UN Second Committee, 10 October 2008 Debt Restructuring in Low-Income Countries: problems and possible solutions Dr Geske Dijkstra Erasmus University Rotterdam

Why such a long debt crisis in low-income countries?

• Persistent country characteristics (bad policies) → low growth and high debts → debt relief → bad policies

Moral hazard

with debtors (Easterly) • High debt and low growth → debt relief → more loans (

moral hazard

policies → lower growth with creditors) and, through conditions, bad

Overview

• Debt restructuring in 1980s and 1990s, and problems • 1999 HIPC initiative and 2006 MDRI did not resolve these problems • New problems in recent years with DSF, vulture funds • Possible solutions

Creditor responses to debt problems in 1980s & 1990s

• Private creditors: no new loans, writing-off • Official creditors, bilateral and multilateral: – Maintained fiction of lack of liquidity, not solvency → Combined rescheduling with new loans and grants – IMF agreement always condition for rescheduling

Bilateral creditors: Paris Club

• Rescheduling of debt service, with increasing percentages of forgiveness during the 1990s • But only on

debt service due

during period of IMF agreement Usually ESAF, 3 years • No

stock

cancelations

Effects of debt relief, Evaluation in eight countries Limited effects on stocks and flows Causes: • Debt relief too limited • Wrong modalities: mostly on flows, not on stocks • Too many new loans, mainly from multilateral development banks

14 12 10 8 6 4 2 0 -2 -4 Net transfers on debt, Sub-Sahara Africa, in US$ billion Bilateral plus grants Bilateral Multilateral Private

Moral hazard

Multilaterals were preferred creditors, so were bailed out by bilaterals →Inefficient use of aid money of bilaterals →

Moral hazard

loans with IFIs, so more new → Perpetuation of

debt unsustainability

IMF agreement as condition

• IMF three roles: gatekeeper, creditor and arbitrage: financing gap →Always new agreement in countries with high multilteral debt → More new multi-loans → No selectivity,

adverse selection

→ Weakened position of debtor, dragging on of debt problems • Uncertainty for debtors • Conditions not always appropriate

Changes with HIPC, 1999

• More debt relief, more cancellation instead of rescheduling • But: – Not enough for debt sustainability Financing by bilaterals → Moral hazard continued – Conditionality became more extensive than ever → Uncertainty and adverse selection continued

22 HIPCs: Average share of multilateral loans in total new loans 120 100 80 60 90-99 00-06 40 20 0 Ben Bol BF Cam Gam Gui GB Guy Hon Mad Mw i Mal Mau Moz Nic Nig Rw a STP Sen Tan Uga Zam

Multilateral Debt Relief Initiative (MDRI) 2006

• Debts reduced for HIPC graduates • But: same conditionality → uncertainty continues for other potential HIPCs • Debt sustainability?

– Not all creditors included, vulture funds & litigation:

free riding

on international agreements – Domestic debts – New foreign loans, so ...

Debt Sustainability Framework (DSF)

• Criteria: size of debt, plus

policies

, measured by CPIA • Consequences: – Lower expected sustainability → more IDA grants → new adverse selection – Additional conditionality on new borrowing: sanctions

Conclusions: (persistent) problems

• World Bank (IDA) loans: still moral hazard, perpetuate debt problems • IMF conditionality continues – Some countries still no access to HIPC – Leverage IMF increased: budget support • New problem: Free riding by vulture funds

Problems and solutions

• Moral hazard WB • IMF Conditionality: – Conflicting roles – Problem of contents of conditions: IMF represents donors and creditors, lack of accountability • Vulture funds • IDA grants, not loans • IMF: – Gatekeeper only: PSI – Proposed: International arbitrage, no funds (Bolton & Skeel) • Better: – More limited role IMF in poorest countries – Independent arbitrage • Changes in legislation creditor countries