DEBT AND DEVELOPMENT: THE NEXT 15 YEARS
UNCTAD, Geneva, Switzerland
15 May 2015
SUMMARY
• FFD zero draft recognizes the importance of
debt for development and asks IMF, WB and
UNCTAD to continue working in this area
• Current debt situation
• Challenges UNCTAD sees in the next 15
years
• Work on crisis prevention
• Improved debt workout procedures
– Recent developments in the GA and IMF proposals
Highlights of UNCTAD’s initiatives and
achievements
• 1960s – UNCTAD advocated for assistance to developing
countries to assist them in debt sustainability
assessments and debt consolidation.
– Advanced proposals on debt relief and guidelines for
debt rescheduling.
– Advanced the adoption of early warning system
imbedded in an institutional framework to ensure
rescheduling didn’t disrupt the development process
and is tailored to country specific circumstances.
UNCTAD’s initiatives and achievements (con’t)
• 1970s –
– UNCTAD IV – developed countries pledged to promptly
address the needs of LDCs for debt relief in a
multilateral framework.
– Resolution 165 of the 9th TDB – 18 developed
countries adopted measures that provided debt relief to
45 countries to an estimated $6 billion.
– UNCTAD V: Called for the establishment of an
international debt commission
– Debt relief should not be limited to crisis response,
should examine problems in overall dev. context
UNCTAD’s initiatives and achievements (con’t)
• 1980s
– UNCTAD pointed to the lack of a well articulated,
impartial framework for resolving international debt
problems
• proposed creating a chapter 11 process (US Bankruptcy code)
at international level.
– Assisted developing countries in Paris Club negotiations
• 1990s
– Pushed for multilateral debt relief for developing
countries
Current Debt Situation: Progress
• Developing countries have been successful on
average in reducing their external debt ratios due
to:
– Favorable external conditions and rapid GDP growth
from 2003-2007
– Debt relief delivered under the HIPC Initiative & MDRI
– MICs external debt reduction came in response to the
financial crises that struck in the 2nd half of 1990s.
External Debt / GDP
(percentage)
100
All developing countries
90
All developing countries excluding
BRICS
BRICS
80
70
HIPCs
60
LIC
50
40
30
20
10
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Public & Publicly Guaranteed Debt to GDP
(Percentage)
90
All developing countries
80
All developing countries excluding BRICS
70
BRICS
60
HIPCs
50
LIC
40
30
20
10
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Composition of Long-term External Debt
(Billion USD)
5000
4500
Private Non Guaranteed
4000
Private Creditors (Publicly Guaranteed)
3500
Official Creditors
3000
2500
2000
1500
1000
500
0
Composition of Total External Debt Stocks
(Billion USD)
7000
Long-Term External Debt
6000
5000
4000
3000
2000
1000
0
Short-Term External Debt
Increases in International Reserves
International Reserves
International Reserves
(Billion USD)
(Billion USD)
8000.0
80.0
7000.0
70.0
6000.0
60.0
5000.0
50.0
4000.0
40.0
3000.0
30.0
2000.0
20.0
1000.0
10.0
0.0
0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
All developing countries excluding BRICS
All developing countries
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Low Income Countries
HIPCs
Current areas of work - prevention
• UNCTAD’s three pillars
– International consensus building
• General Assembly negotiations
• Responsible Sovereign Lending and Borrowing
– Technical assistance
• DMFAS Programme
• Capacity building projects working with Ministries of Finance
and Central Banks (ALM, risk management, debt sustainability,
adoption of Principles for Responsible Sovereign Lending and
Borrowing)
– Research and analysis
• Study and report on emerging issues in the international arena
Strategies to mitigate Debt crises
• Problem solving:
– Avoid over borrowing
– Making debt safer and improving debt
management (DMFAS)
– Establishing international norms on
sovereign lending and borrowing
(UNCTAD’s Principles on Responsible
Sovereign Lending and Borrowing )
Establishing and adhering to international
norms
– UNCTAD's Principles for Responsible Sovereign Lending
and Borrowing
• To establish internationally recognized principles that promote
and reinforce responsible sovereign lending and borrowing
practices.
• At present there are no such universally agreed principles that
exist.
• First step in the process of preventing (and if necessary
resolving) future problems.
• Eventually such guidelines could help identify criteria to assess
whether the sovereign debt has been contracted in accordance
with internationally accepted principles.
PRSLB ENDORSEMENTS
• The first round of endorsements happened during
the UNCTAD Doha Conference on 22 April 2012:
• - Argentina - 22.04.2012
• - Brazil - 22.04.2012
• - Germany - 22.04.2012
• - Italy - 22.04.2012
• - Morocco - 22.04.2012
• - Nepal - 22.04.2012
• - Norway - 22.04.2012
PRSLB ENDORSEMENTS
• Other Member States joined progressively after
that:
• - Cameroon - 27.09.2012
• - Colombia (pre endorsed) - 30.08.2012
• - Gabon - 12.05.2012
• - Honduras - 9.05.2012
• - Mauritania - 25.10.2012
• - Paraguay - 13.06.2012
Safer debt
• Improvement in debt structure is likely to reduce
the probability of a debt crisis.
– Reducing currency and maturity mismatches
– Switching from the international to the domestic debt
market
• This can prove to be difficult for some countries
– Issuing contingent debt instruments
• Downside: investors are likely require higher
compensation for investments with variable
returns.
CHALLENGES FOR NEXT 15 YEARS
• Historically unusual macro situation and challenges of
normalization of interest rates
• ODA, Debt and SDGs
• Post HIPC and sustainability
• Access to markets by new countries (pros and cons)
• Contingent liabilities for governments - private debt and
ageing population
• Climate change and debt - policy implications
US 10 Yr Treasury Rate
16
14
US GVT Bons YLD 10Y
12
Average from 1962-2007
10
8
6
4
2
0
Source: Thomson Reuters DataStream
Net ODA in 2014 as a percentage of GNI
As % of GNI
1.2
1.1
1
0.9
1.1
1.07
0.99
0.85
0.8
UN Target 0.7
0.71
0.7
0.6
0.5
0.64
0.6
0.49
0.45
0.41
0.4
0.3
0.38 0.36
0.27 0.27 0.26
0.2
0.1
0
Source: OECD.Stat, May 2015.
0.29
0.24
0.21 0.19 0.19 0.19
0.16
0.14 0.13 0.13
0.11 0.11
0.08 0.08
NET OFFICIAL DEVELOPMENT ASSISTANT & NET DEBT RELIEF GRANTS
180
160
140
Constant 2013 USD billions
120
100
80
60
40
20
0
Net ODA, All Donors , Total
Source: OECD.Stat, May 2015.
Net ODA, DAC Countries. Total
Net Debt Relief
RECENT HIPC DEBT EVOLUTION
COMPOSITION OF TOTAL EXTERNAL DEBT STOCKS
Billion USD
200
Long-Term External Debt
180
160
140
120
100
80
60
40
20
0
Short-Term External Debt
RECENT HIPC DEBT EVOLUTION
COMPOSITION OF LONG-TERM EXTERNAL DEBT
Billion USD
180
160
Long-term External Debt, Private Non Guaranteed
Long-term External Debt, Private Creditors (Publicly Guaranteed)
140
Long-term External Debt, Official Creditors
120
100
80
60
40
20
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Sub-Saharan Africa Sovereign Bond Issues
(Million USD)
7000
6000
5000
4000
3000
2000
1000
0
2009
2010
2011
Source: Bloomberg, Dealogic, Financial Times
2012
2013
2014
CLIMATE CHANGE AND NATURAL DISASTERS
• There were 189 natural catastrophes
worldwide last year, the highest on Swiss Re
records
• Disasters claimed more than 12,700 lives in
2014
• Severe thunderstorm losses are trending
upward
NUMBER OF NATURAL DISASTERS IN
MEXICO
ESTIMATED DAMAGE COSTS - MEXICO
Causes of Debt Crises
• Crises may be triggered by a number of exogenous
shocks:
– Currency crisis,
– Banking crisis
– Terms-of-trade shocks affecting the debt-to-GDP ratio
and/or debt-to-export ratio.
– Interest rate shocks.
– Excessive borrowing or sub-optimal borrowing
inconsistent with economic fundamentals.
– Sudden capital flows reversals and contagion effects.
– Natural disasters
Debt restructuring
• When a debt crisis occurs, there is a need for debt
restructuring.
– Debt restructuring is a central component of the
discussion on external debt
– It can only be seen as an exceptional instrument in the
debt's general management over the medium term.
Current approach to debt restructuring
• Addressed through various institutions and
arrangements:
–
–
–
–
Paris Club (official creditors)
London Club (private creditors)
Bond exchanges
Highly Indebted Poor Country Initiative (HIPC) &
Multilateral Debt Relief Initiative (MDRI) (multilateral
debt relief)
Problems with the current (non) system
1. Multifaceted (large undertaking involving
numerous stakeholders)
2. Lengthy debt renegotiations
–
–
Costly & time consuming
Some cases do not restore debt sustainability
3. Need to coordinate interests of all stakeholders
–
dispersed creditors and hold out bondholders
4. Lack of access to private interim financing
during the restructuring process
5. Delayed defaults
6. Holdouts.
HERE THEY COME - VULTURE FUNDS
• Countries are faced with significant setbacks
– Social cost of loss revenue for poverty reduction
– Development losses towards achievement of MDGs
– Complicates financial and reserve management
• It is estimated to take HIPCs around six years to
rebound from such litigation that was already
drawn out for 3-10 years.
• High returns on this opportunistic behavior
creates the wrong incentives
NOT ONLY ARGENTINA
• Donegal International purchased $44 million of
Zambia’s debt owed to Romania for $3.2 million
(7.2%)
• Donegal sued the government for the debt and
settled for a payment of $16 million.
• After a missed payment, Donegal sued the
government for full payment of the $44 million in
UK courts.
• Donegal was awarded a settlement of $17.5
million, constituting over 540% profit
DEMOCRATIC REPUBLIC OF CONGO
• DRC reached decision point in 2002, and the completion point 2010
under HIPC (long process)
• The government defaulted on its debts during its Civil War, the fund
FG Hemisphere purchased $3 million of discounted debt
• Fund refused to participate in the debt relief scheme and sued the
Congolese government in numerous courts seeking $100 million.
– Going after the government’s assets abroad FG Hemisphere won an
award of $30 million through Australian courts -- plus $2 million in
legal fees and court-imposed fines
– This was but one of many creditors pursuing large profits through
litigation against the DRC
STILL GOING ON
• Currently 11 ongoing commercial creditor lawsuits against
6 HIPCs
– Democratic Republic of Congo, Republic of Congo,
Ethiopia, Honduras, Sudan and Uganda
• Court locations vary considerably
– South Africa, France, Russia, Honduras, Sudan, Dubai,
Uganda, Republic of Congo, (previous cases in US, UK,
Sierra Leone)
FFD ON VULTURE FUNDS
• «we welcome legislative steps taken to impede
these activities and encourage additional financial
centre jurisdictions to take action»
A few examples of measures :
• Belgium “Anti-Vulture Fund” legislation (2008)
• UK Debt Relief Act (2010)
• World Bank Debt Reduction Facility
• Paris Club commitment not to sell claims on HIPC
countries to creditors who do not intend to
provide debt relief
Current work on improved debt workout
procedures
IMF and ICMA:
– bonds with improved CACs and a strict definition of the
pari passu clause
UN:
GA resolution (A/RES/68/304) “ Towards the
establishment of a multilateral legal framework for
sovereign debt restructuring processes“.
UNCTAD AND GA PROCESS
A/RES/69/247: Modalities for the implementation of
resolution 68/304, UNCTAD has been asked by member
states to be the Secretariat of the Ad hoc Committee on a
multilateral legal framework for sovereign debt
restructuring processes,
- Two Ad Hoc Committee Meetings with no participation
from advanced economies or IMF. Third meeting at the
end of June.
- Chair will be distributing zero draft to member states at
the end of May.
Debate surrounding a formal mechanism
• Arguments in favor:
– The lack of such a structured mechanism is a major failure of
the current international financial architecture which leads
to long delays in debt restructuring, unfair outcomes, and
loss of value for both debtors and creditors.
• Arguments against:
– The current system has all the necessary contractual
instruments for dealing with sovereign defaults and that the
creation of a new institution for dealing with sovereign
insolvencies would be useless at best and dangerous at
worst.
ROADMAP – ELEMENTS OF A SYSTEM
• Principle 1: Legitimacy
Legitimacy is the property of a legal rule or a legal regime which makes it
acceptable to its addressees, thereby inducing compliance.
• Principle 2: Impartiality
Impartiality may be defined as the absence of bias.
• Principle 3: Transparency
Transparency addresses the availability of information about the exercise of
public authority to the general public or at least to interested stakeholders.
• Principle 4: Good Faith
Good faith is a principle which encompasses basic requirements of fairness,
honesty, and trustworthiness.
• Principle 5: Sustainability
• Sovereign debt is sustainable if it can be serviced without impairing the
social and economic development of society.
THANK YOU
http://www.unctad.info/en/Debt-Portal/