Ready for the next debt storm?

The number of poor countries that are in debt crisis is increasing rapidly, as is the share of public revenue that Southern governments need to divert from essential services to pay down debts. The international community is awaiting the storm with remarkable silence: only piecemeal steps have been taken in 2017 at the multilateral level in the areas of effective institutions for debt crisis prevention and resolution. The UNCTAD Debt Management Conference that took place in Geneva on 13-15 November and the Paris Forum the day after provided a glimpse of what is to come.

Bodo Ellmers

THE 11th Debt Management Conference, organised by the United Nations Conference on Trade and Development (UNCTAD), took place in an environment where the debt crisis is moving southwards again. While the 'transatlantic crisis' has dominated academic and political discourses in recent years, the response of Northern central banks has facilitated lending to developing countries and driven up debt levels there. The International Monetary Fund (IMF) reports that three more low-income countries have gone into debt distress this year (Chad, Gambia and South Sudan, joining Grenada, Mozambique, Sudan and Zimbabwe), whilst the number of countries in debt distress or at high risk has increased to 28, from 15 in 2013.

And the irresponsible lending and borrowing party is not over yet, as more hot money is searching for higher yields. Just one category of debt, the issuance of sovereign bonds by developing countries, reached $133 billion in 2016 and is expected to rise further this year, essentially doubling the level from 2015.

At the Debt Management Conference, development finance experts such as Prof. Jan Kregel from the Levy Economics Institute (and the University of Tallinn) and Prof. Nelson Barbosa from the Sao Paulo School of Economics challenged the hegemonic paradigm that underdeveloped countries have to borrow from abroad to finance their development, and pointed to the risks associated with such a strategy.

UNCTAD's own Stephanie Blankenburg pointed to the increasing occurrence of debt crises in recent decades and cautioned that after the lending boom, developing countries may face a new bust cycle as both debt-to-GDP ratios and debt service ratios have increased massively since 2013. The volume however is not the main or only problem, stressed Blankenburg: concerns are growing over the new composition of debt that is a 'treacherous mix' of private and public debts (some of which are hidden as contingent liabilities) denominated in foreign as well as domestic currencies and owed to domestic and foreign creditors. There is currently no debt workout mechanism that could unravel and deal with such a mix.

And Northern governments are making things even more complicated. Karin Kublbock from the Austrian Foundation for Development Research mapped the many instruments with which foreign actors are driving poor countries' debt levels further upward. This is the predictable consequence of their desire to turn billions in grants into trillions of new debt through 'blending' instruments or, as critics say, to create new investment opportunities for capital from the North. The G20's Compact with Africa and the European Union's External Investment Plan are just the newest of these initiatives.

On the debt crisis prevention side, some hope that the introduction and enhanced use of state-contingent debt instruments could provide some kind of buffer to avoid a situation where economic shocks or natural catastrophes lead to defaults. Countries are starting to experiment with GDP-linked bonds or debt instruments that contain 'hurricane clauses', for example. These are debt instruments for which repayment conditions automatically change when a certain event happens, such as a drop in commodity prices or a natural catastrophe. They are seen as 'market-based' debt crisis prevention tools, in the absence of an effective debt workout mechanism that affected countries could turn to.

International organisations such as the IMF and the World Bank expect governments to issue such bonds, and private investors to buy them. Critical observers have, however, already highlighted that the IMF's and World Bank's own loans are not state-contingent, nor are those of bilateral official creditors; this recently led to the perverse situation where, in the aftermath of Hurricane Irma, Antigua and Barbuda made payments to the IMF, and Cuba made payments to its Paris Club creditors. Civil society groups also flagged this problem at the Paris Club's Paris Forum on 16 November, where state-contingent debt was also discussed. 

As it takes a little more time to develop insolvency laws and orderly procedures to restructure the unsustainable debt of sovereign debtors, the UNCTAD conference also debated what can be done with existing soft law mechanisms in the meantime. There is no lack of such mechanisms: the UNCTAD Principles on Responsible Lending and Borrowing, the Basic Principles on Sovereign Debt Restructuring and the G20 Guidelines on Sustainable Finance are just some examples.

Legal scholar Matthias Goldmann noted at the conference that the direct impact of soft law on court decisions is somewhat limited but it can impact indirectly by influencing policy, which later becomes a reference for courts. 

That soft law principles can only be a start was also highlighted by Jubilee USA's Eric LeCompte. He flagged the pressing need for better debt workout mechanisms and cited the US insolvency law's Chapter 9 and 11 as legal models for multilateral legislation in this area. He also said that the urgent need to address the debt situation in the hurricane-hit Caribbean would offer an opportunity to test innovative debt workouts. There is certainly no lack of ideas and concepts for policy- and decision-makers to pick up and put into practice.                                                    

Bodo Ellmers is Policy and Advocacy Manager at the European Network on Debt and Development (Eurodad). This article is reproduced from

*Third World Resurgence No. 324/325, August/September 2017, pp 13-14