Lisa Peryman, Odious Debts Online

March 4, 2005

A Filipino senator this week suggested the government look at Argentina’s model of debt default as one of a number of ways to ease the country’s ballooning national debt of P3.36 trillion ($60 billion).

“I’m not saying we do an Argentina,” Sen. Manuel Villar, the chairman of the Philippine Senate committee on finance, told ABS-CBN News Channel. “What I’m saying is [Argentina] was able to redeem their debt from $103 billion to 28 percent of that, as a
consequence of what they did.”

Emphasizing the need for a more “creative” response to fiscal crisis, Sen. Villar introduced legislation to create a debt relief council to review the country’s bilateral and multilateral loan agreements and treaties.

Under the senator’s proposed Debt Relief Act, a debt relief council could invoke “the relevant privileges” necessary to facilitate “cancellation of odious debt or restructuring of debts or both to ease debt payments.”

“Odious debts,” Villar said, are those incurred without the consent of the people, those which cannot have benefited the public, and whereby the lender must have been
aware of the two preceding conditions. The Philippines’ staggering debt load is largely attributed to economic policy under the corrupt administration of former president Ferdinand Marcos. According to the Philippine Daily Inquirer, foreign loans were
a “rich source of funds” for Marcos and his cronies who used monies generated in loans to line their own pockets. The Inquirer estimates that when Marcos was first elected president in 1966, the Philippines’ debt stood at just under $1 billion. When he fled the country in 1986, the total had soared to more than $28 billion.

Meanwhile, Sen. Villar and another member of Congress, Sen. Panfilo Lacson, have also raised the alarm on public sector debt which Sen. Lacson warned would reach P7.1 trillion by 2010, unless the government got serious about reigning in liabilities.
Sen. Villar proposed a debt cap bill to curb the government’s “borrowing spree” that would set a ceiling on public sector debt. Under the plan, the total debt stock the government would be allowed to maintain could not exceed 75 percent of the GDP of the previous year. For his part, Sen. Lacson called for an audit of public-sector debt and
a probe of government-owned and controlled corporations. According to the senator, the national debt stood at P3.81 trillion at the end of last year, a 13.6 percent increase over the 2003 level. Of this, foreign debts went up by 9.7 percent to P1.8 trillion in 2004.
“These figures mean that every Filipino regardless of age, gender or economic status is currently indebted to the tune of P64,000 each to our creditors,” he said.

Another proposal, this time by former senator Ernesto Macedo, recommends the referral of all future borrowings by the government to the Legislative Executive Development Advisory Council (LEDAC) for review and approval. The process said Mr. Macedo, would force the government executive to explain “if not to the public at least to its representatives, the House and Senate leadership, why it is borrowing, how much and what are the terms and conditions.”

The specter of debt default, however, remains a strong possibility. An investment consultant writing for Asia Times Online this week, warned [PDFver here] that although many analysts and investors were aware of similarities between the Philippines’ fiscal position and that of pre-default Argentina, the social and political similarities between the two countries continued to be overlooked.
“One of the key reasons why economic growth slowed in Argentina was the gathering social revolt,” claims Jephraim Gundzik, the president of Condor Advisers, an investment consultancy that foresaw Argentina’s default and devaluation. “Increasing social instability in Argentina, driven by increasing unemployment, rising taxes and non-payment of public-sector wages and pensions, created political instability,
leading to the eventual collapse of the government and default. Notably, the International  Monetary Fund dictated to Argentina the fiscal policies that resulted in social revolt. The same pattern is being replicated in the Philippines,” he said. Argentina’s debt default instead of sending a warning to other emerging-market countries may
suggest a viable alternative.

According to Philippine congressman Satur Ocampo, quoted in a recent UK Financial Times’ report [PDFver here] , Argentina has “done rather well” following its loan default and has
grown by 8 per cent in each of the past two years. Its currency has  tabilised and 2 million net jobs have been created since 2002, when Argentina defaulted on an $805-million debt to the World Bank. Argentina blamed the default on IMF policy that required the government to tighten its budget and anti-inflation measures before it could strike a deal or emergency funds.

At the time, a report distributed electronically by the Brussels-based anti-debt group
Eurodad suggested the World Bank could be seriously harmed by the Argentine move, the biggest sovereign debt default in history. According to the report, the default posed a threat to the Bank’s own creditworthiness and reputation and put its AAA bond-rating with investors at risk.
Eurodad predicted a default trend could spread if “the contagion pushes other countries in the region into making similar defaults or refusals to deal on the IFIs’ terms.”