European Network on Debt and Development

Current rules of international lending and investment are strongly biased in favour of creditors and investors. Developing countries have very little protection in the international regime, and they have all too often little say in the negotiations of loan and investment contracts.

Eurodad believes that in order to avoid repeated rounds of unsustainable and illegitimate debt, and to ensure that private sector investments are in keeping with standards of responsible financing, the rules of the game need to be fundamentally reformed. We believe that a binding set of responsible financing standards needs to be put in place which emphasises the mutual responsibilities of and is jointly agreed by both parties to the contract. The procedures that need to be followed to ensure responsible and legitimate loan and investment contracts are laid-out clearly in Eurodad’s Charter on Responsible Finance.

Regarding lending to sovereign governments, all loan contracts are considered valid and therefore payable regardless of whether there was corruption involved when the loan agreement was signed, whether exorbitant interest rates were charged or how the funds were finally used. Even where a contract may have been transparently and legitimately negotiated but the debtor finds itself unable to pay there are no international bankruptcy procedures in place to ensure a smooth resolution of the debt crisis for both sovereign debtor and its creditors. Instead, creditors decide on a case-by-case basis in forums such as the Paris or London Clubs, how much debt they will restructure or cancel when a country runs into financial difficulties. This leaves the door wide open for decisions based more on the political priorities of creditor governments than any objective analysis of the debtor country’s economic difficulties and prospects.

Regarding Northern investments in the South, they often bypass basic standards of responsible financing, such as ensuring that international agreements on labour, environmental and social standards or human rights obligations are met, or that a fair amount of tax  is paid to the country where these investments take place. This is even the case when private investments are supported by public subsidies guarantees by international or bilateral development finance institutions.

To push forward new and fair rules in the international financing system, Eurodad conducts advocacy towards European governments and other official bodies such as the Paris Club and the European Commission to ensure that these principles are adopted in all future loan and investment contracts. However there will be incidences where things do go wrong, and for these cases, Eurodad advocates for predictable, fair and transparent dispute resolution mechanisms which recognises the shared responsibility of both parties involved in such contracts.