The global debt governance system for developing countries: deficiencies and reform proposals

ABSTRACT

Debt crises in developing countries in previous decades have revealed the need for a reform of the current global debt governance (GDG) system that is characterised by a high degree of fragmentation, parallel structures, and ineffective instruments. The current GDG system has neither prevented nor fully resolved debt crises in developing countries. To establish an efficient and effective GDG framework it is necessary to reform the GDG system at two different levels. At the instrument level, it is time to reform existing instruments for both prevention and resolution of debt crises and to put in place new instruments such as an insolvency procedure for states. At the systemic level, establishing an adequate GDG system does not only mean choosing appropriate individual instruments but also using them in a complementary manner. Instruments belonging to one set of tools – crisis prevention or crisis resolution – should be linked to each other. In the same vein, the two sets of instruments for crisis prevention and crisis resolution should be combined.

KEYWORDS:

• Debt
• developing countries
• sovereign debt
• sovereign debt restructuring
• collective action clauses (CACs)
• insolvency procedure

Acknowledgements

I am very grateful for valuable comments from Andreas Antoniades, two anonymous reviewers, Florence Dafe and the editors of this journal. However, the views expressed here are those of the author.

Notes

1. For an overview of the costs of a sovereign debt default, see Asonuma and Trebesch, “Sovereign Debt Restructurings”, 175–214.

2. IMF (International Monetary Fund), Public Debt Vulnerabilities.

3. IMF, List of LICs DSAs. In this IMF publication those LICs are mentioned that are eligible for the Poverty Reduction and Growth Trust of the IMF.

4. Trichet, Shaping a New World, 2.

5. IMF and IDA, The Challenge of Maintaining, 4.

6. Numerous articles have been published on single instruments. A number of these articles are cited for the analysis of these instruments in section 'Assessment of the current GDG system'.

7. Several books or special issues on debt crises in developing countries have been published. See Guzman, Ocampo, and Stiglitz, Too Little, Too Late; Herman, Ocampo and Spiegel, Overcoming Developing Country Debt Crises. While these books or special issues tend to analyse various instruments, the combination of these various instruments is hardly assessed.

8. Institute of International Finance (IIF), Principles for Stable Capital Flows.

9. G20, Operational Guidelines for Sustainable Financing.

10. UN General Assembly, Basic Principles on Sovereign; UNCTAD, Principles on Responsible Sovereign; UNCTAD, Sovereign Debt Workouts.

11. Roubini, “Do We Need a New”, 321–333.

12. For an overview of instruments used to prevent and resolve debt crises in LICs, see Berensmann, How to Prevent and Resolve; Berensmann, Involving Private Creditors.

13. IMF, Update on the Financing; IMF and World Bank, Preserving Debt Sustainability; Berensmann, How to Prevent and Resolve.

14. IMF, Review of the Debt; IMF, Staff Guidance Note.

15. IMF, Modernising the Framework.

16. IMF, Staff Guidance Note; IMF, Public Debt Limits.

17. IDA, IDA’s Non-Concessional Borrowing Policy.

18. While the lending instruments of multilateral donors, including the IMF’s Lending into Arrears policy, are also important to ensure debt sustainability, they do not form part of the IFIs’ debt monitoring and assessment frameworks. Hence, an assessment of these instruments would be beyond the scope of the paper.

19. OECD, Principles and Guidelines.

20. IMF and World Bank, Helping Developing Countries.

21. UNCTAD, DMFAS Programme, Strategic Plan 2016–2019.

22. IMF, Staff Guidance Note; IMF, Public Debt Limits.

23. IDA, IDA’s Non-Concessional Borrowing Policy.

24. Berensmann, The IFIs’ Debt Governance System.

25. See note 9 above.

26. Li and Panizza, “The Economic Rationale”, 15–37; Ritter, Transnational Governance in Global Finance; Berensmann, “A Code of Conduct”, 197–204.

27. See note 8 above.

28. UN General Assembly, Basic Principles on Sovereign Debt; UN, “Ad Hoc Committee on Sovereign Debt”; Guzman and Stiglitz, Soft Law Mechanism.

29. UN General Assembly, “102nd Plenary Meeting”, 9.

30. Li, “The Long March”, 338.

31. UNCTAD, Sovereign Debt Workouts.

32. The predecessor to these two sets of Principles were the ‘Principles on Promoting Sovereign Lending and Borrowing’ aimed at reducing sovereign debt risks and preserving economic growth see UNCTAD, Principles on Responsible Lending.

33. UNCTAD, Principles on Responsible Sovereign.

34. See note 9 above.

35. Berensmann, “A Code of Conduct”, 199–201; Roubini and Setser, “Improving the Sovereign Debt”, 9–10.

36. Ritter, Transnational Governance in Global Finance.

37. See note 8 above.

38. Berensmann, Dafe and Volz, “Developing Local Currency Bond”, 351

39. IMF, Recent Developments on Local, 9.

40. Berensmann, Dafe, and Volz, “Developing Local Currency Bond”, 375.

41. The HIPC Initiative was established by the WB and the IMF in 1996 with to achieve debt sustainability in LICs and to guarantee the external environment for poverty alleviation and development. By November 2017, of the 39 countries eligible for the HIPC Initiative, 36 had received full debt relief from the IMF, WB, and other creditors. Three countries had failed to qualify, essentially because of political instability and inconsistent Poverty Reduction Strategy Papers. IMF, Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative.

42. This initiative was completed in 2014. IMF, Heavily Indebted Poor Countries Initiative.

43. Under a debt swap, relief is provided for external debt and, in return, the debtor government commits itself to using additional domestic resources for an agreed development purpose. Berensmann, Debt Swaps.

44. For an overview of Paris and London Club debt restructurings, see Rieffel, Restructuring Sovereign Debt.

45. Gelpern, Heller, and Setser, “Count the Limbs”, 109–143; Häseler, “Collective Action Clauses”, 882–923; Bardozzetti and Dottori, “Collective Action Clauses”, 286–303; IMF, Strengthening the Contractual Framework; IMF, Second Progress Report; For a good literature review on the empirical analysis of CACs see Ghosal and Thampanishvong, “Does Strengthening Collective Action”, 68–78; Schwarcz, “Sovereign Debt Restructuring”, 343–385.

46. IMF, Strengthening the Contractual Framework; IMF, Second Progress Report.

47. ICMA, Standard Aggregated Collective Action.

48. See note 46 above.

49. Makoff and Kahn, “Sovereign Bond Contract Reform”, 1.

50. ‘Pari passu’ means ‘equal step’.

51. ICMA, Standard Pari Passu Provision.

52. IMF, Strengthening the Contractual Framework, 9–11.

53. International Capital Market Association, Standard Pari Passu Provision. IMF, Strengthening the Contractual Framework, 9–11; Stolper and Dougherty, “Collective Action Clauses”.

54. IMF, Strengthening the Contractual Framework; IMF, Second Progress Report, 3–5.

55. For an overview of Paris Club debt restructurings during the past 60 years, see Cheng, Diaz-Cassou and Erce, From Debt Collection; Cosío-Pascal, “Paris Club”, 231–276; Rieffel, Restructuring Sovereign Debt.

56. Ibid.

57. In this paper the term Bank advisory committee is used because this is the most common label that mirrors the preference of the New York-based bankers and Lawyers see Rieffel, Restructuring Sovereign Debt, 103.

58. Das, Papaioannnou, and Trebesch, “Sovereign Debt Restructurings 1950–2010”, 17–20.

59. For an overview of various options for designing an insolvency procedure for sovereign states, see Berensmann and Herzberg, “Sovereign Insolvency Procedures”, 856–881. Other proposals to install institutional frameworks including a Sovereign Debt Forum or an International Debt Restructuring Court belong to frameworks that aim to reduce collective action problems and to facilitate debt restructurings are beyond the scope of this paper. IMF, Sovereign Debt Restructuring; Gitlin and House, A Blueprint for a Sovereign Debt Forum.

60. Helleiner, “Mystery of the Missing”, 91–113.

61. Berensmann and Herzberg, “Sovereign Insolvency Procedures”, 856–881.

62. For similar proposals see Banque de France, “Towards a Code for Sovereign Debt Restructuring”; Berensmann, Involving Private Creditors, 36; Couillault and Weber, “Towards a Voluntary Code of Good Conduct”, 154–162; Gelpern, “Hard, Soft and Embedded”, 347–382.

63. Banque de France, “Towards a Code for Sovereign Debt Restructuring”; Berensmann, Involving Private Creditors, 36.

64. Berensmann, The IFIs’ Debt Governance.

65. Berensmann, Dafe and Volz, “Developing Local Currency Bond”, 375.

66. Berensmann, Involving Private Creditors, 39.

67. A history of ideas on international insolvency procedures can be found in Rogoff and Zettelmeyer, “Bankruptcy Procedures for Sovereigns”, 470–507; Bolton and Skeel, “Inside the Black Box”, 763–822; Stiglitz, Sovereign Debt; Kaiser, Resolving Sovereign Debt Crises.