UNCTAD calls for aid plan and hard tackles creditors

15 May by Milan Rivié


The coronavirus pandemic has triggered a real economic crisis whose effects will be as severe as they are long-lasting, even more so in the countries of the South. In recent days, the international financial institutions’ announcements to cancel their public foreign debt have multiplied. The United Nations Conference on Trade and Development (UNCTAD) has been more disappointing than ever, criticizing them severely in its latest report published on 23 April 2020 [1] and calling for a massive aid plan.

 1. Those responsible for the unsustainability of the debt of the countries of the South are in the North

In the space of about ten years, the total debt (public and private, domestic and external [2]) of the so-called developing countries (DCs) has increased from 120% to 191% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
, with 28% of public debt and 72% of private debt. This record level concerns all income categories, from the poorest countries to emerging countries.

Graph 1: Total debt of the countries of the South, 1960-2018 (as a % of GDP) [3]

Contrary to the dominant discourses that attribute this increase mainly to poor governance, endemic corruption or incapacitated state apparatus, UNCTAD UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

points the blame at the international economic and financial system that is largely shaped by and for the G7 countries. "Over the past decade, developing countries have experienced rapid and often premature integration into highly under-regulated international financial markets, including shadow banking. [4]

The rhetoric aimed at regulating finance and moralizing capitalism in the wake of the 2007-2008 crisis has remained unheeded

The great speeches aimed at regularising finance and moralizing capitalism following the 2007-2008 crisis have remained unheeded. The policies of the major central banks encouraged investors seeking more remunerative investments to use their large liquidities Liquidities The capital an economy or company has available at a given point in time. A lack of liquidities can force a company into liquidation and an economy into recession. for short-term investment and to speculate on the public and private debt of the economies of the South. "Developing countries have become very vulnerable to massive but volatile flows of high-risk but relatively cheap short-term private credit offered by financial speculators in search of returns.

  2. Creditors protect their interests

The liberalization of the economy (national deregulation, privatization of enterprises, introduction of VAT, devaluation Devaluation A lowering of the exchange rate of one currency as regards others. of local currencies, significant removal of customs barriers, exchange controls and capital movements) imposed for decades by creditors in the name of debt repayment has only aggravated the situation and increased the vulnerability of the countries of the South to exogenous factors, all while imposing “strict macroeconomic austerity programmes”.

As UNCTAD explains, the decisions taken by bilateral creditors in the Paris Club are primarily aimed at protecting their collective interests

As explained by UNCTAD, the decisions taken by bilateral creditors in the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

are primarily aimed at “protecting their collective interests”, while “the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
, the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and other multilateral development banks are generally exempted from debt relief or restructuring programmes in exchange for the provision of exceptional concessional loans, linked to specific conditionalities”. As for the London Club London Club The members are the private banks that lend to Third World states and companies.

During the 70s, deposit banks had become the main source of credit for countries in difficulty. By the end of the decade, these countries were receiving over 50 per cent of total credit allocated, from all lenders combined. At the time of the debt crisis in 1982, the London Club had an interest in working with the IMF to manage the crisis.

The groups of deposit banks meet to co-ordinate debt rescheduling for borrower countries. Such groups are known as advisory commissions. The meetings, unlike those of the Paris Club that always meets in Paris, are held in New York, London, Paris, Frankfurt or elsewhere at the convenience of the country concerned and the banks. The advisory commissions, which started in the 80s, have always advised debtor countries immediately to adopt a policy of stabilisation and to ask for IMF support before applying for rescheduling or fresh loans from the deposit banks. Only on rare occasions do commissions pass a project without IMF approval, if the banks are convinced that the country’s policies are adequate.
, representing private creditors, “there is currently no comprehensive mechanism for the restructuring of sovereign debt Sovereign debt Government debts or debts guaranteed by the government. owed to private creditors [allowing] vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
 [5]... to take aggressive legal action to recover the full value of the debt plus interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. ”.

The measures announced in recent days illustrate UNCTAD’s findings. The IMF has announced the cancellation of debt repayments it would be due to receive during May to December 2020 from the 25 poorest countries. In reality, a trust fund [6] supported by various countries will ensure the repayment of the approximately 215 million dollars concerned. The World Bank and other regional development banks have excluded themselves from any debt relief initiative by putting forward the questionable argument of their creditworthiness. The G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). has declared a moratorium on the repayment of bilateral debts of 77 countries for the last 8 months of the year 2020 while inviting private creditors to take similar measures on a “voluntary basis”. The total result of the operation was $20 billion, or 0.67% of public external debt carried over to 2022, 2023 and 2024. Possibly $40 billion, if all multilateral and private creditors joined in. For UNCTAD, “the initiative ... does not constitute debt relief in any way” and goes on to state, “On the contrary, by linking eligibility to new or existing borrowing, even on concessional terms, the initiative privileges concessional loans (and thus new debt) over debt relief”. In fact, the various creditors will maintain their grip on the countries of the South. CQFD.

  3. UNCTAD calls for the replacement of the Paris Club

To enable the countries of the South to cope with Covid-19 and its consequences, the IMF and UNCTAD are proposing a US$2500 billion “global debt deal”.$ 500 billion in the form of a “Marshall Plan Marshall Plan A programme of economic reconstruction proposed in 1947 by the US State Secretary, George C. Marshall. With a budget of 12.5 billion dollars (more than 80 billion dollars in current terms) composed of donations and long-term loans, the Marshall Plan enabled 16 countries (notably France, the UK, Italy and the Scandinavian countries) to finance their reconstruction after the Second World War. ”, $1000 billion in cash injections via IMF special drawing rights and another $1000 billion in the form of debt cancellation or restructuring.

While the CADTM welcomes what could be a step forward, it is in favour of acts of self-defence, aimed at repudiating the illegitimate and odious parts of the debt after it has been examined by citizen debt audits

In order to benefit the populations, this “Marshall Plan” must not be transformed into a disguised tied aid plan for the benefit of the countries of the North. As for recourse to the IMF, it does not seem indispensable in view of the measures it recommends, as the current situation in Argentina and other countries monitored by the Fund shows.

But by proposing the creation of an “International Debt Authority for Developing Countries” (IDA), UNCTAD is in fact addressing a strong challenge to the Paris Club and calling for its replacement.

While the CADTM welcomes what could be a step forward, it favours sovereign acts of self-defence, aimed at repudiating the illegitimate and odious parts of the debt after examination by citizens’ debt audits. Such acts are entirely possible. [7] It is fundamental to ensure that human rights prevail over those of creditors and to put the debt issue back into the hands of the people. [8]


The author would like to thank the members of CADTM for their review and suggestions.

See https://www.clubdeparis.fr/?UNCTAD-calls-for-aid-plan-and-hard-tackles-Paris-Club




Footnotes

[1UNCTAD, From the Great Lockdown to the Great Meltdown: Developing Country Debt in the Time of Covid-19, April 2020. Available at: https://unctad.org/en/PublicationsLibrary/gdsinf2020d3_en.pdf?user=1653

[2Public debt is the debt contracted by the State and/or guaranteed by the State. Private debt is the debt of non-public bodies. Domestic debt is contracted with creditors located within the borders of the State concerned, as opposed to external debt.

[3Ibid, p.3. Unless otherwise stated, all data and quotations are taken from the UNCTAD report.

[4Shadow banking or parallel banking: The financial activities of shadow banking are mainly carried out on behalf of large banks by financial companies created by them. These financial companies (SPVs, money market funds...) do not receive deposits, which means that they are not subject to banking regulation and supervision. They are therefore used by large banks to escape national or international regulations, in particular those of the Basel Committee on Capital and Prudential Ratios. Shadow banking is the complement or corollary of universal banking.

[5Investment funds that buy on the secondary market (the debt flea market) debt securities from countries experiencing financial difficulties. They obtain them at a much lower amount than their nominal value, buying them from other investors who prefer to get rid of them at a lower cost, even if it means incurring a loss, for fear that the country in question will default. The vulture funds then demand full payment of the debt they have just acquired, going so far as to take legal action against the debtor country in courts that favour the investors’ interests, typically the American and British courts.

[6A trust fund brings together aid from different donors.

[7See Éric Toussaint, Le Système Dette, Histoire des répudiations de dettes souveraines.

[8CADTM, “Why can’t international arbitration solve the problem of public debt in developing countries?”27 April 2011. Available at: https://www.cadtm.org/Pourquoi-l-arbitrage-international-ne-peut-pas-resoudre-le-probleme-de-la-dette

Milan Rivié

CADTM Belgium
milan.rivie @ cadtm.org

Translation(s)

CADTM

COMMITTEE FOR THE ABOLITION OF ILLEGITIMATE DEBT

35 rue Fabry
4000 - Liège- Belgique

00324 226 62 85
info@cadtm.org

cadtm.org