The world is faced with increasingly complex sovereign debt situations, and the institutions and the instruments they use to tackle these crises are often inadequate and harmful to the most vulnerable in affected societies. The UN Financing for Development Conference in 2015 will be a unique opportunity to change the way debt crises are being managed to avoid forced ‘defaults’ like the one Argentina has recently faced, or crushing financial collapse like the one that Greece has experienced. In a briefing paper by Eurodad’s Bodo Ellmers, recent reform proposals to manage future debt crises by international organizations are examined – one from the International Monetary Fund (IMF) and one from the United Nations – and the next steps in the process are spelled out. The paper also makes concrete recommendations with respect to the role of Parliaments and steps that legislators and decision-makers can take in coming months to ensure that Europe influences future effective debt workout mechanisms that are responsible, fair and humane.
October 9, 2014 | Eurodad
A briefing paper for European legislators and decision-makers
Introduction
Debt crises are frequent, and they are here to stay:
Between 1950 and 2010, sovereign debt had to be restructured in more than 600 cases in 95 countries worldwide. In 427 cases, restructuring affected official bilateral creditors and was handled by the Paris Club, an informal coordination body of Western creditors that is hosted by the French Ministry of Finance. In 186 cases, private creditors were affected (18 bond restructurings, 168 bank loans). While the 1950s to 1970s were a relatively calm period, most restructurings have taken place since the early 1980s after financial markets were deregulated.
The Greek debt restructuring of 2012 was the largest ever, affecting private bonds with a face value of €205.5bn. This demonstrates how expensive debt workouts can be when debt overhangs are addressed too late. Most experts agree that the Greek debt restructuring could have been ‘cheaper’ and less harmful if the international community had reacted earlier – and had better instruments at hand.
New debt vulnerabilities are emerging:
A recent Eurodad investigation into debt vulnerabilities and crisis risks within all country groupings (high, middle and low income countries) found that:
• In high income countries, including most of Europe, sovereign debt levels have surged and reached their highest levels ever in times of peace.
• Middle-income countries suffer from volatility and might soon face bursting speculative bubbles.
• In low-income countries we see ever riskier debt profiles as they replace development loans by fundraising on financial markets.
• All countries face increasing risks through hidden debt, the contingent liabilities that come from public-private partnerships or private banks that might need to be bailed out by the public.
The international financial architecture is in urgent need of reform:
There is currently no insolvency regime for sovereign debtors (or a sovereign debt workout mechanism) which could be used to restructure unsustainable debt burdens in a fair, timely and efficient manner – and thereby prevent debt crises and their devastating impacts on the social and economic fabric of affected nations. Existing institutions address either only a share of a nation’s debt burden (such as the Paris Club that deals with bilateral official debt), or operate with suboptimal policies and instruments (such as the IMF).
In early 2013, both the IMF and the United Nations (UNCTAD) started new processes that aim to reform existing sovereign debt resolution processes and address the new challenges that arose in Greece and Argentina. The following chapters describe and assess these reform processes. The ongoing reform processes of the EU’s own financial architecture are not the subject of this briefing.
Key Findings
• It is vital that a responsible debt workout mechanism for cases of sovereign insolvency is established and integrated into the international financial architecture.
• The UN’s current proposals for development-friendly debt workouts based on human rights and responsible financing - which is the co-responsibility of creditors and debtors - offer the best chance of ensuring that countries can restructure their debts in an effective, sustainable and humane way.
European decision-makers and legislators can make this a reality by:
• Supporting initiatives for a resolution establishing a Multilateral Convention on sovereign debt workout at the United Nations General Assembly.
• Calling on the UN’s Financing for Development Conference in Addis Ababa in 2015 to promote the institution-building process for an international insolvency procedure.
• Ensuring that any new international insolvency regime is mandated to deal comprehensively with debt problems, is independent of creditors in analysis and decision-making, provides a human needs-based approach to debt sustainability, and gives all stakeholders the right to be heard.
• Integrating debt (debt workout, debt sustainability and responsible lending) into the EU’s Policy Coherence for Development Framework, and defining debt reduction as an explicit aim of the EU’s development cooperation with third countries.
• The European Parliament should also recall and strengthen its earlier motion for an international insolvency procedure or fair and transparent procedure, and urge the EU to immediately take necessary steps for implementation.
Read the full briefing paper here.
