A fine selection of the world’s most important debt experts met in Geneva on 5 and 6 October to discuss key challenges in sovereign debt management, and how to address them. The second DebtCon conference, convened by Georgetown University’s Anna Gelpern, and Ugo Panizza from the Graduate Institute in Geneva, tackled questions such as the need for a multilateral debt restructuring mechanism, dealing with vulture fund litigation, better approaches to assess debt sustainability, and debt and human rights. The question cutting across all these issues: when will that Euro crisis finally be resolved - and in particular when will Greece be released from the debt trap? One thing became clear, policy-makers have accumulated a huge backlog in reforms.
There are few conferences that you wished there were no parallel sessions, simply because all sessions would be interesting to attend. Even beautiful sunny autumn weather and the obvious opportunity to enjoy panoramic mountain views during a walk on Geneva’s lakeside promenade could not distract participants from engaging in two days of hot debates on the dire state - and hopefully better future - of debt crises prevention and resolution. Before we get the full conference documentation, here’s a quick glance at some of the key issues discussed.
Challenges to sovereign debt restructuring
Matthias Goldmann addressed the rise in creditor litigation in debt crises, often by specialised vulture funds, and the worrying rise of court rulings in their favour during the first decade of this century. Michael Waibel explained that issuing debt contracts under foreign law is the legal “original sin” that makes debt restructuring difficult and vulture business easy. Yuefen Li warned that future debt restructuring might become even more difficult due to the increasing coverage of sovereigns bonds and loans by investment treaties. Mathias Audit made the interesting point that some of the world’s largest sovereign debtors (such as France, UK and the USA) issue sovereign debt by law or decree instead of bond contracts. Issuance by law also allows for payment suspension by law, and thus more for sovereign decision-making and protection from vultures.
Martin Guzman picked up the “”, adopted by the UN General Assembly in 2015 and presented a methodology to assess the appropriate size of debt relief. Sayantan Ghosal enriched the debate by focusing on informal creditors – citizens and their social contracts with their government. Efficient debt workouts must take seriously the issues of distribution and inter-creditor inequity between formal and informal creditors, as also outlined in the .
Protecting people, states and human rights
Barry Herman pointed to the many skewed incentives that encourage investors to invest irresponsibly, including tax exemptions for certain investments. Eric Toussaint spoke about odious debt, and how - according to Alexander Sack’s early twentieth century doctrine - contemporary debtors such as Greece should not repay it. The relationship between debt and human rights featured in several presentations, reflecting its increasing prominence in the UN Human Rights Council’s work. Rosa Maria Lastra stressed that even the IMF, as a juridical entity, cannot ignore human rights and that debt sustainability analyses (DSA) could assess human rights implications. An approach that the for low income countries unfortunately does not follow.
I presented the many campaigns that the debt justice movement is running in order to turn progressive ideas into actual change. Needless to say that, besides devastating wars and severe financial crises, civil society campaigns have historically been the third key driver of positive innovations in the debt regime. Which is why we appreciate our alliance with progressive academia, and they with us.
After the storm: (Small) Island States
Puerto Rico also played a role at the conference, not surprisingly as US president Trump had the previous day declared about the island’s debt that “”. Anusha Chari explained the legal constraints of managing a debt crisis in a US territory, including the impossibility of introducing capital controls. Generally, according to Andrew Powell, no viable solution has been found yet to address the debt problems of small island states affected by ever more destructive hurricanes. The still fairly new ‘Catastrophe Bonds’ don’t work for them as they are too costly - for example, a small Caribbean island pays ten times more than Miami. Consequently, these bonds are not much used and most debt is not yet contingent. Just days before the conference, CSOs including on hurricane-affected islands’ debt payments.
Greece and the Euro zone reform
It was no surprise that as DebtCon came to Europe for the first time, Greece and Eurozone reforms featured in many sessions. As Yannis Manuelidis put it, Greece was just the “canary in the mine” whose collapse signalled the inability of the Eurozone system to tackle debt problems. The EU would probably have been better off to chose the Icelandic solution to a crisis caused by the private sector: Fridrik Mar Baldursson explained how Iceland, who refused to bailout banks, managed to get back into a net creditor position within just a few years.
Jeromin Zettelmeyer, now free of the constraints of being a German government official, presented a paper with the rhetorical title “Does Greece need more official debt relief? If so, how much?”. The answer is yes, it needs a lot, because the growth and fiscal surplus assumptions that the Eurogroup fabricated in order to declare Greece’s debt sustainable are impossible to maintain over the next five decades. I presented the positions of the campaign, which include recovering the costs of the unavoidable debt restructuring operation from the private creditors who benefitted from the bailouts. The campaign's “Drop Greece’s Debt” buttons were a vivid gem on many conference participants’ lapels.
The idea of setting up a European Monetary Fund was also discussed as a hot issue, since it had recently gained explicit endorsement by French president Emmanuel Macron. However for most participants it was clear a merely upgraded bail-out instrument adds no real value to the existing European Stability Mechanism (ESM). What Europe and the world needs is an effective debt restructuring framework (even so, it would be good if the ESM was least as transparent and accountable as the IMF.) Looking at the more timid reactions of the government officials in the room, I’d say they still need a little bit more encouragement to take the bold steps that we need.