From debt reduction to a pathway towards development Cases and issues in debt and debt work-out...
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Transcript of From debt reduction to a pathway towards development Cases and issues in debt and debt work-out...
From debt reduction to a pathway towards development
Cases and issues in debt and debt work-out
RomaTre - HDFSJanuary 2015
Massimo Pallottino
Debt: trends and options 2
Policy options
Sovereign debt: still a problemOther kinds of debt are a problem, tooMarket is market, but how about the public sectors’ role? Only bailing banks?Responsibilities’ sharing and independent arbitration‘Ad hoc’ approach Vs. ‘system’ in debt managementA new concept of accountability
Debt and
global crisis
10 reasons why the debt crisis is not over
Debt - Controversies and policy issues 3
1. Economic imbalances continue to boost external debt2. Capital is moving around the globe in an uncontrolled way3. Private debt is on the rise4. Sovereign debt is higher than ever in some places5. Sovereign debt is riskier than ever in some places6. The time bomb contingent liabilities could detonate at any
time7. Tax evasion and avoidance, and aid cuts, are undermining
public income8. Debt limit policies are subject to political manipulation 9. Responsible financing standards are rarely followed 10.Effective debt workout mechanisms do not exist
Preconditions for new debt crisis…?
At least six elements may favour new over-indebtedness trends The low level of residual external debt, at least in its appearance The internal and private debt, that often hides an external debt in
commercial terms. Macroeconomic performances are often on the positive side, although
not much understood in detail New actors, such as China and India, which are not part of the
‘traditional’ negotiation instances, such as the Paris Club Still no comprehensive arrangement is in place to deal with potential
ora actual excessive (?) debt Policy responses to the last financial crisis sofar have demonstrately
been short-sighted, in some cases leading to an unnecessary worsening of the situation
Current
trends
Cases in debt and debt work-out
The issue of new debt
The case of Eritrea: debt/export ratio = 362% (2004)!
29.712.27.66.25.90.8Debt service/exports (%)
105.279.576.654.548.319.5External public debt (% GDP)
200320022001200019991998
0.3
11.0
1997
Ethiopia
Cases in debt and debt work-out
An example: the case of Ethiopia
Italian debt reduction:05/06/02: Pre-HIPC restructuring for 10,99 MEuro21/03/03: Interim Debt Relief for 23,94 MEuro03/01/05: Completion Point agreement for 332,35 MEuro
On the 08/10/04, the ‘Comitato Direzionale ’ of the Ministry of Foreign Affairs approves a concessional credit worth 220 MEuro for the construction of the Gilgel Gibe II dam, which has a total cost of 422 MEuro. Other 550 thousand Euro are provided as a grantAre these important and justified infrastructural investments, or an example of out-of-control financial relations?
Ethiopia
Cases in debt and debt work-out
The strange case of Gibe IIThe amount of the credit for Gibe II is enormous : the total of all concessional credits granted by Italy in 2003 was as much as 180 MEuro; this amount is also 1/3 of all concessional credits granted in 2005The construction of Gibe II was not part of the national energy plan, until 2004On 12/05/05, 5 months before the formalisation of the Italian contribution, the company Salini, was able to sign an agreement with the Ethiopian Power Authority (EEPCO)Already the decision of the ‘Comitato Direzionale’ mentioned the indication of the General Contractor, Salini, which should be chosen by the beneficiary of the grant. But the OECD rules would impose for such a big contract, an open international tenderNo surprise: Salini gets the contract through direct agreement, justified by the urgent need to offer a response to the drought!
Ethiopia
Cases in debt and debt work-out
Gibe II: other details…
The tender notice is regularly published on OECD web site. The dates of the tender are noted as ‘variable’, and no one answer to the telephone number indicatedIt is not the drought the motivation for Gibe II, but the production of electricity: economic analysis say that Gibe II has no possibility of becoming financially sustainable, other that through a massive export of the electricity producedAt least until end-2008, ther is no agreement with Kenya about the price of sale, and no infrastructures for the transportation are in placeIn November 2005, the ‘Directional Committee’ receives a reply of the ‘Evaluation Nucleus’ about the doubts that had been raised when the credit had been awarded. The remarks confirm the doubts, the project is confirmed, and the components of the EN are changedThe history leads to two requests for clarifications by parlamentarians, and several press articles.
Ethiopia
Cases in debt and debt work-out
Ethiopia and debt
Ethiopia qualified for debt cancellation through HIPC in 2004, and subsequently MDRI when it was agreed in 2005. Its debt payments fell from averaging 10 per cent of government revenue a year from 1998-2000 to 4 per cent a year from 2007-2009. At the same time, combined spending on public health and education increased from 22 per cent of government revenue in 2000-2001 to 32 per cent by 2006-2007
Jubilee Debt Campaign (2012) “The State of debt”
Ethiopia
Cases in debt and debt work-out
Prospects
Since the financial crisis began the government’s foreign owed debt has shot-up from $3 billion to $7 billion, and is predicted to reach $10 billion by 2014. In 2010 the IMF predicted that by 2014 the country would be back to spending 10 per cent of government revenue a year on debt payments. This assumes Ethiopia’s economy grows by 7-8 per cent a year, and exports by 17-20 per cent a year.
Jubilee Debt Campaign (2012) “The State of debt”
Ethiopia
Cases in debt and debt work-out
Debt and politics
Ethiopian governement has been able to keep the control of external financial flows in relation with the international donors community.The Ethiopian government has become increasingly repressive in recent years. Following elections in May 2011, Amnesty International say that legislation which severely limits human rights activities came into force. “The independent press was severely restricted. State resources, assistance and opportunities were broadly used to control the population”
Jubilee Debt Campaign (2012) “The State of debt”
Ethiopia
Cases in debt and debt work-out
Quick new lending to Ethiopia…
Jubilee Debt Campaign (2012) “The State of debt”
Ethiopia
A case: Greece/1
Watt, A. (2015). Is Greek Debt Really Unsustainable? (Social Europe Occasional Paper). Institut für Makroökonomie und Konjunkturforschung - Macroeconomic Policy Institute.
Cases in debt and debt work-out
Debt - debts
Sovereign debt: public, or publicly guaranteed Domestic, external (currency) Owed to public bodies (governements, multilaterals) Owed to private bodies (banks, investment funds, private equities)
Private debt Credit: ODA / Commercial
Debt strucure Interest rate Maturity (short/long) Grace period
Debt debts
Cases in debt and debt work-out
Internal and external debt: the case of Bolivia (HIPC)
(elaborated by the FUNDACION JUBILEO BOLIVIA)
Debt debts
Cases in debt and debt work-out
Trend in middle income countries: the case of Ecuador
EVOLUCIÓN DE LA DEUDA ECUATORIANA
0
5000
10000
15000
20000
25000
1960 1970 1980 1990 2000 2010
Millo
nes d
e d
óla
res DEUDA TOTAL
D. PÚBLICATOTAL
D PUBLICAEXTERNA
D EXTERNAPRIVADA
D PUBLICAINTERNA
(elaborated by Hugo Arias Palacios JUBILEO 2000 RED GUAYAQUIL)
Debt debts
Cases in debt and debt work-out
Domestic debt
Debt debts
IMF/WB (2012) “Revisiting the Debt Sustainability Framework for Low-Income Countries”
Cases in debt and debt work-out
Private debt
In half of LICs there are no figures on how much debt is owed to private companies
Where figures exist, private sector payments have increased from 4% of export earnings to 10%
These payments are now double than those of the public sector
Debt debts
Cases in debt and debt work-out
Debt to honour?
Illegitimate debt
Odious debt
Ecological debt
Difficult to make these concepts operational, but…
Controversies
Cases in debt and debt work-out
Illegitimate debt: the case of Norway
3 October 2006: Norway announces the unilateral cancellation of a quota of ‘illegitimate debt’80 MUSD of non conditional cancellation in favour of Egypt, Ecuador, Peru, Jamaica, and Sierra LeoneThe debt involved in the initiative concerns the export of fishing vessels, done between 1976 and 1980This cancellation has not been comprised in the calculation of ODAFor Ecuador, the initial debt amounted to 59 MUSD. Ecuador had already paid 100 MUSD, but still 35 MUSD were to be paid
Controversies
Cases in debt and debt work-out
The case of Ecuador : the investigation commission on external debt
Decreto ejecutivo del 3 de abril del 2006Art. 3.- Funciones y FacultadesVerificar la legitimidad de la deuda pública.Analizar los efectos, e impactos de los procesos de renegociación y emisión de bonos de la deuda pública externa.Verificar el cumplimiento de los proyectos y objetivos para los cuales fueron solicitados los préstamos.Proponer mecanismos de renegociación de la deuda pública externa.,Recomendar los lineamientos y directrices para definir políticas responsables de endeudamiento
Controversies
(elaborato da Hugo Arias Palacios JUBILEO 2000 RED GUAYAQUIL)
Cases in debt and debt work-out
Ecuador: hallazgos preliminares respecto al manejo oficial de la información sobre deuda
Dificultades en la obtención de información. La Comisión no ha tenido la colaboración técnica de las instituciones que manejan la información de la deuda: B. Central, MEF, Contraloría, MRE, etc.;
Ausencia de control de los organismos responsables del manejo de la deuda. Discrepancia escandalosa de la información estadística en las publicaciones
al interior del Banco Central, en el Ministerio de Economía y Finanzas, el Ministerio de Relaciones Exteriores y las IFIs
Los archivos de documentos sobre deuda pública están mal conservados, no ordenados, ni procesados.
La “modernización del Estado” eliminó varias instituciones públicas como el Consejo Nacional de Planificación, las unidades de planificación de los ministerios y con ellas desapareció también gran parte de la información.
No existen investigaciones y estudios sobre deuda
(elaborato da Hugo Arias Palacios JUBILEO 2000 RED GUAYAQUIL)
Controversies
Cases in debt and debt work-out
Nigeria has received a cancellation of about 18 MUSD, by the end of 2005However at the same time, it has renewed its committment to pay immediately 12,4 MUSD (1/2006;3/2006)Nigeria had already repaid more than what it had borrowed. The current debt is formed by penalties and interests on arrears (original debt: 17 MUSD, payments already done: about 20 MUSD)Overall yearly debt service was around 3 MUSD, out of which Nigeria was paying about 1,8 MUSDOpacity of the debt, but strong allegations of illegitimity
Odious/illegitimate debt : the case of Nigeria
Controversies
Cases in debt and debt work-out
The vulture funds
Hedge funds, trying to profit of bad debts
Between 2010 and 2011 there were 17 ‘recognized’(HIPC Status of Implementation) cases of judicial litigation against HIPC countries, that are requested to pay 1,8 billion USD, and that have now been concluded for 991 million USD
Controversies
Cases in debt and debt work-out
The case of Zambia
1979: loan from Romania, earmarked for the purchase of agricultural machines1999: Donegal International anticipates by little the Zambian government, which was about to carry on a buy-back operation, paying about 10% of a face value of 30 million/USDDI (controversially) succeeds in obtaining the ‘acknowledgement’ of the validity of the debtIn 2003, a legal action in the British Virgin Islands leads to a seizure action, and pushes the Zambian government to reiterate the engagement for the 33% of a face value, by then increased up to 42 millions USDZambian Attorney General orders the interruption of the payments after the first instalments, contesting the powers exerced by the Zambian government representatives in signing 2003 agreementDI summons the Zambian government to appear in front of a British Court, and obtains 15 millions USD, against 55 asked for. That is about 1/3 of all benefits gained in 2007 for all the debt reduction initiatives…
Controversies
Cases in debt and debt work-out
Who are the ‘bad ones’?
The vulture funds, for sure. But also…
Rumanian government, that has accepted to sell the Zambian sovereign debt to DI
The Zambian government, and the way it has managed the issue
Within a general framework that is not capable of avoiding this sort of situation
Controversies
Cases in debt and debt work-out
Different options in debt reduction
Different techniques to reduce public external debt burden: Rescheduling/restructuring Buy-back Swap
First generation : secondary markets/involvement of environmental NGOs
Second generation : intergovermental agreements Cancellation (or conditioned cancellation)
The discussion about the monitoring of the freed-up resources used to be one of the pillars of the early negotiations about debt reduction
Resources for
development
Cases in debt and debt work-out
Debt reduction in perspective
Debt reduction policies have become an additional tool in financing for development
Conditionality
Earmarking and fungibility
Accountability
Resources for
development
Cases in debt and debt work-out
Debt relief and other ODA flows
Financial flows Conditionality Earmarking Accountability
Balance of Payments Support
Macro None None
Budget Support Macro and budget None, or nominal
Budget management system
Debt Reduction Macro and budget ??? Government system
Sector support Sectoral Sector Government system, agreed upon
Projets/programmes (government led)
Sector/programme/project Project/ programme
Government system, agreed upon
Projets/programmes (parallel systems)
Limited Total Donor
(Adapted from Foster e Leavy (2001:24)
Resources for
development
Cases in debt and debt work-out
Debt swaps
Compared to the cancellation
Heavier for the beneficiaries countries in financial terms
Heavier for the beneficiaries countries in management terms
Easier trackability for the resources
Proposed during the ‘pioneer’ phase, and, more recently for middle income countries (and not only): Peru, Argentina … but also Kenya and Guinea
Resources for
development
Debt: trends and options 37
Aid effectiveness
Rome, Paris, Accra, Busan
Alignment of procedures
Alignement of priorities
Civil society? Forgotten?
Resources for
development
Debt: trends and options 38
Civil society….?
Alongside macroeconoinic conditionalities, 'country ownership' has been a central principle of the HIPC Initiative. PRSs were the major vehicle through which such ownership was to be realised. However, country ownership has, at best, translated into truncaled forms of ownership by governments, with parliaments and other state institutions often being quite marginal. Democratic or citizen ownership has been largely overlooked in discussions of 'country ownership'. Because of this, genuinely democratic oversight of the governance of debt continues to be minimal. This is a major lacuna in the design of contemporary debt-relief schemes. It is surprising that many leading donors strongly espouse 'democracy', 'democratisation' and 'accountability' in other important contexts, but see these principles at best as having only limited or narrow relevance to the governance of debt.
Walker B. (2011) "Using Debt Exchanges to Enhance Public Accountability to Citizens", in "Debt-for-Development Exchanges: History and New Applications", Buckley R.P.(ed), Cambridge University Press, Cambridge
Resources for
development
Cases in debt and debt work-out
An old new tool: debt swap
Debt-for-equity
Debt-for-nature
Debt-for-education
Debt-to-health
Debt-to-development
Debto-for-security
Resources for
development
Cases in debt and debt work-out
A case of debt swap: Guinea
The Jubilee Campaign
The Italian Church initiative
The forst proposal: the purchase of debt owned by Italy
The centrality of the civil society
After the approval of the law 209/2000, a proposal of debt swap
Guinea
Cases in debt and debt work-out
The functioning of the FOGUIRED
Appoints a member
Management Committee
Appoints a member
Appoints a member
Appoints a member
Appoints four member, of which
three Guinean citizens
Receives the reports, authorises the following
the funds replenishments
Prepares the funding decisions
Supports the work of the TB COUNTERPART
FUNDContributes for 6 million Euro
Contributes for 1,5 million
EuroManages the CF
Government of Guinea
Justice and Solidarity Foundation
Italian Government
Technical Bureau
Surveillance Committee
Guinea
Cases in debt and debt work-out
Outcomes
Both the Justice and Solidarity Foundation have contributes their part
About 720 projects have been funded
‘Qualitative’ outcomes : the support to ‘unstructured’ organisation, value of the synergies
The FOGUIRED has been an opportunity for the dialogue between the civil society and the government, one of the few in the country
Guinea
Cases in debt and debt work-out
Debt in Indonesia
Pre-1997: Suharto, odious debtThe crisis of 1997 Political crisis Economic crisis Financial crisis Social crisis
Capital flightPrivate sector crisis, and public sector taking overReluctant Indonesian Government
Indonesia
Cases in debt and debt work-out
Trends in debt service
Payments for interests
Internal debt
External debt
Repayment of the principal
Indonesia
Cases in debt and debt work-out
A remark on the ‘maturity structure’
Why is Indonesia paying more for the interests than for the principal repayment?
In debt servicing, instalments are formed by a part of ‘principal’, that makes the outstanding debt to decrease, and a part of ‘interests’ paid of outstanding (residual) debt.
A repayment at ‘constant instalments’ implies in most cases that the first instalments of the series have a larger part of interests than that of principal. Afterwords, as the outstanding debt decreases, the interests generated are lesser, and each instalment can comprise a larger share of the principal. A situation like the one shown for Indonesia, may indicate that these are ‘recent’ loans, contracted in ‘non concessional’ terms, maybe after the big financial crisis of 1997-1998, that have ‘behind’ a very large outstanding
Indonesia
Cases in debt and debt work-out
Advantagesof debt swaps
Advantages Bilateral relations Creditor’s credibility Effective earmarking Reduced financial load (in some cases) Flexibility Participation/accountability (in some cases
Resources for
development