took place in Geneva this week. At one of the best attended policy conferences ever, several hundred participants – including Eurodad staff, members and partners - discussed topics such as how to tackle the unfolding developing country debt crisis, debt sustainability analyses for a new debt landscape, new debt transparency initiatives, and more effective debt workout mechanisms. Participants agreed that urgent action is needed to address the new wave of debt crises, and called for more political will.
The conference was opened by a keynote speech from the Namibian Finance Minister Carl Schlettwein.
He stressed that growing global indebtedness is a key challenge, and asked how to use debt so that it promotes growth, rather than causing recessions. Global debt stocks reached more than three times global GDP, and the surge of private debt caused by decades of financial deregulation might derail the 2030 Development Agenda and Paris Agenda due to the strain on fiscal space in developing countries. He explained that Namibia is a vulnerable country and has been affected by severe drought and a commodity price shock in recent years which makes managing debts difficult. He called on all nations “to engage in reinvigorated debate that addresses some of these systemic issues”
PANEL 1: The unfolding debt crisis in developing countries revisited: Overview and recent trends
, Head of UNCTAD´s Debt and Development Finance Branch, gave a detailed assessment of the current state of debt. The massive surge in private debt in developing countries over the past three years has been remarkable, and is a consequence of financial liberalisation and deregulation, and the rise of shadow banking. “Foreign non-banks”, such as investment funds and pension funds, now hold about a third of developing country government debt, and the debt stock increasingly consists of bonds. The share of official bilateral loans which were more than half of that debt in the 1970s, has fallen by two thirds. Developing countries have a riskier debt structure, as short-term debt continues to rise. Moreover, corporate debt surged massively, which causes additional systemic risks.
She also cited UNCTAD research which looked at 30 countries and found that if no further ODA grants were available, debt-to-GDP ratios would increase from the present level of 47% to 185%. Unfulfilled ODA commitments already amounted to USD 2.7 trillion between 2002 and 2017. Debt relief could make a very substantial contribution to SDG financing, said Stephanie Blankenburg, especially in Africa and especially for Low Income Countries (LICs). But better debt restructuring frameworks are needed for speedy and sustainable debt relief.
from the Howe Institute in Canada, stressed that there was an overreliance on monetary policies in richer countries in response to the global financial crisis, which caused capital flow volatility and speculative lending to the South. He suggests strengthening capital controls and improving debt reporting. The US Central Bank Fed should take spillovers into account, and regulators generally could force lenders to pay attention to developing countries’ needs and vulnerabilities. Capital flight is an issue that limits space for fiscal and monetary policy in developing countries. He stressed that the vulnerability of developing countries to a crisis has increased. Policy options to cope with that include a better-resourced IMF; new swap agreements with the IMF; and especially better debt restructuring frameworks for public and private debt.
PANEL 2: Debt transparency to the rescue? Possibilities and limitations
from the IMF stated that work is progressing in different forums on debt transparency. He presented the so-called “multi-pronged approach” of the IMF and World Bank, a comprehensive reform initiative. The already reformed Debt Sustainability Framework for Low Income Countries makes more data available. The updated IMF debt limits policy will also include new transparency requirements. The World Bank (IDA) will have a new Sustainable Development Finance Strategy soon. The IMF also supported the G20´s self-assessment exercises along the Operational Guidelines on Sustainable Financing, which will be made available on IMF website in the coming days.
from the Institute of International Finance (IIF), a private banks´ lobby group, presented figures on the “decade of debt”. Total global debt has risen massively, driven in particular by the USA and China. Looking at different debt categories, she described the massive expansion of the emerging market bond universe. She presented the state of progress of the new IIF Transparency Initiative, a voluntary initiative by private banks that was launched in response to the Credit Suisse and VTB lending scandal in Mozambique. Remaining issues include how to disclose interest rates and fees, at what point of time data will be disclosed, and finding a repository where the data will be disclosed.
from the South Centre added that process transparency is also needed, including on due authorisation and loan approval procedures. The UNCTAD Principles on Responsible Lending and Borrowing emphasise the co-responsibility of debtors and creditors, and contain a number of qualitative provisions to promote transparency.
The Jubilee Debt Campaign´s Head of Policy, Tim Jones, presented a thorough critique of the IIF initiative and made proposals that go further. Ideally, all creditors would report all loans in a publicly accessible database, he said. Voluntary initiatives such as the IIF are a step forward, but insufficient. It is unlikely that creditors comply if there is no sanction mechanism for non-compliance. An effective sanction could be “no reporting – no enforcement”, and only publicly reported claims should be eligible to be treated in court cases when disputes arise.
PANEL 3: Debt and the securitisation of development finance: Useful innovation or recipe for more toxic debt
from the Bank for International Settlements assessed the trend towards securitization in China – a process where different loans are pooled and packaged in securities and eventually sold on to investors. He called this trend a double-edged sword. It reduces reliance on bank lending but also causes systemic risks, as the global financial crisis has shown in other countries. While securitisation was been insignificant until 2013, China has grown to the world´s second-largest market in just six years.
from the University of the West of England in Bristol explained the trends towards securitisation pushed by and in multilateral development banks (MDBs), a trend that ultimately led to the MDB preference for public private partnerships (PPPs) in infrastructure, as they require generating payment streams for institutional investors. The `Maximising Finance for Development` strategy pushed by World Bank, IMF and G20 aims to create `SDG assets` for institutional investors, a tendency that she calls the “Wall Street Consensus” due to the private investment friendly approach. She warned hat competing ESG-rating exercises can lead to greenwashing, and presented a green finance strategy as an alternative.
from the University of London took a critical look at the trend towards collateralised lending in commodity-dependent developing countries. Using future commodity export revenue as collateral for debt is a bad idea, he concluded, as it exposes developing countries to highly volatile commodity prices. He stressed that there is generally an overreliance on external financing in developing countries, and advises to use less risky domestic financing more often. PANEL 4: Long-term debt sustainability and the Sustainable Development Goals: Beyond the short-term prioritisation of creditor interest
from the European Commission discussed how to finance the SDG funding gap, which is huge. She said that ODA grants are not sufficient, and other sources such as domestic revenue, private finance and debt need to contribute. She presented “Integrated National Financing Frameworks” as holistic planning instruments that can link a financing strategy to a sustainable development strategy. She thinks that the EU´s financial support to developing countries does not undermine debt sustainability, despite increasing reliance on blended financing instruments. More transparency and better institutions to resolve debt crisis are important, however. Work done on collective action clauses (CACs) in bond contracts could be extended to loan contracts.
Columbia University´s Martin Guzmán
presented recent reforms in sovereign debt restructurings and warned that Argentina 2020 will be the test of recent innovations, such as improved CACs. He emphasised that in the past, debt restructurings generally came “too little – too late”, which led to unsustainable outcomes and the need for repeat restructurings. He stresses that urgent action is needed to restore debt sustainability in Argentina, at the latest by March 2020. IMF loans should not be used to bailout private lenders, but to finance productive investments.
from the Overseas Development Institute presented different perspectives on debt sustainability in her presentation. In her own model, the non-interest current account plays an important role to determine debt sustainability. But she also listed approaches to look at sustainability from an affordability perspective, models that focus on the opportunity costs of using scarce resources for debt service instead of public service delivery and poverty eradication. Thirty-eight developing countries spend more on interest payments than on health services, she said.
PANEL 5: Multilateral policy responses I: Long-term debt traps and the renewed relevance of debt and disaster relief initiatives
Bodo Ellmers from Eurodad opened up this session by stressing that rising debt service costs have become a real issue for public service delivery. This is the topic of ongoing Eurodad research that will be published in early 2020. This is also a human rights matter: governments neglect their human rights obligations when their budget allocations give preference to debt payments over public services and social protection. Debt restructuring frameworks should be firmly anchored in human rights. Human rights impact analyses should complement debt sustainability analysis, and their findings should decide when to trigger and design a debt restructuring process. On climate disasters and debt, he stressed that small island developing states (SIDS) cannot be expected to buy costly insurances against disasters, as they did not cause climate change.
Jubilee USA´s Eric LeCompte
pointed at the successful outcomes of past debt relief initiatives. The Heavily Indebted Poor Country Initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI) won debt relief worth US$ 115bn for the poorest countries. School fees were cancelled following debt relief, and 54 million additional children could go to school. Political will is essential to address the new debt crises of our times. A good started would be a targeted debt relief initiative for Caribbean countries and SIDS affected by climate change. He concludes that “we have done it before, we can do it again”.
, economist at the School of Oriental and African Studies in London, assessed the HIPC and MDRI Initiatives in more detail. Their impact could have been greater if it had not been for their shortcomings: the volume of debt relief was in some cases insufficient, and harsh conditions attached limited the positive impact on fiscal space. She reviewed negotiations on debt crisis solutions at UNCTAD conferences, the UN Human Rights Council and the General Assembly and found that many suitable and more ambitious proposals have been politically blocked and could not be put in practice yet.
from Erlassjahr.de presented a concrete proposal for a debt relief initiative for the Caribbean Island States affected by climate disasters. He also looked at historic successful examples of sustainable debt restructurings and stressed that independent arbitration was a key factor to prevent `too little´-restructurings and ensure good outcomes.
PANEL 6: Multilateral policy responses II: Sovereign debt restructurings – practical ways forward
Cornell University´s Odette Lienau introduced the topic with an entertaining anecdote on how, in the middle ages, a sovereign (king/queen) could borrow as much as creditors would give, but was liable personally, with his/her own property or even freedom and life. This is a very different situation to sovereign debt nowadays, where elites can enrich themselves and citizens are footing the bill. This disconnect between risk and return facilitates overborrowing. Her latest research found that vulture funds have an inconsistent attitude towards corruption: they try to uncover and seize private assets held by shell companies, arguing they were sovereign assets that were privatised through corruption. However, they do not support the idea that it is corruption that turns sovereign debt into illegitimate debt which should not be repaid. She argues that co-responsibility of lenders and borrowers needs to be strengthened and the defunct debt restructuring system repaid, and eventually mapped out recent reforms.
Tackling the vulture funds problem was the key topic of Peter Kovacs, debt policy lead at the European Commission’s DG DEVCO. He presented the new scoping study on EU-wide vulture funds legislation, a step by the European Commission on request of the European Parliament, and also in response to the commitments that the EU made in 2015 in the Addis Ababa Action Agenda. He outlined what an EU legal instrument to curb vulture funds could look like, inspired by the existing laws in EU Member States such as Belgium and France, and stressed that the EU and partners could take additional steps, such as agreeing to ban sales of assets to vulture funds at all.
, director of Development Finance International, argued that the time has come for an additional round of debt relief as many countries faced economic or natural disaster shocks, which drove debt back to unsustainable levels. Moreover, debt relief can free up urgently needed resources for SDG implementation. HIPC/MDRI had some benefits that new initiatives can build on, for example linking debt relief to debtor needs, or trying to make it comprehensive. Future debt relief should be based on SDG funding needs, and the next round of debt relief should be truly comprehensive, i.e. avoiding any hold-outs or vulture fund interventions. It should also move much faster than HIPC/MDRI. A new round of debt relief, together with increased official development assistance and changes in the international tax regime, are key to achieve the SDGs. Strengthening debt management and operationalising debt transparency
The remaining panels discussed in greater detail how to operationalise debt data transparency, and debated how the international community can support debt management strengthening. Experts from developing countries, such as Jules Coulibaly
, the director of Cote d’Ivoire’s debt management office, and Kokou Dandjinou
from the Togolese Ministry of Finance, presented the practical steps that they took in recent years. The UNCTAD´s Gerry Teeling presented the work of the DMFAS programme, and the World Bank´s Lea Hakim
their Debt Management Facility, two technical assistance programmes.
Richard Kozul-Wright, the director of the UNCTAD´s Division on Globalization and Development Strategies, stressed in his closing statement that hyper-globalisation has shrunk policy space through deregulation and the reforms made since the global financial crisis have been insufficient. Surveillance reports by the European Central Bank and others identify surging systemic risks, indicating that a new crisis is at the doorstep. Continued commodity dependence makes developing countries vulnerable to shocks, and the continued absence of a debt restructuring framework makes it difficult to prevent crises or resolve them quickly where prevention failed. UNCTAD will continue to promote a new debt workout mechanism and principles for responsible lending and borrowing.