From debt reduction to development Trends and options

1. From debt reduction to developmentTrends and options RomaTre - HDFS January 2015 Massimo Pallottino maxpallottino@gmail.com

2. 10 reasons why the debt crisis is not over • Economic imbalances continue to boost external debt • Capital is moving around the globe in an uncontrolled way • Private debt is on the rise • Sovereign debt is higher than ever in some places • Sovereign debt is riskier than ever in some places • The time bomb contingent liabilities could detonate at any time • Tax evasion and avoidance, and aid cuts, are undermining public income • Debt limit policies are subject to political manipulation • Responsible financing standards are rarely followed • Effective debt workout mechanisms do not exist Debt - Controversies and policy issues

3. Debt and global crisis Do debt crisis represent an exception? • After the WWII (Kaiser, 2013) • Eighties: Third World Debt • 1989-91: fall of the Soviet Union, and financial crisis in the former Union’s countries • 1994-95 Mexico’s debt crisis • 1996-97: Asian financial crisis • 2007: a long prepared financial crisis blows-up Debt: trends and options

4. Debt and global crisis Debt and the global crisis • The impact of the global crisis on impoverished countries • Markets • Aid flows • Remittances Debt: trends and options

5. Debt and global crisis A different context, but some similarities • Financialisation of the global landscape • Debt private - > public • Structural adjustment Debt: trends and options

6. Sustainable lending Debt audit and arbitration • Ecuador’s official debt audit commission • Examples of grossly unfair loan agreements • Question to lender: How could you draw-up such a skewed loan agreement? • Question to borrower: Why did you sign an agreement on such unfavourable terms? • Who is liable in these circumstances? Debt - Controversies and policy issues

7. Sustainable lending Need for independent arbitration • Until now, the creditor decides • No bakruptcy procedures for governments • ‘Contractual’ Vs. ‘Statutory’ approach • Towards a Sovereign Debt Restructuring Mechanism (SDRM) • But, before reaching an unsustainability point… Debt - Controversies and policy issues

8. Sustainable lending A shifting policy environment • Post HIPC and MDRI: policy debate has shifted to how to avoid rapid re-accumulation of unsustainable and irresponsible debt • Norway cancelled US$80mn in October 2006 citing “shared responsibility” for debts • Increased prominence of a number of “new lenders” (China, India, Brazil, Venezuela). Noises over a “race to the bottom:” “the competition of the Chinese banks is clear […] they don’t bother about social or human rights conditions” (Philippe Maystadt, President, EIB in 2007) • Vulture fund action has graphically underscored need for contractual changes to curb litigation by vultures (Donegal vs. Zambia in 2007: US$15.5mn awarded). Liberia: November 2009, for US$11.6mn awarded, a debt bought for US$2.5mn, and undetected in the last HIPC/MDRI SoI Debt - Controversies and policy issues

9. Sustainable lending A shifting policy environment • US sub-prime mortgage debate: “it is not the job of central banks to bail out lenders who lent imprudently” (Mervyn King, Governor Bank of England) • All domestic legal systems recognise situations in which a legal contract can no longer be enforced • UNCTAD and World Bank have published discussion papers on odious debt Debt - Controversies and policy issues

10. Sustainable lending …but inadequate policy responses • WB-IMF debt sustainability framework presented as important tool to avoid new debt build-up. Provides no assessment of “quality” of finance on offer. Voluntary coordination tool for lenders • G20 Charter on Responsible Lending: voluntary code of conduct • 2006 Equator Principles: voluntary code of good conduct for commercial bank lenders • Social and environmental safeguard policies (e.g. World Bank, IFC etc.): some mandatory, others discretionary Debt - Controversies and policy issues

11. Sustainable lending What does the situation need? • Why did countries become so dramatically over-indebted? Provision of poor quality finance, badly invested, often extended for political purposes with scant regard for use of funds… • Clear ex ante and ex post rules of the game only way to enforce (and reward) responsible lending and borrowing behaviour • Internationally recognised standards for responsible lending and borrowing to apply to all loans issued to sovereign states or covered by a sovereign guarantee Debt - Controversies and policy issues

12. Sustainable lending Legal and financial terms and conditions • Purpose and amount of loan: aid effectiveness & poverty focused. Loan must be driven by national needs assessment and growth strategy • Mutual obligations and predictable disbursement: The borrower commits to spend the funds as stipulated in the loan agreement. The lender commits to deliver the funds predictably as stated • Assessment of financial position of borrower and assumptions used to calculate how borrower will reimburse the loan • Fair interest rates and penalties policies (reasonable and fair upper limit); • Compliance with relevant national and international legislation; • Fees and charges: loan must give details of any fees charged as part of transaction (purpose, amount, recipient). Side-letters not permitted • Conflict of interests: The loan document should also spell out any additional role the lender has played in relation to the loan • Restrict right to sell loan on secondary market (informed consent of borrower) Debt - Controversies and policy issues

13. Sustainable lending Protection of human rights and environment • Respect for human rights: activities financed must not violate human rights; • Positive independent ex ante long-term integrated impact assessment of viability of project and details of how risk will be shared between signatories; • Loan must comply with internationally recognised social, labour and environmental standards; • Independent evaluation and audit; Debt - Controversies and policy issues

14. Sustainable lending Public consent and transparency • Parliamentary and citizen participation and consent (provision of adequate time and information in appropriate format) • Full public disclosure of information (press, radio, web etc.). Loan document should be available to citizens on request • Loan contract must be available in main national languages Debt - Controversies and policy issues

15. Sustainable lending Procurement • Government procurement processes must be open and transparent: loan must carry clear details of those carrying out any work • Loan must carry details of any host government agreements, production-sharing agreements, power-purchase agreements or any agreement to repay the loan in goods or services provided by the borrower • Local capacity-building: Procurement procedures should support the capacity-building of local companies and institutions • Development loans should not be tied to the purchase of goods and services from the lender Debt - Controversies and policy issues

16. Sustainable lending Repayment difficulties or disputes • Change in circumstance: The loan must recognise that there will be cases where a dramatic change in circumstances – beyond the will of either borrower or lender – means that the borrower is no longer able to meet its financial obligations on the loan • Independent arbitration: Loan document should provide for an independent and transparent arbitration procedure in cases of repayment difficulties or dispute. There will be a stay on debt repayments while negotiations are underway. The borrower will be protected from litigation while negotiations are in progress • Borrowers and lenders will respect the decision of the independent arbiters and there is the right to appeal • The details of loan refinancing agreements must be public • Cross-default: Loan document must not contain any cross-default or similar clause Debt - Controversies and policy issues

17. Sustainable lending Conclusion • Ultimately both lenders and borrowers need to be held accountable for their decisions: clear ex ante and ex post rules of the road needed to ensure responsible behavior • Move away from traditional top-down conditionality approach: citizens South & North are provided with tools to hold their governments to account Debt - Controversies and policy issues

18. Debt and global crisis Policy options • Sovereign debt: still a problem • Other kinds of debt are a problem, too • Market is market, but how about the public sectors’ role? Only bailing banks? • Responsibilities’ sharing and independent arbitration • ‘Ad hoc’ approach Vs. ‘system’ in debt management • A new concept of accountability Debt: trends and options

19. Web references • www.worldbank.org • www.imf.org • www.eurodad.org • www.cidse.org • www.jubileedebtcampaign.org.uk • www.jubileesouth.org • www.afrodad.org • www.latindadd.org Debt: trends and options