving Sovereign Debt Crises: Towards a Fair and Transparent International Insolvency Framework”. The result is a concrete step-by-step simulation on how an impartial and fair process could look like or work in the concrete case of Zimbabwe.