Debt Relief

Indebted nations must pay to play, creditors say

The secretary-general of the Paris Club, Emmanuel Moulin, said the Club has never recognized the concept of odious debt due its difficult implementation as a policy.

Defining “sustainable debt” and understanding the diverging development needs of lower-income and middle-income countries were some of the key issues to emerge during a two-day conference that ended Tuesday at the United Nations.

Entitled “Sovereign Debt for Sustained Development: Issues for Countries that Access Financial Markets,” the conference drew more than 50 representatives from academia, non-governmental organisations, international financial institutions and the private and public sectors to discuss how to mitigate risks and promote opportunities for developing economies.

The forum focused not on debt forgiveness for the poorest countries, which has been addressed in other venues like the Group of Seven industrialised nations, but on mechanisms to ensure that countries make their payments without defaulting – “debt sustainability”.

“There is . . . no unambiguous analytical concept that indicates debt sustainability that can be applied to each country,” said Barry Herman of the U.N. Department of Economic and Social Affairs. “One size does not fit all.”

Vikram Nehru of the World Bank’s Debt Department opposed the term “sustainable debt” at all because he said it lacked clarity.

“We don’t know whether today’s debt of a particular country is sustainable or not,” he said. “Tomorrow, if that country is in a crisis, today’s sustainable debt becomes unsustainable tomorrow. Similarly, if a country has rapid growth, today’s seemingly unsustainable debt can become very sustainable tomorrow.”

He pointed to Bangladesh as an example of a country that was considered one of the most indebted nations in the world in the 1970s, but now is rarely discussed thanks to its successful growth rate.

Middle-income countries in particular, added Nehru, face a very different financing situation than lower-income countries, to the point that the same debt sustainability analysis cannot be applied to both types.

The gradual move by middle-income countries away from bank lending and toward bond financing implies that their debt is now spread among a wider variety of creditors, making it more difficult for collective action.

“It’s very difficult to get the creditors together to come up with an arrangement in the event of a default which would allow for more borrowing to resume,” Nehru said.

“The point I want to make is that we can do debt sustainability analyses until the cows come home, but those analyses don’t decide what is sustainable debt in middle-income countries. It’s the markets that decide.”

The lack of transparency in how debt sustainability is assessed was another concern.

Brazil was cited as being “uniquely excellent” in that it actually increased its communication as it financial markets displayed decreasing confidence in the country’s economy following the devaluation of its currency, the real, in 1999.

However, transparency on the part of creditors was also raised, particularly the conflict of interest that occurs when an institution serves in the dual role of being a mediator in debt negotiations and a creditor, as is the case with the International Monetary Fund.

Several participants called for an end to the “monopoly” that the International Monetary Fund and the World Bank hold on assessing a nation’s debt sustainability.

“I don’t think the creditors should not be allowed have a role in deciding what the sustainability level is, but I think the views of the debtors and the creditors need to be balanced and this needs to happen in a different forum that we don’t have available today,” said Aldo Caliari of the Centre of Concern, a Washington-based NGO.

Other concerns surrounded the role of the 19-member Paris Club (a group of creditor nations), including the complexity of debt negotiations with club members and the requirement that governments seek comparability of treatment from private creditors, an obligation that participants said was often problematic.

Emmanuel Moulin, the secretary-general of the Paris Club and the International Debt Office Chief in the French Finance Ministry, acknowledged that new mechanisms are needed to take into account the sudden changes in circumstances that can alter the ability of country to make its payments.

But in the grand scheme of things, he said, the Paris Club is generally a minority player, particularly for countries with market access, which tend to be middle-income countries.

On the question of “odious debt” – referring to debts not created in the interest of a state, but of a regime, such as that of Saddam Hussein’s Iraq – Moulin said the Paris Club never recognised the concept of odious debt due its difficult implementation as a policy.

However, many debt activists condemn creditors for financing “odious debt”.

Joseph Stiglitz, the former chief economist of the World Bank and now a professor at Colombia University, called for a specific provision on any new sovereign debt restructuring mechanism that addresses the question of odious debt.

Such a provision should explore the culpability of both the debtor and the creditor, comparing the odious debt transaction to that undertaken when credit card companies attempt to lure teenage children with no credit histories to sign up for credit cards and incur debt.

“The notion of culpability is one that we can all understand,” he said. “One can put more weight on it going forward with a clear legal structure, but one should put weight on it now that a large fraction of Argentine debt can be traced to compound interest from lending to the generals.”

Ulysses De La Torre, Inter Press Service (Johannesburg), March 8, 2005

Categories: Debt Relief, Odious Debts

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