B. Debts and Structural Disequilibria
C. Debt Management after 1982 – A Never-ending Hapless Story
1. Delaying the Necessary Solution
2. From HIPC I to HIPC II - Delaying Further
3. Creditor Caused Damage
D. A Free and Transparent Arbitration Process aka International Chapter 9 Insolvency
1. Early Calls for International Insolvency
2. The Essence of Insolvency
3. Chapter 9 Insolvency within the US
4 The Framework of an International Chapter 9 or FTAP
E. The Need for an International Chapter 9 - Lessons from History
F. Renewed Interest in International Insolvency Procedures
“Present debt management has been characterised by unhampered creditor power with dire consequences for debtor countries, in particular for so-called vulnerable groups. Granting too small reductions too slowly has prolonged rather than solved the problem. It is clear that debtors will be unable to repay more than a fraction of their nominal debts. Quick initiative was shown occasionally to bail out money centre banks or in the cases of Mexico 1994-5 and Asia 1997 speculators at large”.
This statement might have sounded radical when it was published in 1998. Meanwhile, however, it is shared by the International Financial Institution Advisory Commission established by the US Congress as part of the legislation authorising approximately $18 billion of additional funding by the US for the IMF, colloquially referred to as the Meltzer Commission. Stating that neither “the IMF, nor others, has [sic!] produced much evidence that its policies and actions have this beneficial effect” of cushioning declines in income and living standards, the Commission concludes: “One reason may be that IMF loans permit some private lenders to be repaid on more favorable terms, so the benefits have gone mainly to those lenders.” The Meltzer Commission also found:
It soon became apparent that the growing debt burdens of Latin American debtor countries were not sustainable, regardless of whether countries followed or ignored IMF advice. IMF assistance postponed debt reduction. The postponement of the inevitable debt write-down and restructuring was costly. It delayed renegotiation of the debt and the resumption of capital inflows, investment and economic growth. As a result the decline in living standards was deeper and more prolonged. During the 1980s, as the unpaid principal and accumulated interest rose, Latin America remained stagnant. Many critics of the IMF policy of lending to countries that could not service their debts viewed this policy as contributing to the delay of the necessary restructuring process and subsequent recovery.
The Meltzer Commission stated expressly that “default should not always be prevented in these countries or elsewhere”, but stopped short of demanding a proper, fair, and economically sound procedural framework for such defaults. It stated: “Proposals for bankruptcy courts, collective action clauses and other contractual changes, or other attempts to share losses between private and public lenders and institutions, raise many unresolved problems. None of them is problem free.” Nevertheless it “believes that the development of new ways of resolving sovereign borrower and lender conflicts in default situations should be encouraged but left to the participants until there is a better understanding by debtors, creditors, and outside observers of how, if at all, public sector intervention can improve negotiations.”
This invitation to advocate a viable model of international insolvency is gladly taken up by this publication, although the idea of government insolvency a such is not really that new. One of the Commission’s members, Jeffrey D. Sachs, was an outspoken advocate of an internationalisation of US insolvency procedures of private firms during the 1980s. The first to make this proposal, though, was a Glaswegian professor of moral theology, held in esteem by most economists as well as by quite a few politicians. Unfortunately, though, his lucid advice is still not accepted:
When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor.
Unfortunately, official creditors are still determined to deny an economically indicated and sensible solution to Southern Countries (SCs), upholding the equivalent of debt prisons for Southern debtors, to whom they keenly preach on human rights and decent legal frameworks, accepting high social costs – to which inter alia the Meltzer Commission drew attention – to the world’s poorest.
After too many years of economically inefficient “debt management” that put creditor interests in the narrowest possible sense above the Rule of Law and basic principles of human rights but could not even avoid continuous and substantial growth of debts in the South there have been encouraging signs recently. Many NGOs have taken up the proposal of an international insolvency modelled after the basic ideas of the US Chapter 9, a special procedure for debtors with governmental powers. Quite often the formulation Fair and Transparent Process of Arbitration (FTAP) has been used recently to avoid the word insolvency, particularly by NGOs from the South. The Declaration of Tegucigalpa, though, the platform of Latin American Jubilee movements, explicitly calls for an international Chapter 9 insolvency on 27 January 1999. So do Erlaßjahr 2000 in Germany and the Austrian Jubilee campaign, Erlaßjahr 2000 Österreich.
Another more recent and very positive evolution is the emphasis put on this proposal within the UN, during the UN process Financing for Development, and most notably the call for a "debt arbitration process to balance the interests of creditors and sovereign debtors and introduce greater discipline into their relations" in his Millenium Report by the Secretary General himself.
Very recently, the ministers of finance of the US, the UK, and Canada have supported the idea of international insolvency. Finally, even the IMF's new First Deputy Managing Director, Anne Krueger demanded a framework "mimicking the features of the formal process that happens frequently in domestic bankruptcy regimes".
Encouraged by what has to be seen a greater openness towards the solution advocated already by Adam Smith this publication is going to present the idea of an international insolvency once again in greater detail. It will start by pointing out that the problem of Southern overindebtedness has to be seen in a broader context. Also, it is important to show that the debt problem existed long before August 1982, when Mexico declared itself unable to honour debt obligations as contractually due, and the date conventionally called the beginning of the debt crisis, although Poland's default in 1981 was already a major shock. Dating the beginning of the debt crisis in the 1980s veils the fact that the underlying structural causes of the debt problem had existed long before. The date also disguises the long and dismal record of debt management and the ineffectiveness of the policies enforced by the Bretton Woods Institutions (BWIs) in restoring the sustainable economic viability of debtor countries. 1982 is an important date with respect to BWI-influence on debtor economies, though, which increased dramatically since then. Any financial support to debtors has been made contingent on the "seal of approval" by the BWIs, even though they have not delivered any sustainable successes. Apparently, fundamental structural disequilibria in economic North-South relations seem to be the root of the problem. The debt crisis was foreseeable and was foreseen well before that year. This is important for the evaluation of the effectiveness of present debt management by the BWIs.
The publication will then produce a rather brief sketch of the history of “debt management” since 1982, to be followed by a description of domestic Chapter 9 procedures in the US. Then, the basic features of an international Chapter 9 – or FTAP – are described. Doing so this publication will also discuss counterarguments that have come up since internationalising Chapter 9 for sovereign debtors was first proposed in 1987. Referring to historical de facto precedents it will argue that this solution can be implemented. Finally, it will list authors and institutions that have supported this idea or at the very least mentioned it favourably. The final conclusion is, of course, that Adam Smith’s advice should finally be heeded to avoid further unnecessary damages to debtor economies and further unnecessary suffering by vulnerable groups.
Prepared on request of the president of the IBRD the Pearson Report already identified structural origins of the debt problem in 1969, strongly recommending debt relief. It warned of "many serious difficulties" that could result from "very large scale lending", emphasising that "The accumulation of excessive debts is usually the combined result of errors of borrower governments and their foreign creditors. Failures on the part of the debtors will be obvious. The responsibility of foreign creditors is rarely mentioned." This sounds as modern as its finding that debt management had emphasised spending cuts and credit restrictions while neglecting the need to sustain sound development outlays.
The Pearson Report considered the debt problem already so urgent that it suggested the application of a unique feature of the $3.75 billion US-UK loan in 1945 (at 2 per cent interest), the so-called Bisque clause, to provide ”a timely policy alternative to moratoria or debt rescheduling when a country is in temporary balance of payments difficulty”. This clause allowed the debtor (the UK) to waive or cancel interest payments unilaterally contingent on certain conditions. It was agreed to change it in 1957: the UK was then entitled to postpone up to seven instalments of principal and interest. Four of these seven deferrals had been used when the Pearson Report was written. Deferred payments were to be paid after 2001, carrying an interest of 2 per cent.
Recently the OECD started a thirty-year retrospective on aid with the “pathbreaking” Pearson Report, recalling some of its findings as “still relevant today”. However, the Report's recommendations regarding overindebtedness are not mentioned, even though they are highly topical at present
The Pearson Report proves that the problem was there before the lending spree of the 1970s and thus well before 1982. The debt problem results from structural inequalities and disequilibria in the global economy, putting SCs at a disadvantage - the structural resource gaps to which the Prebisch-Singer-Thesis (PST) had drawn attention when showing evidence for secularly falling terms of trade. The PST rocked the boat of professional complacency exposing an apparent contradiction between theoretical expectations and practical outcome. Economists had initially expected Southern Net Barter Terms of Trade to improve because of industrial economies of scale, faster technical progress in the North, and the law of diminishing returns applying to the raw material exporting South. Regarding price relations, economies of scale and technical progress have the same effect: both reduce costs, which must lead to lower prices in a functioning market. The dominant view on Net Barter Terms of Trade necessarily results from the neoclassical model, which had ruled unchallenged before. One conveniently assumed that actual trade was in fact as beneficial as its academic model. Prof. Jevons was indeed so worried about price hikes for raw materials so steep that a modest full professor's pension would be insufficient to heat his home that he stored as much coal in his house to provide for his bleak future as he possibly could. If Professor Jevons had been right the market would have worked and might actually have solved the problem of development as assumed.
Really existing markets however do not live up to theoretical models. The PST rocked the boat of professional complacency exposing an apparent contradiction between theoretical expectations and practical outcome. Secularly deteriorating Southern Net Barter Terms of Trade destroy the whole established logic based on a beneficial world market. While this point is elaborated in greater detail elsewhere, only the one point essential for the topic discussed here is summarised: export earnings are lower than they should be according to neoclassical theory, and resources needed to finance development are lost. Or, world markets push SCs into structural disequilibria. The existence of structural disequilibria was to some extent also recognised by orthodoxy and its dual gap approach. Naturally, this theorem was less controversial, stating that there was a domestic gap due to insufficient savings to finance necessary investments, and a scarcity of foreign exchange. The external gap generated from the necessity to import most investment goods. One could explain the foreign exchange gap by domestic shortcomings as well as by failures of international markets. The foreign exchange gap has to be overcome by external finance.
The problem recognised by the Pearson Report was covered up by the ”easy money” of the 1970s - more precisely the increasing exposure of commercial banks in the South, starting as early as the end of the 1960s. One should note that this was well before the so-called first oil crisis of 1973-4, which is usually but wrongly blamed as the one and practically only reason of the present crisis. Commercial banks lent eagerly. The importance of official and multilateral sources for the South declined. Commercial loans covered the structural problems identified in the 1960s. Political intervention to help commercial banks through comparatively small crises during the 1970s contributed to the growth of debts. The end of high international liquidity in the 1980s brought the problems identified by the Pearson report again to everyone's attention.
Abbott saw the roots of the debt crisis in Sub-Saharan Africa in the 1960s, when foreign debts first began to accumulate faster than economies or foreign exchange earnings were growing. Seeing insolvency rather than illiquidity as the problem, he already proposed debt cancellation.
Accepting the need for debt alleviation the major creditors adopted the so-called Retroactive Terms Adjustment (RTA) in 1978, measures to provide debt relief and improve the net flow of bilateral official aid to Low Income Countries. Debts of these countries were mostly caused by official flows, including aid. One should mention the co-responsibility of official creditors deciding and monitoring where and how their money is spent. The programme's long-winded, clumsy name documents the creditors' desire to avoid the words debt relief or debt cancellation, not to mention insolvency. This steadfast refusal to recognise realities officially has remained the most important hindrance to proper debt management and to a viable solution of the crisis until the most recent declarations at the end of 2001. The word insolvency remained ostracised until the first shock after the Mexican disaster in 1995, and creditor governments were still not willing to accept insolvency procedures as the proper and necessary solution to the debt problem until very recently.
Warnings against overindebtedness were heard in Latin America as early as the late 1960s. Citing dramatic proportions of foreign public debts Wionczek thought a debt crisis comparable to the 1930s possible. Many crises in the South after 1982 have dwarfed the experience of the 1930s. A conference in Mexico City in October 1977 discussed solutions to the debt problem. G.K. Helleiner demanded rules for debt relief, including the reduction of present values of repayments. The IBRD's C.S. Hardy warned of debt problems, classifying refinancing as "not really a credible alternative". The co-ordinator of this conference, M.S. Wionczek, explained the post-1977 wave of optimism in the face of a deteriorating situation: "in terms of institutional interests and social psychology rather than economic and financial analysis".
The BWIs themselves started Structural Adjustment well before 1982. According to Finance & Development, their official quarterly, the IMF started in Sub-Saharan Africa already after 1973. During this early phase, when the Fund was apparently glad to find clients, conditionality was considered lenient "in relation to the required adjustment effort". Adjustment programmes were initially planned for one year. This time horizon was preferred, apparently because of convenient accounting. In 1979 conditionality became stricter. 88 arrangements were approved by the IMF between January 1979 and December 1981, to support adjustment policies, particularly measures to reach a sustainable balance of payments position. All countries asking for rescheduling in 1981 "had adopted an adjustment program" with the Fund when negotiating with their creditors.
Officially the IBRD started its involvement in programme lending in 1980, but it exerted influence in connection with projects before. The Bank always used its leverage to support the IMF and its policy against resistance by SCs. After some turf fighting Structural Adjustment has been administered jointly by both institutions – a duplication of bureaucratic procedures that hardly recalls efficient management.
The BWIs, particularly the IMF, did not arrive on the scene after August 1982 to solve a problem created by others, but they had been part of the process leading to it . Their type of adjustment did not prevent the debt crisis. A critic might say that the first unsuccessful adjustment programmes existed before the official start of the debt crisis. The IMF might counter by pointing out that it did not have sufficient leverage before 1982 to force countries into necessary reforms. Naturally, this would be at odds with the claim that debtors themselves "own" programmes only "supported" by BWIs. The issue of "ownership" is another peculiar feature of the BWIs. Depending on occasions and audiences these institutions either claim to be only supporting a country's own programme or to make a country adopt "sensible" policies - one but not the only clear logical inconsistency. The claim of country-"ownership" is heard more often recently than in the past, when more pride was expressed on how tightly SCs were controlled. Both official sources and publications by leading BWI-staff show that countries do not "own" programmes. Finally, one would have to ask why programmes were financed if and when the IMF was aware that necessary reforms were not undertaken and the money could thus not be put to good use.
After 1982, when commercial banks withdrew from the South, multilateral funds poured in, allowing commercial banks to receive higher (re)payments than otherwise possible. A remarkable shift in the structure of debts occurred. It deserves mentioning that the BWIs did not even criticise the practice of some private banks to force debtor governments to guarantee retroactively already insolvent private debts. They chose to ignore it. Although this ex post socialisation made debt management more difficult the BWIs insisted on punctual service of these debts as well.
Debt management by Bank and Fund has received unconditional support by their major shareholders, in spite of apparent and protracted lack of success. Gravest officially documented failures, e.g. by the internal Operations Evaluation Department or the Wapenhans Report, have not even made creditor countries dominating the BWIs by their voting majority question the effectiveness of the BWIs seriously, let alone demand appropriate reforms.
The substantial bail-out of private banks by multilaterals was aptly called an "implicit taxpayers' subsidy" by Jeffrey Sachs. In a major process of risk-shifting risk was reallocated to public multilaterals, increasing their share of debts substantially. This hardened conditions for debtors since multilaterals - in marked contrast to private banks - have always refused to reschedule or reduce their claims until HIPC I. A financial merry-go-round started to keep up the pretence that multilaterals do not reschedule. Funds from, say, the Bank were used to repay the IMF, allowing it in turn to lend again to the SC, so that the IBRD's loan could be serviced "in time". Not seldom OECD governments participated as intermediary financiers. The whole bill had to be picked up by debtors. It must also be pointed out that official debts are not necessarily cheaper than private loans.
In the 1990s another shift took place. New flows from new sources, namely bonds (as in the 1930s) and foreign direct investment poured into some SCs, allowing voluntary repayments to commercial banks and easy servicing of multilateral debts. Commercial banks themselves knew better than putting substantial sums of their own money into these countries again, a fact that should have cautioned those positing that the debt crisis had been overcome. Regulatory changes, relaxed quality guidelines and lowered minimum credit ratings, induced institutional investors to place money in the South. Official optimism as well as interest rate differences helped to attract money until the Mexican crash. Risk was shifted again, this time away from mulitlaterals onto institutional investors and the public at large. Induced by regulatory changes and official optimism they had replaced banks and international financial institutions to an extent that these "tens of millions of little-guy investors" were one, if not the, main argument for the new $50 billion bail-out in Mexico.
Many SCs, particularly the poorest, remain burdened by a high amount of multilateral debts they have to service with priority. Other creditors must wait and multilaterals receive the lion's share of debt service payments poor SCs actually make. After an embarrassingly long time of multilateral involvement in Africa - and before the euphoria about Latin America - it was attempted to declare that Structural Adjustment had worked. However, the famous statement "Recovery has begun" by a leading IBRD official had to be withdrawn quickly, quite rightly so, as present experience shows.
The specific characteristic of multilateral debts is that creditors do not only lend, but have always influenced the way their resources are used on a massive scale and down to details, to an extent that clients do not see these operations as in their interest any longer - they do not "own" them. As SCs have to pay for BWI-errors this is hardly surprising. This victim-pays-principle is a unique arrangement, which cannot be justified by economic or legal reasoning. Under market conditions international firms can and do sue their consultants successfully in cases of wrong or negligent advice if they fail to observe certain standards of professionalism. Orange County sued Merill Lynch for $2 billion. Bank Austria sued Price Waterhouse for £147 million, arguing they had not checked Sovereign Leasing, a firm Bank Austria invested in, with sufficient care. Damage compensation is also awarded to private individuals in the Anglo-Saxon legal system if a bank goes beyond mere lending. A British couple borrowing money from Lloyds sued the bank successfully, because its manager had advised and encouraged them to renovate and sell a house at a profit. The High Court ruled that the manager should have pointed out the risks clearly and should have advised them to abandon the project. Because of its advice Lloyds had to pay damages when prices in the property market fell and the couple suffered a loss. If comparable standards were applied to the South there would be no problem of multilateral debts. Failures caused by the staff of multilateral institutions have to be paid for by borrowers, who might get burdened with a further loan enabling them to repair the damage financed by the first. At a time when letting the market work by connecting decisions and risks is gaining popularity in the former Soviet Union there is no reason why it should not become popular with multilateral creditors. Bringing the market to multilaterals would increase the quality of their programmes and projects considerably. The total and unjustified protection of the BWIs from legal and market consequences is one important factor explaining the present disaster. It defies both the very basic principle of the Rule of Law that anyone has to compensate damage done by him/her and the most basic principle of economics that those deciding must carry financial risks connected with this decision. It is therefore mandatory that multilaterals too are finally subjected to these principles, having to pay for damages done by them and their staffs.
1. Delaying the Necessary Solution
Assessing the evolution of debts and the severity of the crisis after 1982 one must remember that the BWIs strongly encouraged SCs to borrow in international markets. Giving this advice the BWIs are part of the problem. In spite of RTA, the Pearson Report and other explicit warnings quoted above, the fact that new loans were mostly used to service old ones on time during the last years before 1982, or their own macroeconomic interventions and adjustment programmes the BWIs did not realise how serious the situation was. It took them an embarrassingly long time to acknowledge the nature and the dimension of the debt problem, as can be proved by a host of evidence from their own publications. As late as 1982 a paper in their official quarterly allayed fears that private banks might not cover SC-deficits. These wide spread concerns of "two years ago" had become unfounded "nowadays", although it could not be excluded that some groups of non-oil-exporting SCs might not be able to borrow all the funds they might need in the future. Nowzad echoes the findings of an IMF working group on international capital markets published in Finance & Development of March 1981 in an unsigned article and as an Occasional Paper.
Even after August 1982 the BWIs thought the money market functioned well, seeing no signs of liquidity bottlenecks, nor of restrictions regarding the capital base of private banks limiting lending to SCs, which was supposed to continue on a large scale. The Task Force on Non-Concessional Flows established by the BWIs in 1979 presented their findings in May 1982. Pointing out that the conclusions had been presented before the crisis and there was presently even less reason for optimism the author insisted that they did still hold.
In spite of this embarrassing (now largely forgotten) record the BWIs are now allowed to lecture on prudent borrowing. The World Debt Tables 1992/93, e.g., explain that "the principal policy lesson of the debt crisis is that domestic resources and policy, not external finance per se are the key to economic development". The IBRD goes on drawing conclusions such as
heavy reliance on external finance is a risky strategy because it increases vulnerability to adverse external development and their attendant long-term development impact ...
Prudent lending and borrowing policies should take into account the vulnerability to adverse external shocks. Current interest rates are a poor guide for external finance decisions. Seemingly cheap variable-rate loans may turn out to be expensive if interest rates increase. Negative terms of trade shocks may be permanent rather than transitory and merit adjustment rather than external finance.
In a solvency crisis, early recognition of solvency as the root cause and the need for a final settlement are important for minimizing the damage. ...protracted renegotiations and uncertainty damaged economic activity in debtor countries for several years ... It took too long to recognize that liquidity was the visible tip of the problem, but not its root.
Ahmed and Summers quantify the costs of delaying the recognition of the "now" generally acknowledged solvency crisis as "one decade" lost in development. This delay was caused by defenders of the so-called illiquidity theory in the 1980s, notably the IMF and the IBRD, positing that the debt crisis was a liquidity, not a solvency crisis. As most explicit advocates they supported this theory by overly optimistic forecasts "showing" that debtors would "grow out of" debts. In line with US policy they defended the view that debt reductions were unnecessary until the "Brady Plan" discarded it in 1989. The needed solution was delayed.
After defending the illiquidity theory for quite some time the BWIs simply chose to forget their own arguments and analyses. They also fail to remember that the policies advised to (or forced on) debtor countries by them were based on this error. In other words: their "advice" or - paraphrasing a sterner source - their "firmer understanding" of monitoring has created economic and social damages in SCs for which the countries, not the BWIs had to pay, thus increasing debt burdens, not least by new multilateral loans necessary to finance rehabilitation measures. Bank and Fund gained financially from their own errors. Naturally, official creditors do not see their delaying tactics as a reason for compensating at least part of the damage caused by them.
Until September 1995 the BWIs denied officially that multilateral debts were a problem. Then a leaked discussion document of the IBRD's acknowledged for the first time that something had to be done about multilateral debt, since it was a heavy burden on many poor countries. A Multilateral Debt Facility was suggested and backed by the new president of the IBRD, James Wolfensohn, against strong internal opposition. The idea is simple: a fund financed by contributions from individual countries and from multilaterals themselves would pay off multilateral debts of eligible countries, thus maintaining the fiction that multilaterals do neither reschedule nor reduce debts. As creditor countries had to bail out multilaterals repeatedly in the past to keep this fiction "intact", the first part is not entirely new. The suggestion that multilaterals themselves should finance reductions of their own debts may be called new, although the IDA Debt Reduction Facility was already funded from the Bank's net income to reduce commercial debts. Making debt service of the IBRD's own loans easier, this implies an element of fungibility. The precise contribution by multilaterals to the new Facility remained unclear for some time, although the IBRD expected a $850 million windfall surplus in that year, which was seen as one source to finance the fund. According to The Economist of 6 September 1995 many people within the BWIs still clung to the old idea that new money and growing out of debts were the best solutions. Considering that this had been practised unsuccessfully for quite some time this view is hard to understand. It has delayed the early recognition of solvency and final settlement important for minimising damages, to which the IBRD itself rightly drew attention.
2. From HIPC I to HIPC II - Delaying Further
The first HIPC-Initiative was a step into the right direction and James Wolfensohn's efforts are highly commendable. By recognizing the need of multilateral debt reductions another important step forward was made. Some features of HIPC I already - though remotely - recall customary features of insolvency procedures. The officially declared objective of the first HIPC Initiative was to reach overall debt sustainability by co-ordinated action, allowing the country to exit from continuous reschedulings.
So-called vulnerability factors introduced by HIPC I as well as the ranges of indicator ratios allow a more specific and tailor-made approach, as usual in insolvency cases. Finally, accepting actual data of the recent past as the basis, rather than notoriously "optimistic" BWI-projections introduced more realism. Nevertheless, optimism underlies HIPC II as well. In an assessment of the enhanced HIPC initiative pursuant to a congressional request the US General Accounting Office (GAO) points out that maintaining debt sustainability will depend on assumptions of annual growth rates above 6 per cent (in US dollar terms) - in four cases including Nicaragua and Uganda even above 9.1 per cent - over 20 years. The GAO doubts whether such growth rates can actually be maintained for that long, warning also about the volatility of commodity prices. It points out that additional money ("increased donor assistance") will be necessary. HIPC II is apparently again built on fragile, optimistic assumptions.
To qualify the country has to have a good track record with the BWIs. The indicators used for HIPC I were a ratio of debt stock (in Present Value terms) to exports of 200-250 per cent and a Debt Service Ratio (DSR: defined as debt service divided by export earnings) of 20-25, which were considered sustainable for extremely poor countries. As will be shown below this is a multiple of what creditors had considered sustainable in the case of Germany's debt reduction in 1953. Nevertheless creditors felt they were "generous". In practice HIPC I fell short of the needs of debtor economies, as even creditors had to recognise, mainly because creditors remained all powerful, judge, jury, bailiff, interested party, and witness all in one. Only NGO advocacy has provided some countervailing pressure. The results of the first HIPC-Initiative and the rules established by creditors prove what has been known: creditors must not be allowed to decide on debt reductions. This is not allowed by insolvency procedures in any decent legal system.
If the IBRD is correct that the root is insolvency and that delays cause grave damages, there is no economic justification for delaying relief further, most evidently so for countries classified to be in an "unsustainable" situation. Delay only means allowing debts to grow further, as the history of debt management in general as well as of both HIPCs proves. Nevertheless HIPC I did not foresee immediate reductions but foresaw two three year periods first.
Analysing the performance of HIPC I Raffer predicted two years before Cologne that "another round - HIPC II - might already be in the making". At the Cologne G8 summit of 1999 the major creditor governments themselves recognised HIPC's failure, demanding a new approach, now often called Enhanced HIPC or HIPC II. With HIPC II creditors have officially admitted that HIPC I failed.
Meanhwile HIPC II drags on and delays further. When the Okinawa summit took place in the summer of 2000 only one country, Uganda, had reached its completion point, after discussions and delays. The BWI Conference in Prague did not produce a new impetus. During the concluding press conference on 28 September 2000 the IBRD's president answered a question whether there were moves to simplifying procedures and whether there was progress justifying high expectations for deeper debt relief for the poorest very clearly
There were high expectations, indeed, by some, but our expectations were to advance the implementation of the second program of the enhanced HIPC facilities. There was no indication that I'm aware of, given by Horst [Köhler, the Managing Director of the IMF] or myself, that we were going to get deeper or broader. That was certainly something that Jubilee 2000 and many others had been hoping for.
But we have maintained a position that what we want to do between now and the end of the year is to implement, for as many countries as possible, the enhanced HIPC Initiative. We are hopeful that we will reach the target of 20 countries by the end of this year, at which point debt relief can be operative.
As this only means reaching decision point, this does not mean adequate relief yet. Maybe a Reuters report on the G7 finance ministers' meeting at Palermo in February 2001 formulated this point best, quoting that 22 of the world's poorest countries had been brought into the so-called HIPC debt relief initiative in 2000 according to the communiqué. The agency added that G7 representatives also said they would work to ensure those countries benefitted fully from HIPC over the coming years (!), which would eventually (!) see two-thirds of their debts written off. In plain English no meaningful relief yet, nor in 2002.
The new focus on poverty goes into the direction of one element of insolvency, debtor protection. Within an international insolvency procedure modelled after the US Chapter 9 it is proposed to exempt those resources needed to finance a humane minimum of basic education, health etc. for the poorest from the reach of creditors by establishing a Fund financing such measures. Focussing more on poverty - which the BWIs have claimed to have done anyway during the recent past - is thus a laudable idea. One may hope that it becomes more visible in the future than it was in the past.
What happens at present largely repeats past errors. Too little is given too late, even though it might be more than in the past. By delaying a proper solution creditors continue to make debts grow further. They increase ultimately unrecoverable amounts, which exist only on paper, thus making debt relief look more expensive than it actually is. Rather than accepting the economic fact of insolvency, let alone financial accountability for their own errors, creditors saw both HIPC I and Cologne's HIPC II again as acts of mercy, not as steps towards the economic solution to overindebtedness universally applied to all debtors unless they are SCs. The problems of implementing HIPC I under creditor leadership and the continued delays since Cologne show very clearly that a legal framework is needed to deal with overindebted SCs, which - in contrast to Structural Adjustment - protects a minimum of human dignity of vulnerable groups. Without it the goal posts for eligibility may be moved any time, and one may resort to statistical tricks to minimise actual reductions, thus prolonging the problem. Also, one may go on treating some countries that meet all objective economic criteria for a HIPC differently from others, denying them the same treatment simply because creditors are afraid that this might be too costly.
Nigeria, also a Severely Indebted Low Income Country, is an interesting illustration. It was classified a HIPC initially, but removed from the list in 1998 as no longer meeting the criteria. Its indicators were 250.14 and 11.22 in 1998. However, the low DSR results exclusively from the fact that Nigeria - unable to pay as due - had been accumulating huge arrears. Since 1993 debt service was a fraction of interest arrears on long term debt. Arrears of principal were always much higher than these interest arrears during that period. Simply by adding interest arrears Nigeria's DSR would have been slightly above 35 per cent in 1997. Adding all principal arrears shown by the Bank for 1997 would result in a DSR of 90.93 per cent. In 1998 the situation is even more drastic. DSR obtained by dividing actual debt service plus interest arrears - as shown by the World Bank - by exports amounted to 60.4 per cent. Adding principal arrears in the numerator results in well over 160 per cent, not surprisingly so, as arrears on long term debt alone were slightly higher than export income. Recent increases in crude prices will certainly affect Nigeria positively, but it remains to be seen whether they will push ratios back sufficiently to bring the ratio of debt service due to exports below the Cologne limits. Conveniently for creditors the country's very debt overhang - producing a low DSR - measured by the IBRD as actual payments but disregarding substantial arrears - provides a "reason" to argue that it is not highly indebted, therefore not in need of HIPC treatment. The higher arrears a bankrupt country amasses, the less necessary HIPC treatment becomes. This is a good illustration of the "sensible" economics on which both HIPC Initiatives are based.
Unsurprisingly, one unsuccessful HIPC-Initiative has created the next unsuccessful HIPC-Initiative. With good reason the Zedillo Report already stated that HIPC II has “in most cases” not gone far enough to reach sustainable debt levels, suggesting a “re-enhanced” HIPC III. Past record and new rhetoric about the debtor country now being in charge leads one to assume that all the blame will again be put on debtors, claiming that they had not pursued proper policies. This blame could be corroborated by figures showing how "generous" actually given insufficient debt relief was compared with irrelevant market conditions. According to the IMF "PRSPs [Poverty Reduction Strategy Papers] have been produced by the country authorities, and not by Bank and Fund staff". Thus blame must logically rest with the country even though the Fund states: "Greater ownership is the single most often cited, but also the least tangible, change in moving to PRGF-supported programs. There is no single element of program design or documentation that will signal this change." An economically sensible solution with a human face is needed, an international Chapter 9 provides it.
3. Creditor Caused Damage
Wrong decisions by creditors unwilling to accept economic facts and powerful enough to have their way have exacerbated the problem. Avoiding smaller write-offs first, official creditors increased debts and the write-offs unavoidable later. One can protect the illusion that everything will by repaid by bankrupt borrowers by going on lending or capitalising interest arrears for quite a while, theoretically forever. This increases the costs of debt relief on paper, due to higher shares of uncollectable debts. One must not forget, though, that the poorest, not creditors, have been affected by the crisis most severely.
The economic inadvisability of present debt management and the growth of unpayable debts it causes can be shown with some extremely basic mathematics. For the sake of simplicity and clarity an interest rate of 5% is assumed, no amortisation, and total debts of $1000 at the beginning of year 1.
Table 1: Evolution of Unpayable Debts
Debt Stock Debt Service due Debt Service paid New Debt
Year 1 1000 50 25 25
Year 2 1025 51.25 26.25 25
Year 3 1050 52.5 26.5 26
Year 4 1076 53.8 27.8 26
Year 5 1102 55.1 28.1 27
Year 6 1129 56.45 28.45 28
Year 7 1157 57.85 28.85 29
Year 8 1186 59.3 29.3 30
Year 9 1216 60.8 29.8 31
Year 10 1247 62.35 30.35 32
At the end of year 1 debts have grown by $25 due to the debtor's inability to pay and the need to capitalise interest arrears. As the debtor is insolvent rather than (temporarily) illiquid this liquidity problem does not disappear. Debts start accumulating. At the end of year 10 the stock of debts is $1279 ($1247 + $32). The gaps between debt service due and actually paid widens although the debtor pays steadily more debt service, possibly so because of the lemon squeezer effect of BWI-type "Structural Adjustment". Nevertheless, debts accumulate in the books of creditors with increasing shares of debts that cannot be repaid, which we may call "phantom debts".
The example in Table 1 could be complicated, e.g., by introducing amortisations, variable interest rates or inflation, but the basic mechanism remains unchanged. Capitalised arrears increase debt stocks, as anyone familiar with basic mathematical operations can verify. Phantom debts eventually grow too. Caused by creditors unwilling to acknowledge insolvency, debts are boosted to ever more unrealistic levels, making debt reductions to economically sustainable amounts appear costlier and costlier on paper. Forgiving $520 at the end of year 2 would have allowed the debtor to pay the rest without problems - if the level of foreign exchange income assumed for this year by the example can at least be maintained. This is by no means sure if and when protracted debt service at the cost of necessary replacements has reduced production capacities, as feared by the IBRD or the GATT already in the 1980s. Finally, $672 must be forgiven (new debt stock: $607) to allow honouring all obligations with $30.35. The difference of $152 results from the unwillingness of creditors to grant timely reduction. It never existed economically as it could never be actually cashed.
Logically, debts have grown further by capitalised arrears, adding unpayable debts on top of those obligations an insolvent debtor is already unable to honour. If a debtor has to pay n% interest, but is only able to pay m% (m<n) the stock of debts grows by (n-m)% every year. Debts keep growing by capitalisation of arrears, multiplying by [1 + (m-n)](k-1) over k years if arrears occur at the end of year 1 for the first time and the relation m/n remains constant. With n and m assumed constant (5 and 2.5 respectively) debts would, e.g., increase by 28 percent over a decade. If the debtor is insolvent rather than illiquid, debts start accumulating on paper, further beyond an insolvent debtor's economic capacity to repay. Debts that can never be repaid because of increasing gaps between economic capacity and payments contractually due - "phantom debts" - must increase eventually. Creditors unwilling to grant sufficient relief when necessary, increase irrecouperable debts. Total debts are pushed to ever more unrealistic levels, making reductions to economically sustainable amounts appear costlier and costlier on paper as the share of phantom debts increases. Existing only on paper they nevertheless compromise the debtor's economic future. They also allow creditors to exert pressure. The important point is that phantom debts can never be recouped by creditors. There is some justice in that because they owe their existence to creditor mismanagement anyway. "Forgiving" them does not really mean losing money as official creditors often claim. Money one cannot get, cannot be lost. Reducing phantom debts is simply an acknowledgement of facts. Minds more critical than I might even call it redress. Deleting phantom debts simply means stopping to play the Emperor's New Clothes, acknowledging the naked economic truth.
As phantom debts make sensible debt reductions look costly creditors are reluctant to grant them, although the money is already lost, and real costs are zero. This applies in particular to official creditors, either because they unjustifiedly insist on preferential treatment, or because they have no loan loss reserves. Trying to keep write-offs small to go easy on their budgets, official creditors allowed debts to grow further, thus increasing the problem, forcing themselves to accept much bigger write-offs later when the illusion of repayment finally crumbles. Insolvency laws in all decent legal frameworks avoid precisely this kind of creditor dominated debt management increasing phantom debts at the expense of the debtor’s economic recovery. They insist on neutral bodies deciding necessary debt reductions. The fatal flaw of both HIPC-Initiatives - unhampered creditor power causing insufficient debt reductions - is ruled out by all insolvency procedures. Debtors are not left completely at the mercy of creditors. Phantom debts show that a neutral institution makes economic sense.
The assumption that actual payments are never less than half the payments due is quite optimistic, in particular for HIPCs. According to the IBRD Sub-Saharan Africa has, e.g., paid less than one fifth of the amounts due in quite a few years during the recent past. The realism of the simple illustration in Table 1 is corroborated by official sources. Despite high net transfers HIPC-debts have kept growing. The IBRD acknowledges the effects of delaying relief:
The surge in borrowing, coupled with increasing reliance on rescheduling and refinancing, increased the nominal stock of debts of HIPCs from $55 billion in 1980 to $183 billion in 1990 ... by the end of 1995 it had reached $215 billion.
The slowdown from an annual growth rate of 12.77 per cent to 3.28 per cent in the 1990s was achieved by a shift towards more grants, higher concessionality and forgiving ODA debts. The IBRD acknowledged: "In many HIPCs the negative impact of external debts seems to come more from the growing debt stock rather than from the excessive burden of debt service actually paid." In plain English: countries pay little, capitalising a lot of arrears.
This accumulation of arrears is hidden by conventional debt indicators of the BWIs that are based on actual payments. This debt service ratio divides actual payments by export earnings. The less a country pays - the higher its debt overhang - the lower its DSR becomes, while arrears accumulate. Therefore I recommended dividing actual debt service by contractually due debt service as a suitable indicator for the real debt problem. This new indicator is simply
0 DSR/DSRd* 1 (1)
DSR is the Debt Service Ratio as defined by the World Bank (cash base). The subscript d denotes payments contractually due. DSRd* in the denominator contains debt service plus arrears. Theoretically the real debt service ratio must include all payments due but not effected including interest arrears and amortisation of short term debt and capitalised interest. Furthermore, it should include rescheduled principal arrears for every year. Due to constraints of data availability I had to define DSRd* as the contractual debt service ratio (DSRd) plus interest capitalised. While an improvement on traditional debt indicators, it still understates the burden of debt service. The index is 1 if payments are made on time, 0 if the debtor does not pay at all. The less the debtor pays, the lower my index gets, revealing the real debt burden, which conventional indicators hide. It does not suffer from the ambiguity of the IBRD's Interest Service Ratio or Debt Service Ratio, which may be equally low if a debtor has few debts or simply does not pay as stipulated.
Assuming exports earnings of $600 in our example above, conventional debt indicators based on actual payments are 5.06% - Debt Service Ratios (DSRs) are also Interest Service Ratios. This hides accumulating arrears. The less countries pay - the higher a debt overhang grows - the lower DSRs become. If debt service actually due were divided by export revenues (DSRd*) 10.4% would result, more than double the conventional ratio. Calculating DSRd* with readily available IBRD-data for Sub-Saharan Africa and Low-Income Countries during the 1990s produces values around 0.2 and 0.4 respectively. In 1992 Sub-Sahara Africa’s DSRd*was 0.126.
Interestingly, SSA's conventional debt indicators were dramatically lower than Latin America's at the beginning of the 1990s. However, International Financial Institutions (IFIs) did not interpret them as optimistically as in the case of Latin America, a fact which must be taken into account when evaluating their optimism on Latin America's recovery.
From this simple illustration interesting conclusions emerge:
1) Deleting phantom debts is “generosity for free”. Debtors get no real relief. Costs of debt relief are exaggerated by including phantom costs at face value. An example are costs of $34 billion over time – two thirds of HIPC’s total costs - estimated officially for 22 Decision Point HIPCs.
2) Meaningful reduction must go beyond removing phantom debts. A certain share of remaining claims can be paid if the debtor’s future - in US legal parlance: “fresh start” - is put at risk. In any insolvency case more than $672 would be cancelled to protect debtors and to ensure economic sustainability. Investment needed to ensure viability and “tools of trade” are exempt. Debtor are also guaranteed a minimum standard of living. Too small reductions – Highly Insufficient Payments Cuts (HIPCs) - expose debtors to relatively small external shocks and are likely to impair their capacity to honour remaining obligations. Rational private investors will be reluctant to invest, fearing the next “Adjustment” programme. Nationals have an incentive to transfer assets out of their country. Highly speculative, short term capital may by attracted, hoping for quick profits, particularly so if official bail-outs socialising losses can be exacted.
3) Too small or just sufficient reductions conditioned on additional expenditures by debtors logically produce new crises as lending is needed to finance debt relief. The interest rate of additional borrowing is immaterial. Even 0.5% is unfeasible. If $160 are cancelled conditional upon the debtor’s financing measures (e.g. poverty reduction) amounting to, say, $16, new arrears accumulate, even without external shocks. 8 cents are moderate. A 10% swap for poverty reduction is low. But circular causation of arrears starts again, evolving relatively slowly due to the high concessionality of additional borrowing. Poverty reduction and investments necessary for sustainability must be financed from debt reductions beyond $672 – from money creditors could technically collect without debtor protection.
4) Delaying relief creditors caused damages to debtors, and made things more difficult for themselves. Substantial shares of present debts were caused by creditors delaying the necessary solution.
The problem boils down to determining which percentage of debts is uncollectable. This should be done in an economically sensible way while protecting a minimum of human dignity of the poor in indebted countries. An economic solution with a human face is needed - an international Chapter 9 provides it. Since 1987 this proposal has repeatedly been presented. Designed and used for decades in the US as a solution to the problems of debtors vested with governmental powers - so-called municipalities - it can be easily applied to sovereign lenders. Like all good insolvency laws it combines the need for a general framework with the flexibility necessary to deal fairly with individual debtors.
The fatal flaw of the HIPC-Initiative as well as of Paris Club relief - unhampered creditor power causing insufficient debt reductions - is ruled out by all insolvency procedures. Debtors are not left completely at the mercy of creditors. Civilised insolvency laws applicable to practically all debtors except developing countries demand a neutral institution assuring fair solutions. As phantom debts show, this makes economic sense.
D. A Free and Transparent Arbitration Procedure, aka International Chapter 9 Insolvency
1. Early Calls for International Insolvency
A paper by an international lawyer, C.G. Oechsli, is apparently the first publication dealing with this matter in detail. Interestingly, it was published shortly before the debt crisis "broke" in 1982. Soon afterwards a banker, D. Suratgar, proposed an international Chapter 11 to solve the debt problem. Another banker, the late Alfred Herrhausen, was among the most vocal advocates of negotiated debt reduction. This solution was repeatedly advocated by economists in the 1980s, among them Nobel Laureate Lawrence Klein, as well as by UNCTAD in 1986, J. Sachs, or Raffer. In Germany Thomas Kampffmeyer, who was the first to draw attention to the German example of a de facto insolvency, proposed the application of this solution to Southern debtors.
While economically feasible, international reorganisation pursuant to Chapter 11 of US Title 11 (Bankruptcy) or similar laws in other countries fails to address the important problem of sovereignty. Although Kampffmeyer showed that this was no hindrance in the cases of Germany and Indonesia presented in more detail below, there is a formalistic counterargument against internationalising US Chapter that carries enough weight to destroy it. As insolvency procedures for firms do, of course, not tackle the problem of governmental powers, it was rightly argued that it cannot be applied to sovereign debtors. This argument is right as far as it goes, but there is an easy way out. Instead of internationalising Chapter 11, one can easily and immediately apply the US Chapter 9 to sovereign debtors. Designed and used for decades in the US to solve debt problems of municipalities, debtors vested with governmental powers, its essential points can be applied to sovereign borrowers without problems. Like all good insolvency laws it combines the need for a general framework with the flexibility necessary to deal fairly with individual debtors. Therefore internationalising Chapter 9 of Title 11 was proposed as a rejoinder. It deals with the problem of sovereignty and can be adapted to the international problem with minor formal changes. There exists no more technical problem to heed Adam Smith's economically sound advice.
Encouraged by a private consulting firm, Hungary recently introduced insolvency proceedings for municipalities - so far the only country following the US example. The international business community did not voice concerns. Understandably, the business community does not like insolvency but accepts it as a means of last resort to clear up an economic mess. As phantom debts prove they act quite reasonably. Commercial banks have quite often, though not always without "persuasion", granted debt reductions in various forms. If international insolvency recalling that countries can go bankrupt too had existed in the 1970s, loans would certainly have been given more cautiously. The debt crisis would most probably not have occurred. International insolvency is thus also an early warning and prevention mechanism, and thus in the interest of bona fide creditors.
2. The Essence of Insolvency
Before describing insolvency procedures pursuant to the US Chapter 9 in detail a brief general point about the essence of all insolvency regulations seems advisable to clarify their very essence. As already shown above there is the need for an efficient procedure to solve cases of overindebtedness, as phantom debts otherwise continue to grow creating problems to anyone, including creditors. Historical evidence proves that even debt prisons cannot make unpayable debts paid. Once it is clear that creditors cannot get all payments to which they are entitled, it becomes obvious that a procedure to share losses is necessary and advisable. Such procedures were developed by all civilised legal systems.
The basic function of any insolvency procedure is the resolution of a conflict between two fundamental legal principles. In a situation of overindebtedness the right of creditors to interest and repayments collides and the principle recognised generally (not only in the case of loans) by all civilised legal systems that no one must be forced to fulfil contracts if that leads to inhumane distress, endangers one’s life or health, or violates human dignity. Briefly put: debtors cannot be forced to starve themselves or starve their children to be able to pay. Although creditor claims are recognised as legitimate, insolvency exempts resources from being seized by bona fide creditors. Human rights and human dignity of debtors are given priority over inconditional repayment. It is important to emphasise that insolvency only deals with claims based on a solid and proper legal foundation. In the case of odious debts no insolvency is needed, as these debts are null and void. Demands for cancelling apartheid debts of the Republic of South Africa are therefore based on the odious debts doctrine.
Debtor protection is one of the two essential features of insolvency. The other is the most fundamental principle of the Rule of Law: that one must not be judge in one's own cause. Civilised insolvency laws applicable to all debtors except SCs demand a neutral institution assuring fair settlements. Like all legal procedures insolvency must comply with the minimal demand that creditors must not decide on their own claims. Even at the time of debt prisons creditors were not allowed to do so - in contrast to present international practice violating this very minimum required by the Rule of Law most flagrantly. Creditors have been judge, jury, experts, bailiff, even the debtor's lawyers, all in one. This unrestricted creditor domination is not only an open breach of the Rule of Law, a principle presently preached to SCs by all OECD governments, but also inefficient from a purely economical perspective. Creditors tend to grant too small reductions too late, thus prolonging the crisis rather than solving it. Insolvency relief is not an act of mercy but of justice and economic reason. Substantial shares of present debts exist only because of prolonged, unsuccessful debt management by official creditors refusing necessary debt relief over years.
The basic question is therefore whether a general solution that has been successfully applied over centuries to debtors in general can also be applied to a very special class of debtors - sovereign countries. If this is technically possible there exists no logic reason not to do so.
3. Chapter 9 Insolvency within the US
Chapter 9, a procedure not well known outside the US, solves a problem unique to insolvent public borrowers: intrusion into the debtor's governmental power from without. The debtor, a municipality, is defined by section 101 (34), 11, USCA as a "political subdivision or public agency or instrumentality of a State". In practice cities, irrigation districts, sewer operators, counties, even a hospital subject to control by public authority have been Chapter 9 debtors. Apart from being "authorised" to be a debtor - which apparently means minimal requirements of juridical independence of the entity - a municipality filing a petition must
- be insolvent or unable to meet its debts as they mature
- desire to effect a plan to adjust such debts
- have either obtained the agreement of the majority of each class of creditors affected, or have attempted to work out a plan without success, be unable to negotiate with creditors because this is impracticable, or reasonably believe that a creditor may attempt to gain preference.
A petition filed results in an automatic stay of enforcements of claims against the debtor.
The problem of governmental power is solved by §904, which limits jurisdiction and powers of the court. It makes clear that the court may not interfere with the choices of a municipality as to what services and benefits it will provide to its inhabitants. The jurisdiction of the court depends on the debtor's volition and cannot be extended beyond it. The composition plan can, of course, provide for interference into the political and governmental powers of the debtor. Also, the municipality may consent to interference by the court in such matters.
During the Great Depression Chapter 9 procedures were introduced precisely to avoid prolonged and inefficient negotiations and reschedulings, allowing a quick, fair, and economically efficient solution for overindebted US municipalities. A first draft by municipalities that did not bar creditor intervention into the governmental sphere was rejected by lawmakers as unconstitutional. Creditor interventions such as those usual in SCs nowadays were considered unacceptable. A new version containing §904 was allowed to pass. This demonstrates the appropriateness for sovereign debtors. Technically, Chapter 9 offers the legal possibility to implement an economically sensible solution. It became law for the very purpose to avoid that kind of "debt management" practised internationally for decades. The jurisdiction of the court depends on the municipality's volition, beyond which it cannot be extended, similar to the jurisdiction of international arbiters.
The present version of §904 titled "Limitation on Jurisdiction and Powers of Court" formulates with greatest clarity:
Notwithstanding any power of the court, unless the debtor consents or the plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with -
(1) any of the political and governmental powers of the debtor
(2) any of the property or revenues of the debtor; or
(3) the debtor's use or enjoyment of any income-producing property.
It should go without saying that this strong position precludes any form of receivership. Unlike in other bankruptcy procedures no trustee can be appointed, as §902(5) explicitly confirms: "'trustee', when used in a section that is made applicable in a case under this chapter ... means debtor". The only exception is §926, the very special and justified case if the debtor refuses to pursue avoiding powers. The text on the website of the House explains using Senate Report No.95-989:
This section is necessary because a municipality might, by reason of political pressure or desire for future good relations with a particular creditor or class of creditors, make payments to such creditors in the days preceding the petition to the detriment of all other creditors. No change in the elected officials of such a city would automatically occur upon filing of the petition, and it might be very awkward for those same officials to turn around and demand the return of the payments following the filing of the petition. Hence, the need for a trustee for such purpose.
The general avoiding powers are incorporated by reference in
section 901 and are broader than under current law. Preference,
fraudulent conveyances, and other kinds of transfers will thus be
A municipality's politicians - elected democratically - cannot be removed from office. In cases of fraud or conflicts of interest a trustee may be appointed for the special cases defined above. Understandably, elected officials will often even be glad not to have to deal with those creditors that gained preference themselves again. Rather than receivership §926 contains a rule to solve potential conflicts of interest and to avoid damage to bona fide creditors by fraud or other illegal activities. It is limited to such cases. It needs to be emphasised that a municipality cannot go into receivership and elected officials cannot be removed from office by the court - but, of course, by voters at the next elections. This makes Chapter 9 especially suited as a solution of sovereign debt overhangs.
Surprisingly to anyone caring to thumb through the law, a frequent "counterargument" against an international Chapter 9 is that one cannot put a country into receivership or remove the government. Particularly in the German discussion it has surfaced with interesting regularity. Without discussing the compatibility of IMF conditionality with sovereignty - critics might see this as a form of receivership - it seems therefore be necessary to repeat in plain English that both are impossible in a Chapter 9 case, as a quick look at the law proves. Any form of BWI-type Structural Adjustment would clearly be impossible in any domestic US case. It would be seen as an unconstitutional infringement on the debtors governmental powers.
In a more sophisticated way Kenneth Rogoff sees lack "of enforcement clout in debtor countries" as the main problem with international bankruptcy, but comes to much more differentiated conclusion, conceding:
it seems unlikely that an international court would have the right to enter a debtor country and seize physical assets, much less fire the "board of directors" - in this case the country's government. Advocates of international bankruptcy point out that similar problems arise in the case of bankrupt state and local governments, and that the obstacles have not proved insurmountable. For example, Chapter 9 of the U.S. bankruptcy code, which governs municipalities, has proven relatively effective (Raffer, 1990).
The analogy to local government bankruptcies is certainly closer than to firm bankruptcies, but still far from perfect.
The powerful position of the debtor might make people, especially non-economists, doubt whether this procedure actually works. Some 500 cases within the US so far show it does. As the debtor needs to reach a solution it must offer something that is acceptable to creditors. The composition plan should be fair, equitable, and feasible. Furthermore, to be confirmed the plan has to be reasonable and also in the best interest of creditors, who must be provided the "going concern value" of their claims:
The going concern value contemplates a "comparison of revenues and expenditures taking into account the taxing power and the extent to which tax increases are both necessary and feasible"... and is intended to provide more of a return to creditors than the liquidation value if the city's assets could be liquidated like those of a private corporation.
A court decision further specified that a plan can only be confirmed by the court if it "embodies a fair and equitable bargain openly arrived at and devoid of overreaching, however subtle".
The openness and publicity of the bargaining process are of particular interest. People affected by the plan have the opportunity to voice their arguments. So-called "special taxpayers affected by the plan" may object to the confirmation of the plan. The legal term characterises a record owner or holder of title to real property against which a special assessment or tax has been levied, whose tax burden the plan proposes to increase. But also the municipality's employees have a right to be heard. Any record owner of title to real property included in the lists filed pursuant to Rule 1007e (formerly Rule 9-7b) shall have the right to be heard in all matters arising in a Chapter 9 case.
Subsection (d) of Rule 2018 gives labour unions, employees' associations, and representatives of the debtor's employees the right to be heard on the economic soundness of a plan affecting their interests. Their right to appeal exists only if it is specifically permitted by law.
The open process of elaborating the composition plan did not restrict the right to be heard to these two most directly affected groups, but Rule 2018(a) extended it, allowing the court to permit any interested entity to intervene generally or with respect to any specific matter.
Fairness depends on "whether the amount to be received by bondholders is all they can reasonably expect in the circumstances". In practice these amounts are similar to Chapter 11 cases. As the law explicitly prescribes the applicability of many sections of Chapter 11 to Chapter 9 this is no surprise. Approval of the plan is denied if the municipality has the means to honour all its obligations. In Fano v. Newport Heights Irrigation District this was done, because the district had assets greatly exceeding its liabilities and "there was no sufficient showing why District's tax rate should not have been increased sufficiently".
There are, however, legal limits to tax increases. In the 1930s, when some creditors insisted on higher payments by the City of Asbury Park - financed by tax increases - the US Supreme Court clearly stated:
The notion that a city has unlimited taxing power is, of course, an illusion. A city cannot be taken over and operated for the benefit of its creditors, nor can its creditors take over the taxing power.
A municipality is not expected to stop providing basic social services essential to the health, safety and welfare of its inhabitants in order to pay its creditors. Tax increases that would depress the standard of living of the municipality's population below the minimum guaranteed to private debtors are clearly illegal. Legally feasible tax increases have actually been much lower.
In all OECD countries insolvency laws protect a certain minimum of basic needs, which is remarkably higher than the standards of most people in problem debtor countries. Interestingly, these insolvency laws are not considered uneconomic humanitarian sentiments, but, as for instance US jurisprudence states, a matter of "a public as well as a private interest". The purpose of bankruptcy laws is defined as granting the debtor a new financial life, a fresh start, or, as prec. §101, note 63 formulates, "the opportunity to accumulate new wealth unhampered by pressure and discouragement of preexisting debts", to free the debtor from "oppressive debts, and to restore him to business activity", or to "discharge a debtor from obligations, which due to his particular circumstances, the bankruptcy court may find that he is unable to pay". Courts have regarded family needs and a reasonable protection of the family as of greater concern than payments of debts. In 1954 a US court explained the essence of bankruptcy laws as "founded on the principles of humanity, as well as justice, and [this title] confers on debtors privileges tending towards his [sic!] rehabilitation while protecting his creditors' substantial rights". Generosity, a word so often heard in the case of bankrupt countries is not mentioned.
In all cases of insolvency - be it a private or public debtor - the reduction of creditors' claims is one essential means of reaching a feasible composition plan. Feasibility is defined by whether the debtor emerges from reorganisation with reasonable prospects of financial stability and business success (or in Chapter 9 cases economic viability), including sufficiency of capital structures. The viability of the reorganised debtor is the touchstone, which includes the ability to service debts agreed on in the plan, and enough working capital to continue business. In short: the main characteristic of bankruptcy law is to give the debtor, private, corporate or municipal, a fresh start - a chance that is steadfastly denied to SCs.
4. The Framework of an International Chapter 9 or FTAP
As the problem of governmental powers is solved by Chapter 9 it can easily be adapted to sovereign debts. Judging from the reasoning in a relevant US court case Chapter 9 could be instantly applied. In 1984 the US Court of Appeals for the Second Circuit in New York granted US insolvency protection to Costa Rica. The court recalled a Canadian precedent, drew analogies to US laws, quoted § 901(a), stating that Costa Rica's actions were "consistent with the law and the policy of the United States" and
in entire harmony with the spirit of bankruptcy laws the binding force of which ... is recognised by all civilised nations ... Under these circumstances the true spirit of international comity requires that schemes of this character, legalized at home, should be recognized in other countries .
After a rehearing in 1985, however, the court reversed itself. The executive branch had joined the litigation as amicus curiae making it clear that they supported the IMF rather than principles recognised by all civilised nations. Therefore a simple change in the administration's policy - accepting principles, which should be recognised by all civilised nations according to the Court - appears to be sufficient to allow the application of US law to sovereign debtors.
Because impartiality of national courts, whether located in a creditor or a debtor country, cannot be guaranteed a neutral court of arbitration must be established to allow absolutely fair and equitable international Chapter 9 proceedings, devoid of overreaching, however subtle. The very essence of insolvency is an independent court, or - in the case of sovereign debtors - international arbitration. Proposing insolvency and proposing arbitration are therefore essentially equivalent as regards solving the debt problem. Therefore the acronym FTAP catches the essence of my Chapter 9 proposal. A fair and efficient decision on which part of a country's debts is unpayable can only be taken by a neutral entity, neither by creditors nor by debtors. Demanding the cancellation of unpayable debts means demanding an independent entity empowered to decide. Apparently, what creditors oppose is not so much debt reduction, which is seen as unavoidable anyway, but giving up control, even though creditor controlled debt management has failed and debts have accumulated further during and because of it. According to UNCTAD two thirds of the increase in Sub-Saharan African debt since 1989 was due to arrears.
The WTO's dispute settlement, state-investor arbitration as foreseen by NAFTA or proposed for the presently shelved MAI prove that arbitration is generally quite popular with OECD governments. The London Accord provided for neutral arbitration to settle disagreements between Germany and its creditors. By the way, arguing that neutral arbitration panels must replace bankruptcy courts, I used Germany’s London Accord as the illustrating example when proposing an international Chapter 9. Arbitration is only shunned by OECD governments when it comes to sovereign Southern debts - when it comes to protecting the human dignity of the poorest.
As is usual practice in international law each side should nominate the same number of persons, who, in turn, elect one further member to achieve an uneven number. One of the arbitrators is elected as chairperson by simple majority, or, if debtor and creditors should wish so, by qualified majority. Such a neutral body of arbitration was, by the way, also established by the London Accord, which reduced Germany's debt burden in the 1950s. Arbitration has been part of contracts between private creditors and some Southern debtors recently. The IBRD's Articles of Agreement explicitly foresee arbitration, recognising default of countries as a fact of life. Article IV.6 demands a special reserve to cover what Article IV.7 calls "Methods of Meeting Liabilities of the Bank in Case of Defaults". As the Bank is only allowed to lend either to members or if member states fully guarantee repayment (Article III.4) the logical conclusion is that default of member states was definitely considered possible, maybe even an occasionally needed solution. Nevertheless the IBRD shies away from granting the Rule of Law to Southern debtors like official creditors by abiding to its own constitution.
Naturally the number of arbitrators should not be excessively high. Since any case involves only one debtor but many creditors the number of arbitrators will most likely depend on creditors' demands. IFIs, such as the IMF or the IBRD, cannot be considered unbiased and neutral because they are both controlled by majorities of creditor States and creditors in their own right.
It appears unlikely, though, that all creditors will feel well represented by any choice made by IFIs. It must not be forgotten that creditors themselves are not unbiased when making decisions affecting their own claims as well as those of other creditors. Emerging Markets this Week published by the Commerzbank in Germany, expresses this concern very clearly: the BWIs "will be concerned with protecting their own balance sheets rather than with fair 'burden sharing'". Therefore the "IMF and World Bank are not suited either as arbitrators or as objective regulators of sovereign insolvency procedures."
Under particularly exceptional circumstances both sides might agree on one single person. This happened when both Indonesia and its creditors asked the German banker Hermann Joseph Abs to solve Indonesia's debt problem in 1969. Although creditors eager to avoid a legal precedent stressed the singularity of the case, and Abs was not formally an arbitrator, Indonesia is a model solution. Economically it was doubtlessly a de facto international insolvency.
Like a court in a domestic Chapter 9 case arbitrators would have the task of mediating between debtors and creditors, chairing and supporting negotiations by advice, providing adequate possibilities to be heard for those affected by the plan, and - if necessary - deciding what should be done. Agreements between debtor and creditors would need their confirmation, in analogy to §943. They would have to take particular care that a minimum of human dignity of the poor is safeguarded - in analogy to the protection enjoyed by a municipality's inhabitants.
Exactly like in domestic Chapter 9 cases employees of the debtor would be represented by trade unions or employees' associations. In contrast to "special taxpayers affected by the plan" the affected population would have to be represented by organisations speaking on their behalf. Grass-roots organisations of the poor, NGOs or international organisations such as UNICEF or the World Council of Churches could fulfil this task. The possibility of describing the expected impacts on the poor publicly would certainly have mitigating effects, contributing to a solution with a human face. Publicity of negotiations, in analogy to public sessions of domestic courts, would help guarantee a fair and equitable bargain, openly arrived at.
As a first step towards elaborating the legal framework of an international Chapter 9 the following list of tasks and problems was presented:
- Assessment of Debts: All claims have to be verified loan-by-loan at the beginning, as routinely done in any domestic insolvency. This has recently been demanded by Krueger as well.
- Socialised Debts: In many countries governments were forced by banks to assume retroactively losses from private lending initially done without any government involvement. Such increases in the debt burden of countries have never met audible protest by IFIs, although they made debt management much more difficult. These socialisations of private losses must be declared null and void.
- Symmetrical Treatment of Creditors: An important distinction is made between commercial banks, bilateral governmental loans, and IFIs. The Brady Initiative only called on commercial banks to take losses by reducing their claims, while IFIs are still allowed to go on insisting adamantly on full and punctual repayment. This raises the question whether an objective reason exists for preferential treatment of this class of creditors. Considering all arguments the answer is no. The understandable self-interest of any creditor apart, there is no reason why IFIs should get a better deal. Considering that IFIs have been granted preferred treatment so far, the present discussion about bailing-in the private sector is particularly obfuscating. In the 1980s IFIs did bail-out commercial banks as long as the fiction - known as the "Baker Plan" - was maintained that temporarily illiquid SCs would eventually repay everything including newly incurred debts. But under Miyazawa/Brady schemes private creditors granted debt relief, e.g. 35 per cent in the case of Mexico or 45 per cent in the case of Ecuador. Although the percentages were quite generous, new official money increased debts again at the same time. With private creditors granting 45 per cent reduction of their claims Ecuador's first Miyazawa/Brady deal did not produce more than a very small blip downwards in the function describing the evolution of the country's debts over time. In 1999 finally, the country was unable to honour its "Brady bonds", the first undeniable example of failure of this Initiative. If all creditors had granted a reduction of only 30 per cent commercial banks would have saved 15 percentage points and the country would in all probability have been economically afloat again. Ecuador is thus a prime example of the necessity of equal treatment, as also demanded by the Commerzbank publication quoted above.
Multilateral lenders may argue that they charge interests below the debtor's market rate. Even for normal IFI-lending which is too tough to qualify as Official Development Assistance according to the OECD definition - therefore it is called "development finance" - this is an objective difference between IFIs and private banks, generally (but not always) a valid point for preferential treatment.
There is, however, another objective difference between these groups of lenders: commercial banks did lend aggressively but have usually not interfered with their clients' economic policy while multilaterals have strongly influenced the use of loans and exerted massive influence on their debtors' economies. This difference is well characterised by Svendsen's distinction between "debtor determined" and "creditor determined" debts. In the case of the IMF the Group of 24 criticised the proliferation of performance criteria extending quite often down to microeconomic variables such as prices for specific products. The IBRD has been proud of the detailed monitoring of its projects for decades. Only in the most recent past this pride has not been voiced as perceptibly, apparently for good reason. In 1983 the high ranking IBRD economist Ernest Stern presented Structural Adjustment Loans as an excellent means enabling "the Bank to address basic issues of economic management and of development strategy more directly and urgently", a "unique opportunity to achieve a comprehensive and timely approach to policy reform", and a tool for "detailed articulation of the precise modifications in policy necessary to adjust to a changed international environment". There is, of course, a need for a "firm understanding" of monitoring "in principle no different from the relationship involved in Bank sector or project lending."
In other words: IFIs take economic decisions but refuse to participate in the risks involved. IFIs insist on full repayment, even if damages negligently caused by their staffs occur, which have to be paid by the borrower. A new loan might be given to correct the damages done by the first, as e.g. in Brazil's Polonoreste case, leaving the debtor with more debts and the IFI with more interest income. Or, to give one other example: the Republic of Trinidad and Tobago documented grave irregularities and deficiencies in the IMF's assessment of its economy, which created the impression of economic mismanagement. After the IMF became aware of these substantial errors this information was not published in spite of its importance for the country.
The IBRD argues that its own excellent rating as a borrower would suffer if not all their loans were repaid to the last cent. If that were true all commercial banks would have unbelievably low ratings as a certain amount of lost loans is part and parcel of normal banking activities. Also, one has to ask why debt reduction is enshrined in its own Articles of Agreement.
Brady's policy of substituting IFI money for less strictly enforced commercial bank claims was bound to create problems. An increasing share of IFI debts which must be served at any costs to get the "seal of approval" or because of explicit links between a country's rating and IFIs, e.g. in the US International Lending Supervision Act, will eventually impair the service of private loans further. The fact that inverse transfers from debtor countries to IFIs have been observed, turning IFIs into net receivers rather than net funders, provides another strong argument for symmetric debt relief. From the point of view of fairness it is hard to see why some creditors should contribute to a solution by reducing their claims, while others - more involved in producing the problem - are allowed to refuse this. Finally, the poorest countries with practically no debts to private banks but substantial shares of IFI-claims cannot benefit from debt reduction schemes excluding these important creditors.
Summing up one must therefore say that a symmetrical treatment of all creditors is more than justified. The striking contrast between free-market recommendations given by IFIs and their own protection from market forces must be abolished. Like any other creditor they should carry the risk of losing part of their claims as the connexion between decisions and risks is the most basic condition for the functioning of the market mechanism. If this link is severed market efficiency is severely disturbed. After riskless decision making by bureaucrats was abolished in the East of Europe, there is no reason why it should be preserved in the West. Compensation for damages done within projects, where determining faults and errors is much easier is an issue in its own right. It would reduce the debt burden further.
- Capital Flight: Both creditor and debtor countries should take measures against capital flight, as proposed by W. Nölling. In analogy to domestic laws the international Chapter 9 should provide the possibility of overruling banking secrecy if justified suspicion exists that money was obtained in the first place by certain criminal activities, such as corruption, theft or embezzlement. The act of screening accounts could be done at the request of arbitrators in the way of judicial assistance rendered by domestic courts in the country where the pertinent bank is located. Legal details would have to elaborated by jurists.
A particularly interesting and innovative idea by Jean-Loup Dherse was reported in the journal The Banker of May 1999 on p.14. Debtor countries should formally transfer to the Paris Club or its members title to any funds illegally spirited abroad by former regimes. These creditors have the means to track down and sequester this money. Debt reductions would thus be at least partly self-financing. The concern that debt relief would mainly benefit corrupt élites could be thoroughly dispelled. Of course, OECD governments could also choose to let former dictators have that money as a reward for whatever services rendered to creditor governments, as long as the country and the poor would not have to pick up the bill.
- Economic Adjustment: Economic reform in problem debtor countries is doubtlessly necessary, but the burden of adjusting should not be shifted entirely on them. In analogy to domestic insolvency debt service must be geared to the debtor's capacity to pay, restoring economic viability while protecting minimum standards for the poor. In contrast to present practice there must be a trade off between payments and protectionism. The more protectionism creditor countries wish to maintain the more relief must be granted.
A realistic policy would drop the present predilection for one-sided liberalisation by those countries that are at the mercy of IFIs. Trying to export more while export possibilities are destroyed by increasing protectionism is no sensible strategy. If all coffee producers are advised to produce more coffee, simple microeconomics suggests that oversupply will lead to falling prices, as has actually happened and is known as the "fallacy of composition" argument. Import substitution on a substantial scale is necessary, while existing export possibilities should be used. Economic diversification must be part and parcel of this kind of adjustment. A policy mix between intervention and market forces is necessary. It would be a task of the arbitrators to prevent protection necessary to establish infant industries from petrifying. The board of arbitrators would have the power to suspend or revoke Chapter 9 benefits if the debtor tries to abuse the system by not complying with the agreed plan.
- Protecting the Poor: It is mandatory that schemes to protect a minimum standard of living be part and parcel of every international composition plan. In analogy to the protection granted to the population of an indebted municipality by domestic Chapter 9 the money to service a country's debts must not be raised by destroying basic social services. Subsidies and transfers necessary to guarantee humane minimum standards to the poor must be maintained. Funds necessary for sustainable economic recovery must be set aside.
Examining domestic orders for general principles of law in search of international law rules the ILA's Committee on International Monetary Law concluded:
On the municipal level, bankruptcy laws and norms protecting debtors from enforcement measures affecting the right to a basic living standard would be relevant. As a State is involved, the special rights and obligations of the State on the national level have to be taken into account. An integrated perspective of these rules may suggest that obligations of a State cannot generally be enforced if basic rights of the population would be affected. Such considerations could be supplemented by reference to modern recognition of human rights in general, and of basic rights of the human person in particular.
Protecting the poor can be done by targeting social expenditures on those needing support. Considerable knowledge how to do so exists. Present anti-poverty strategies under HIPC II meanwhile also demand protection of the poor. Redirecting expenditures in favour of basic services, using less expensive yet efficient drugs, employing basic health workers or "barefoot doctors" are possibilities. Good results can be achieved with limited financial resources. These resources, however, must be exempted from debt service. In addition some percentage of the country's foreign debt could be transferred to a counterpart fund financing social expenditures in domestic currency. This has already been practised by some commercial banks donating parts of their claims to NGOs for environmental (debt for nature swaps) and, more recently, for social purposes. The Austrian Creditanstalt, e.g., was the first bank to conclude a debt for charity swap of some Mexican debt with FAPRODE to finance social projects and housing for the poor.
The principle of debtor protection demands exempting resources necessary to finance minimum standards of basic health services, primary education etc. This exemption can only be justified if that money is demonstrably used for its declared purpose. Not without reason creditors as well as NGOs are concerned that this might not be the case.
The solution is quite simple - a transparently managed fund financed by the debtor in domestic currency. In a discussion with public servants of the G7 and representatives of the BWIs Ann Pettifor proposed a Poverty Action Fund as a means to guarantee that the money is actually used for the poor and for expenditures necessary for a fresh start of the debtor economy. The management of such a fund could be monitored by an international board or advisory council consisting of members from the debtor country as well as members from creditor countries. They could be nominated by NGOs and by governments (including the debtor government). As this fund is a legal entity of its own, checks and discussions of its projects would not concern the government’s budget, which is an important part of a country's sovereignty. Aid could also be channelled through the fund, changing its character of money just set apart from the ordinary budget towards a normal fund for the poor.
- The Problems of Commercial Banks: Contractual constraints for individual bargains between debtors and banks, such as negative pledge and sharing clauses, exist. The former forbids separate deals with individual banks, keeping the debtor from working the case-by-case approach on the banks. In the latter clause members of bank consortia forswear making separate deals with the debtor. Consent by all banks involved is necessary to waive these clauses. To accelerate the pace of debt reductions Brady had initially proposed a general waiver of these clauses. Commercial banks opposed strongly and successfully. These clauses serve the same purpose as the automatic stay triggered by a Chapter 9 petition: to prevent unfair preferential treatment of one or some creditors. Whatever can be received from the debtor must be shared.
In an international Chapter 9 these clauses would no longer be necessary because all creditors would have to be treated fairly and equally. This solves the free rider problem too. Any bank is reluctant to reduce its claims and consequently its interest earnings if some banks refusing to go along remain entitled to full repayments and interest on initial face values. If relief measures are successful, viz. the debtor economy becomes again able to service (remaining) debts correctly, these free riders would be rewarded for letting others make concessions. A deadlock where all banks refuse debt reductions may result. Insolvency procedures covering all creditors can avoid this outcome. The free rider argument also strengthens the case for symmetrical treatment of all creditors.
Debt reductions should be fixed in percentages of present values. Within national regulations legal and accounting details should be arranged in the way most favourable to creditors. Regulatory relief, if needed, should be made available when Chapter 9 is applied internationally for the first time.
The introduction of international insolvency should also be used by national legislators to change national laws and regulations creating unnecessary complications and "legal risks". The US is a prime example: crises reported at quarters' ends during the 1980s were often triggered by awkward and economically debatable regulatory constraints, such as the 90 days clause, the impossibility of capitalising interest arrears, or unpredictable and allegedly discriminatory decisions of regulators. Inflexible and antiquated US regulations even brought about the only working "debtors' cartel" so far when debtors such as Mexico, Brazil or Venezuela joined to help Argentina pay in time to save US banks from having to classify loans as non-performing. On one occasion the hands of the clock were reportedly held back to book payments "in time".
Finally a clarifying remark on tax deductible loan loss provisions seems necessary, because they have often been misunderstood as a taxpayers' subsidy to banks. The costs to the taxpayer, and hence the benefits to banks, have always been strongly exaggerated. Tax authorities in countries restricting tax deductibility are at least implicitly of the opinion that losses occur when the respective entry correcting a loan's nominal value is made in the creditor's books. According to this perception a loan would be granted by the Treasury over the period between the year in which reserves are established and the year in which the loan is finally written down or off, or reserves are finally dissolved and taxed. Tax deductible provisions only shift losses (or taxes) over time. Assuming reserves of $100, a tax rate t, and an interest rate ig at which the government itself can borrow, the annual costs to the taxpayer are
$ 100tig (2).
Or verbally, these costs are the additional amount which would have been paid to tax authorities if no provisions had been made or these provisions would have been fully subjected to taxation multiplied by the interest rate the government has to pay as a borrower. In continental Europe this loan carries no interest - not only in the case of banks, but for all enterprises. At a tax rate of 50%, and an interest rate of 6% at which the government itself borrows, reserves of $100 cost taxpayers $ 3 annually. Clearly, tig is the upper limit for any estimate of costs. If one sees tax deductability this way the conclusion logically follows: the longer it takes to solve the crisis (= to realise losses) the higher will costs to the taxpayer become. Delaying a solution to the debt crisis - as our governments have done - has negative financial effects on taxpayers according to this view.
But the assumption that the time lag is the span between the year in which reserves are set aside and the year when they are used is not unassailable. A loan still kept at 100 per cent in the books will have a lower factual or real value once the creditworthiness and economic standing of a debtor has become doubtful, as the existence of secondary markets proves. From an economic and factual point of view money is actually lost before nominal claims are finally adjusted downwards in the books. Recognising diminished values of claims is just another way of stating that the sum of net assets, and thus the tax base, have declined.
To the extent that provisions reflect actual losses in the values of loans already suffered but not yet booked, they do not economically constitute taxable income. This would be the case if loan loss reserves set aside during one year are equivalent to the change in factual values during that year. Increasing reserves continuously in line with declining factual values would thus not really cost the taxpayer a single cent. Should the economic outlook of the debtor change to the better these reserves would, of course, have to be reduced accordingly to keep provisions in line with actual values. A tax régime without tax deductibility of reserves thus taxes illusory profits, which only exist due to accounting practices. Looking at the matter this way, it might be argued that banks grant an interest free loan to the Treasury by shifting losses to the future.
Because the real world is not an economist's comfortable blackboard, uncertainty will not allow a precise estimate of probabilities (and thus factual values) in practice, and one might discuss whether reserves actually match losses already suffered. If reserves are larger than these losses banks get a loan by tax authorities equivalent to this difference between reserves and changes in the values of loans; if reserves are smaller this difference is taxed as illusory income. In contrast to the first one-period example above the costs of the tax-loan are not $100tig for reserves of $100, but only tig times this difference if reserves are greater than actual losses. Or, more formally,
$[100(1 - p) - reserves]tig (3)
where p is the probability of repayment, and 100p hence the expected value. The first term in square brackets expresses actual losses. If set aside reserves are smaller than actual losses the term in square brackets is simply illusory income taxed. Assuming that supervisory authorities keep loan loss reserves roughly in line with the decline in value of dubious loans one can say that both costs to taxpayers and taxation of illusory profits will be very low or negligible. A substantial stabilising effect can be obtained at no or minimal real costs to the taxpayer.
Economically, provisions have the important function of spreading losses over some years, which might ruin a creditor if they had to be absorbed in one year. Whether to have a tax system that encourages more prudential provisioning this way is a political question, which should not be decided without considering the alternatives. Continental Illinois or the case of the US S&L institutions may suffice to show that extremely limited tax deductibility does not necessarily mean no costs to the taxpayer.
E. The Need for an International Chapter 9 - Lessons by History
The present evolution towards debt relief as well as historical lessons show that economic constraints finally enforce debt reduction. The final outcome of the Latin American debt crisis in the 1930s, offers excellent illustrations. The case of Mexico after 1914, where debt service was finally geared to its capacity to pay is a particularly good example. Creditors finally received less than 10 per cent of face values. Some big European debtors were themselves delinquent with regard to their debts after World War I. The British and French governments defaulted in the 1930s, considering the needs of their peoples more important that legal obligations to creditors. The essence of this argument is, by the way, familiar to bankruptcy specialists. In the 1940s nine US states - sovereign as far as debts are concerned pursuant to the 11th Amendment - suspended interest payments on loans they had received to build railways and canals, when the price of their main export good, cotton, left them short of foreign exchange. US states have, by the way, a long history of defaulting. The term repudiation was apparently coined by Mississippi in the last century when it simply refused to honour its debts.
The management of the Egyptian debt crisis of 1876 is an economic success story contrasting vividly with present BWI-policies. How this debt accumulated is not discussed here, nor its role in Anglo-Egyptian relations, only the technicalities of the solution. The administrator appointed to protect creditor interest, Evelyn Baring, did not apply the “lemon squeezer” approach. He lowered, e.g. taxes, postal fees, financed expenditures in public health and education, or encouraged improvements in irrigation. Wages and pensions were paid out in full. After a surprisingly short time his concept was economically successful for creditors and the debtor alike. A hard nosed 19th century capitalists managed this debt crisis much better and more quickly than international public sector institutions did after 1982. It remains to be noted that the representatives of private bondholders had decided to use Egyptian insolvency law as the yardstick for the solution. This underlines that Adam Smith was right. His advice should finally be heeded to avoid further unnecessary damages to debtor economies and further unnecessary suffering by vulnerable groups. It also shows that private, hard nosed nineteenth century capitalists may not only deal with a debt problem more efficiently but also in a much more humane way - compared with international public sector institutions such as the BWIs.
Two spectacular cases of de facto composition after World War II deserve special mentioning: the London Accord with Germany and the Indonesian solution of 1969. Both roughly halved the present values of these countries' debts.
Germany in 1953 is a very prominent case, also because the international Jubilee Campaign - and most notably the German Erlaßjahr 2000 - picked it up at the end of the last millenium. Comparing Germany’s debt indicators with those considered "generous" for the poorest countries by the Cologne Summit shows an inexplicable difference regarding the treatment of debtors. During the years before the London Accord Germany had e.g. a debt service ratio of less than 4%, which was considered unsustainable though well below the 15% of HIPCs after Cologne. Table 2 reproduces Hersel’s calculations of Germany’s debt indicators as used after 1982 for sovereign debtors.
Table 2: Germany’s Debt Indicators 1949-53
(% of export earnings)
Year Debt Ratio DSR
1949 358 13,71
1950 173 6,78
1951 99 3,89
Jan-Jul 1953 90 3,52
1952 85 3,35
Source: Hersel 1998
These figures based on data of Germany's Statistisches Bundesamt show quite a difference between what was considered unbearable in the case of Germany and any HIPC. Payments scheduled for 1953-60 were so low that the scheduled DSR fell to 3.06 in 1953, 2.57 in 1954, 2.21 in 1955, and to 1.84 in 1956. After that year it only rose once to slightly higher than 2 per cent: in 1958 2.07 per cent of export earnings were scheduled for debt service. This is explained by the fact that amortisation started in 1958 after five years grace. Germany's economy boomed so dynamically after this debt reduction that the country outdid its schedule, using the contractual possibility of early repayments. Paying more than agreed and scheduled in any year between 1953-60 it always paid less than 5 per cent of export earnings and never more than 60 per cent of its trade surplus. Based on this fact the German campaign Erlaßjahr 2000 demanded an upper limit of 5 per cent for debt service. As Hersel shows creditors accepted a German trade surplus, and they agreed that debt service cannot generally exceed this surplus - another important difference vis-à-vis present (Southern) debtors.
Germany’s debt burden was vanishing rapidly once trading activities started to pick up again after WWII. Any SC recording a similar quick improvement would certainly not be considered a case for debt relief nowadays. One cannot contradict Hersel conclusion: "if the West Germany of 1952 were analysed under the current conditions of the HIPC-Initiative, it would not be eligible for any debt reduction". Fortunately it was not. Nor was it forced to adopt present Structural Adjustment policies. The successful economic policies Germany was allowed to pursue, characterised by the term “social market economy” (Soziale Marktwirtschaft) were the very opposite of BWI-type “Structural Adjustment”.
At the end of the 1960s Indonesia's new Suharto regime received a debt reduction very similar to the German case. This is hardly a surprise considering that the mastermind behind the Indonesian solution was also Hermann J. Abs, accepted in this role both by creditors and the debtor. Although Indonesia - like any SC at that time - held mostly public debts, the composition covered all kinds of debts, public and private. Abs insisted on strictly equal treatment of all creditors, declaring this "indispensable for any settlement of debts" As Indonesia was substantially indebted to Communist governments, this demand was also of great political importance. The West was understandably reluctant to reduce Indonesia's debts just to make repayment to the East easier.
Legally, of course, creditors have always refused to recognise these cases as precedents. In the case of Indonesia Abs had to find arguments in favour of the singularity of the Indonesian case and its inapplicability to other debtors. These "special characteristics" are of greatest interest to anyone studying the present crisis:
- All old debts were contracted by the previous government.
- Indonesia's debts consisted predominantly of credits with little or nor economic usefulness; practically the whole debt service had to be financed by the central budget.
- High inflation could only be brought under control by energetic policy and exceptionally generous help from without.
- The country was unable to repay its debts in the future.
Indonesia's debtors, especially the Paris Club, obviously recognised these reasons as valid. It should therefore be examined whether they apply to present cases. If they do there seems to be no logical reason why the same solution should not be applied as well - without creating any legal precedent if necessary. When Ghana demanded "Indonesian type" relief soon after the Indonesian settlement, creditors were reluctant to grant comparable terms, explaining this by the desire to avoid precedents. Eventually, Ghana was granted very "generous" terms that have remained undisclosed until this day. The present discussion on debt reduction has hardly made disclosure any more likely.
More recently Poland, and Egypt received substantial debt reductions. Both were politically motivated, but they show nevertheless how quickly and simply debt reductions can be done if and when creditors agree. They, too, therefore prove that international insolvency can be done immediately once creditors decide to apply the Rule of Law and the respect for Human Rights onto their own claims as well.
After the Asian Crisis of 1997 and the Indonesia's economic melt down the solution of the 1960s has been referred to by various authors and NGOs. In July 2000 there was a seminar on Indonesian debts, which I attended, where the debt reduction of the 1960s was also discussed in detail. Interestingly, the IBRD published a "Report" on Indonesia's debt situation, in which it conspicuously avoided the word debt reduction, using renegotiation and rescheduling instead. In the discussion the IBRD official on the panel (who spoke no German) upheld the assertion that the settlement was a rescheduling, not a reduction. The fact apart that simple calculations of present values done on the basis of the Bank's own publication show that debt reduction did occur - Kampffmeyer puts the reduction granted at 57 per cent - this assertion seems explicable from changes in the use of language. Abs was admittedly guilty of being unaware of "World Bank lingo" that developed years after 1982, differentiating very strictly between rescheduling (presently virtually always understood exclusively as a change of payment schedules without reductions in present values) and reduction, which, of course, is logically also a change in schedules. Abs used "Umschuldung" (rescheduling) and comparatively seldom "Erlaß" (debt reduction/cancellation) interchangeably in his paper. This appears - as further correspondence showed after I had sent a copy of Abs's paper (originally written in German) to Jakarta - to have been seen as a reason to claim that no debt reduction occurred, an error of which, of course, only a translator or a person able to read the original can be guilty. Even well after the 1960s the terms were not used in their present sense, as can be proved by looking at publications. Kampffmeyer and Raffer, e.g., both advocating an international insolvency, still used rescheduling in the broader sense including debt reductions. So does Krueger in her recent proposal, speaking of "an orderly restructuring" mimicking bankruptcy procedures. Finally, as Abs himself - who never denied that debt reduction had taken place - had used Erlaß in his paper as well, the German campaign Erlaßjahr 2000 demanding debt reductions would have to be translated as "Rescheduling Year 2000" if the IBRD were right.
While the IBRD's box on the first Indonesian settlement is not always wholly correct as regards facts - outright debt reduction happened as this was more convenient to some creditors than an interest rate of zero (as slightly preferred by Abs), and the IBRD does not mention Ghana, there is one interesting passage that merits quoting. The IBRD writes
In addition, the Paris Club permitted Indonesia, under a bisque clause arrangement similar to that contained in the Anglo-American Financial Agreement, to defer at its option up to one-half of the principal payments falling due in the early years of the new schedule. These deferred obligations were to be repaid with an interest at 4 percent per annum during the final years of the agreement.
As a quick look at the British terms shows, similarity of terms still means tougher treatment for Indonesia in comparison with the UK. Nevertheless, the BRD is right to state that the Abs-settlement was generous. Incidentally, the last years for deferred interest payments included the years 1997 and 1998.
There is no valid economic reason for treating debtors differently and for denying people a minimum protection of human dignity because of their race, colour, or nationality. On the contrary, the assumption that sovereign debtors would not be allowed to go insolvent has caused much economically unsound lending, resulting in massive misallocations of resources. International insolvency would allow the market mechanism to work more efficiently in international financial markets. Banks would stop lending if loans were not used properly, as they usually do. If an international Chapter 9 had existed in the 1970s there might be no debt crisis now - the debt burden would certainly be lower. Both economic efficiency and the protection of human dignity therefore demand economists and lawyers to co-operate in elaborating an international Chapter 9.
F. Renewed Interest in International Insolvency Procedures
In 1990 the Working Group Swissaid/ Fastenopfer/ Brot für alle/ Helvetas/ Caritas submitted the idea of an international insolvency to the Swiss Bundesrat, supported by two papers written by Prof. K.W. Meessen (Augsburg/Geneva) and myself. It was taken up and discussed in the Swiss Parliament. Switzerland tried discreetly to discuss this proposal internationally, but finally stopped these attempts as no other creditor government signalled any interest. In the year 2000 this proposal was again taken up by the Swiss parliamentarian Christoph Eymann in the Nationalrat. Unlike before, the Swiss government, who replied on 28 June 2000, presently prefers HIPC to insolvency.
The lack of reactions to the Swiss initiative might to some extent also be an effect of the situation at that time. With the beginning of the 1990s and the official euphoria about new capital flows to Latin America any discussion on mechanisms for debt reduction stopped. According to the IBRD the debt crisis was over, the 1990s were touted as the years of hope and recovery. The Mexican crash changed that. This euphoria of the 1990s was not the first of its kind, by the way. The 1970s saw euphoria about the well working and unregulated Euromarket, successfully "recycling" money to the Third World, a euphoria that stopped in 1982. The one about beginning recovery in Sub-Sahara Africa was already mentioned above.
Shortly after the Mexican crash 1994/5 the Chairman of the Federal Reserve System, Alan Greenspan, suggested thinking about an international insolvency as an appropriate mechanism to settle the debt problem. The Financial Times reported that Treasury Secretary Robert Rubin said he carefully avoided the term "international bankruptcy court" but that some procedures to work out the debt obligations of debtors were needed. In an article in the Wall Street Journal of 10 April 1995 Rep. Jim Leach of Iowa, the Chairman of the House Banking and Financial Services Committee, recommended international insolvency proceedings: "What is needed today is a Chapter 11 [insolvency of firms] process for the global financial system, a technique to keep nation-states and their people from the impoverishing implications of insolvency." Mentioning the little known Chapter 9 proceedings [for debtors with governmental powers] briefly, he specifically pointed out its implicit understanding that local government must continue to function. At first it was considered informally to bring the issue to the table of the Halifax G7 summit, but this was not done. New euphoria on capital flows to East Asia soon eclipsed the Mexican shock, and the problem faded away again.
At the end of the 1990s the idea of an international settlement mechanism based on arbitration and along the lines of US Chapter 9 has gained some currency again. Many years of failed attempts by creditors to find a solution seem to be one factor explaining this. But the main reason is no doubt the strong lobbying by NGO campaigns for meaningful debt relief. The most important movement in this regard was Jubilee 2000 UK, also the first Jubilee campaign taking up this issue. Their platform demanded the cancellation of unpayable debts. To determine which part of debts was unpayable an international arbitration process as described above under the heading International Chapter 9 was demanded. The word insolvency - even more radical in those days - was not expressly used by the official platform, though. They were quickly followed by the German and Austrian Erlaßjahr-campaigns. These latter expressly demand an international Chapter 9 insolvency for states. So does the Tegucigalpa Declaration, or the German Commission Justitia et Pax, which published a paper just before and for the Cologne Summit. Internationally, however, particularly in the South, the term arbitration is preferred vis-à-vis insolvency. At present an international NGO working group on FTAP (Free and Transparent Arbitration Process) pursues this issue.
UNCTAD renewed the proposal of applying Chapter 11 insolvency to sovereign creditors, initially made by it in 1986. It also referred to Chapter 9 and the arbitration mechanism contained in its international variant. In its Chapter on Sub-Saharan Africa the Report demands
Nevertheless it is possible to establish the key insolvency principles and apply them within the existing international framework. The application of these principles would dictate an immediate write-off of all unpayable debts in SSA [= Sub-Sahara Africa] determined on an independent assessment of debt sustainability.
The first word refers to UNCTAD's doubts whether an international bankruptcy court applying international insolvency rules laid down in the form of an international treaty ratified by all members of the UN can be expected to be established easily. This doubt is wholly shared by most proponents of FTAP/Chapter 9 insolvency. Therefore they propose temporary arbitration panels, not the establishment of a court acting on the basis of virtually universal ratification. This is e.g. the official position of Erlaßjahr 2000 Germany, repeatedly stated by their spokesperson Jürgen Kaiser.
In connection with the Asian crisis insolvency procedures for firms are seen as essential for avoiding future crises. The Reports on the International Financial Architecture published by the OECD recommend it strongly, but avoid the I-word with regard to sovereign debtors. The Working Group on International Financial Crises proposed an insolvency procedure in all but name, demanding the international community to provide: “in exceptional and extreme circumstances ... a sovereign debtor with legal ‘breathing space’ so as to facilitate an orderly, co-operative and negotiated restructuring”.
Emulating insolvency features, such as debt reduction by qualified creditor majority or "Collective Action Clauses" for sovereign bond contracts, was recommended as a critical contribution to "creating the institutional structure needed to encourage orderly workouts", because a "binding insolvency regime for sovereign debtors is unlikely". The Report even admits that "a purely voluntary approach" might not be feasible because "the government may not have the bargaining power to obtain sustainable terms", e.g. if creditors demand destabilisingly high interest rates. It remains to be asked why one shied away from the obvious conclusion - the need of an independent entity empowered to decide in such cases - and why all the advantages praised by the Working Group in the case of firms should not be equally advantageous in the case of sovereign debtors. Why emulate features of insolvency instead of simply using the existing model, which can be adapted so easily?
In a recent paper two employees of the Bank of England and the Bank of Canada, Andy Haldane and Mark Kruger, propose a standstill arguing that sovereign debtors need the safe harbour which bankruptcy law provides in a corporate context: "Everyone accepts this as an important part of the capital market mechanism; it supports, not supplants, market forces. The same is true in an international context, where standstill guidelines can serve as surrogate bankruptcy law." Like Anne Krueger later, the authors refute many "objections" against their proposal that have also been made against sovereign insolvency, but stop short of proposing an independent arbitration panel.
The OECD, too, has come around to accepting insolvency: “Moreover, an international lender of last resort and an international bankruptcy court could help to prevent financial panics altogether.”
The IMF, a bulwark against insolvency over years went one step further. Michel Camdessus suggested “some sort of Super Chapter 11 for countries” in an interview with the Financial Times of 17 September 1998, qualifying the need for international bankruptcy procedures “already” an “obvious lesson”. This conclusion is welcome, even though “already” is definitely the wrong word. One has to ask, however, why Camdessus demanded the legally unviable variant of a Chapter 11 rather than an international Chapter 9. While one cannot know why this was done, one can point out that Chapter 11 - made for firms - does not have the transparency of a Chapter 9 insolvency described above. It would therefore be comfortably closer to the IMF's tradition of secrecy and behind-closed-doors decisions.
As already mentioned above the IMF's new First Deputy Managing Director on 26 November 2001 proposed a new approach to sovereign restructuring along the lines of insolvency. Her speech has given this idea political momentum, and fuelled the discussion strongly. She clearly stated that the IMF should not adjudicate disputes between creditors and creditors and the debtor, like the advocates of an international Chapter 9. With this statement in mind, it is not absolutely clear what she means by saying that the Fund is "the most effective channel through which the international community can reach a judgement on the sustainability of a country's debt" unless she sees the IMF as some kind of mediator, possibly giving expert advice. She differs from Raffer's proposal as the debtor country requesting this mechanism would have to get its request endorsed by the IMF, a creditor, not by an independent entity. Finally, she is not clear about whether she proposes Chapter 11 or Chapter 9 as the model, which, however, means that Chapter 9 is not explicitly ruled out either. One would have to concur with her that the IMF could play a valuable role, helping to bring such a process about. It might indeed encourage debtors to go down the road earlier than they do now. This is not a bad thing. At the moment too many countries with insurmountable debt problems wait too long, imposing unnecessary costs on themselves, and on the international community that has to help pick up the pieces.
The IMF - that has opposed this solution so far - could advocate it with its members instead, or offer technical help in solving problems that might come up, such as steps to avoid disruptive interference by vulture funds. The IMF could help co-ordinate bondholders. It might even lend money necessary to keep the country going during FTAP, but only if no conditionality is attached to these drawings.
Last but not least one has to concur with Krueger that the mere existence of appropriate procedures would make solutions easier, leading to agreements "in the shadow of law", without any formal process. If their outcome are acceptable to civil society this may save anyone a lot of trouble, especially the debtor and its population.
On the political scene the demand of an international Chapter 9 is most strongly discussed in Germany. Since Erlaßjahr 2000 started their campaign this issue has received attention by the Bundestag as well as the administration. The Advisory Council of the Federal Ministry of Co-operation (BMZ) commissioned a report on it, which was widely discussed. In April 1999 the Bundestag demanded that the Government study the issue of international insolvency. A question (Kleine Anfrage) by the CDU/CSU parliamentary fraction in March 2000 requested information what the Federal Government had done to fulfil this demand, whether it considered initiating such a mechanism and if so on what basis and what concrete steps had been taken. A Hearing on this issue by the Bundestag's Finance Committee (Finanzausschuß) took place on 14 March 2001.
The Italian Parliament passed a law on debt relief in the summer of 2000, Art. 7 of which requests an examination of present debt management. Under the title International Regulations on Foreign Debt this article reads:
The Government will propose, to the relevant international institutions, the starting (initialize) of the necessary procedures to obtain a ruling from the International Court of Justice on the consistency between the international regulations governing developing countries’ foreign debt and the general framework of legal principles and human and people’s rights.
Considering that the serious effects of present debt management on the poor, in particular on vulnerable groups have been proved and admitted by the Managing Director of the IMF already during the 1980s - this is a very much needed action.
In the UK the Treasury Committee of the House of Commons published the proposal of an international Chapter 9 insolvency with symmetric treatment of IFIs as a measure to bring financial accountability to the IMF as an appendix of the document on their hearings on the IMF and debt management. In the summer of 2000 the International Development Committee of the House of Commons published its 9th Report on The Effectiveness of EC Development Assistance. Although the topic is not debt issues specifically this Committee published a submission of mine as Appendix 10 which suggests an international Chapter 9 as the necessary precondition for any meaningful development co-operation in overindebted ACP countries. At the Ottawa meeting of the Bretton Woods Institutions in November 2001 the British Chancellor of the Exchequer, Gordon Brown, and the Canadian Finance Minister, Paul Martin, spoke out in favour of a solution modelled after the US Chapter 11 insolvency.
Urging that "debt cancellation should become part of the dialogue within the ACP-EU Partnership and that the EU should encourage other donors also to take measures to relieve or cancel debt" the ACP-EU Joint Parliamentary Assembly demanded FTAP last year, believing
that consideration should be given to the creation of an International Debt Arbitration Panel to restructure or cancel debts where debt service has reached such a level as to prevent the country providing necessary basic social services
After the default of Ecuador's Brady-bonds civil society - possibly best represented by the demands contained in the paper of CONAIE, the Confederación de Nacionalidades Indigenas del Ecuador - demanded a debt-to-development swap of all present debts, as well as international arbitration to solve problems of future overindebtedness. It was demanded that debt service be replaced by payments into a Fondo Social y Ecológico to finance social, cultural and ecological programmes (including education). This demand is essentially the same as the counterpart fund proposed by Jubileo 2000 Red Guayaquil in a joint study with the UNDP and UNICEF, which specifically addressed the problem of servicing debt to public creditors, including IFIs.
Referring specifically to US municipalities CONAIE's demand for international arbitration also seconded Jubileo 2000 Red Guayaquil, who had been one of the organisers of a conference on Ecuadorian debts in early December 1999 where this solution had been presented. Quite rightly, CONAIE pointed out that such arbitration procedures result from the very fundamental base of the Rule of Law that no one must be permitted to be judge in their own cause. Stating with clarity that this essential base of the Rule of Law is presently violated by creditors, being "judge and party" CONAIE demanded creditor governments to respect the Rule of Law. The paper also states that fundamental human rights have been violated by present debt management denying otherwise customary debtor protection in the case of the poorest. However, as usual in cases of Southern debts, neither the Rule of Law nor human rights cut any ice with the Paris Club whose members keenly preach these very principles to their debtors except when it comes to their own claims.
It is important to mention that CONAIE blames the Ecuadorian government with outmost clarity as well, identifying the important role of Ecuador's government and élites in creating the debt overhang. While the country is not simply presented as an innocent victim, the co-responsibility of creditors is properly addressed, who often granted loans quickly and easily to dictatorial regimes.
The paper refers to Ecuador's experience with counterpart funds created in connexion with debt reductions by Belgium, Switzerland and with partial debt reductions by Germany. Especially the Swiss case, the Fondo de Contravalor Ecuatoriano Suizo (FOES) is presented as highly successful. Finally, the paper refers to Germany's London Accord of 1953 offering generous terms to a debtor whose situation was perceptibly better than Ecuador's, the basically similar Indonesian case, and the more recent cases of Poland and Egypt to show that demands for meaningful debt reduction are technically possible.
Like CONAIE Afrodad, a platform of NGOs in Africa, has taken up the demand for an international arbitration court on foreign debt, stressing the same concerns as CONAIE. Speaking of "institutional imbalances" Afrodad becomes very explicit:
As is said in West Africa: In a Jury of Foxes (the Creditors), the Chickens (the Debtors) are always the guilty! The Paris Club for example, is itself undemocratic as it is a gang of creditors against one debtor etc.
These undemocratic practices have to be replaced by structures which respect human rights, democracy and the right of the Debtor countries and their peoples to be heard.
The document goes on, referring to the UN's Financing for Development process:
A proposal for internationalisation of Chapter 9 Insolvency Law of the USA was presented as part of the NGO Hearings to the United Nations in the context of the Financing for Development (FfD) Conference preparations during November 5-9, 2000 in New York by Professor Kunibert Raffer of Austria. Chapter 9 of USA Laws is a procedure for solving the insolvency of a governing body, a Municipality, without violating or undermining its governmental power. Applied to sovereign countries, the Law would not violate sovereignty of the state.
Referring to fears that insolvency procedures might not highlight those unequal power relations at the root of the debt overhang, and that declaring bankruptcy might be seen as suggesting that debtors are solely responsible for the debt crisis, Afrodad also sees a need for an international arbitration process explicitly addressing the responsibilities of creditor countries and the effects of exogenous factors that might be influenced by creditors, such as denied market access, trade imbalances and declining terms of trade.
Based on the Chapter 9 proposal, an arbitration court with a larger mandate is finally demanded. It should expressly deal with both the issues of debt as well as for retrieval of money stolen by leaders and put into foreign banks, which has to be returned to its lawful owners. Compared with an international insolvency in the strict sense Afrodad's variant is more ambitious and addresses problems at the root of the debt crisis in a more direct way. Implicitly, of course, problems such as Northern protectionism cannot be ignored as well. The question of market access for instance is inseparably linked with the percentage of debt reduction necessary to reach economic viability of debtor nations.
In the US the “Global Sustainable Development Resolution” drafted in 1999 by Congressman Bernie Sanders called for an international insolvency mechanism based on Chapter 9 of US bankruptcy laws, including arbitration as proposed within an international Chapter 9. More recently, the Secretary of the Treasury, L. Summers said in an interview in Time magazine of 24 July, 2000 that "Even the toughest private lenders write off their bad debts. That's what governments - and private lenders - need to do with bad loans they have made." His successor at the US Treasury, Paul O’Neill, has publicly confirmed the usefulness of an international insolvency procedure for sovereign governments, an idea seconded by the British Chancellor of the Exchequer, Gordon Brown, and the Canadian Finance Minister, Paul Martin a bit later. This change of mind of important G7 countries might also have been helpful for the change of attitude within the IMF expressed by Anne Krueger.
At the UN Kofi Annan, as already quoted above, demanded FTAP/Insolvency. Unfortunately he has meanwhile - possibly so under strong pressure - totally taken back his courageous demand, speaking of mediation not arbitration in his Report. Unfortunately, he seems to have felt forced to go even one step further, demanding an "independent" mediator, assisted by the IMF and other experts (one might suppose the IBRD to qualify) on a voluntary base. Clearly, this would not change the situation allowing creditors (mainly the IMF) to dominate procedures. In contrast to arbitration this would still deny sovereign debtors and the poor the principles of the Rule of Law, but might produce the wrong impression as though something had actually changed in favour of debtors. Therefore the Secretary-General’s first proposal is preferable, even though mediation was no doubt proposed after conscientious and careful deliberations.
The FTAP-option was presented and discussed at the Civil Society Hearings of Financing for Development in New York in November 2000. The High-Level Regional Consultative Meeting on Financing for Development, Asia and Pacific Region (Jakarta, 2-5 August 2000) called for an international bankruptcy procedure for states - possibly a result of lessons learnt from the Asian crisis.
Last but not least the idea was echoed in academic publications. Most notably Rogoff presented an international Chapter 9 as a means to stabilise the international financial system, even though he expressed doubts about its implementability in the near future. However, with enhanced global and regional political institutions "ideas like a global bankruptcy court or an international system of financial regulation may not seem so far fetched." At present, the lack of an effective international bankruptcy system allows "'Junk' country debt" to play "too large a role".
Barry Eichengreen discusses this proposal, listing "Raffer's International Bankruptcy Court" in his "Architecture Scorecard". He mentions quite a few arguments in favour of insolvency, such as the unrestricted "destructive incentive to scramble for the exits" or that - without a court or arbitrator - "talks can drag on, aggravating the macroeconomic and financial losses caused by default". Eichengreen also mentions "vulture" funds, and the problems they create at present. All this would speak for international Chapter 9 procedures.
Eichengreen, however, eventually comes down on the side of new clauses (e.g. majority voting clauses) in bond contracts as the "only practical way", thinking them to be "infinitely more realistic than .... some kind of supranational bankruptcy court empowered to cram down settlement terms." There is no doubt that such clauses in loan contracts make sense, and he was perfectly right that there was not yet any political will of official creditors to allow such a procedure at that time, before the declarations by the US, the UK, Canada, and the paper by Anne Krueger. Propagating international insolvency arbitration is indeed an uphill struggle. He is wrong, though, in thinking of a supranational institution, as the source he quotes calls for an ad hoc arbitration panel to be dissolved when no longer needed - a traditional feature in international law not normally referred to as supranational.
One may suppose this error to stem from the passage: "The reason why no court, whether located in a creditor or debtor country, should chair the procedures is self-evident: its impartiality is not guaranteed", which refers to courts, not courts of arbitration. Language apart, the illustrating example - the US Court of Appeal for the Second Circuit of New York, definitely no court of arbitration - proves this beyond doubt. Eichengreen's error nevertheless suggests the use of "panel" whenever discussing arbitration. This might also be helpful to differentiate the proposed ad hoc panels from a permanent court of arbitration. Technically, a permanent entity could handle such cases as well. But ad hoc panels can be established much more quickly, and too much time has already been wasted because of creditors. Furthermore it is to be hoped that - once the backlog of cases is resolved - this kind of arbitration will not be needed frequently. Finally, ad hoc panels might have the advantage of being custom made for each case.
In the German language area a conference volume edited by Dabrowski et al discusses the proposal of an international Chapter 9 in detail. Frenkel and Menkhoff mention it, summarising, however, largely Rogoff.
In the case of an insolvent county creditors know that they will not be repaid fully. The question is thus only how to share losses, and whether to grant any debtor protection. All civilised legal systems answer this question unequivocally by giving the debtor's human dignity precedence over bona fide claims. Insolvency procedures are part and parcel of economic life nowadays, and they fulfil also the economic function of a disincentive to lax lending, as happened in the 1970s with regard to Third World debts. Internationally, such procedures do not yet exist, although they or parts of insolvency procedures have repeatedly been emulated.
An mechanism equivalent to domestic insolvency is needed, not least to redress the situation where only one class of debtors is denied meaningful relief, a fact that makes lending to them unduly attractive. It can be shown that the mechanism of insolvency can be applied to sovereign debtors, and that it is able to redress the present situation where the Rule of Law and human rights of debtors are only guaranteed to those living on the right and mostly white side of the North-South divide. It is important to stress that only a solution modelled after Chapter 9 safeguards the debtor's sovereignty and gives the population a voice. This is a fundamental difference to Chapter 11. Therefore one must insist that the participatory Chapter 9 not Chapter 11 be used for a really fair and transparent process. Lobbying and campaigning may still be necessary to assure that this solution for public debtors in the US be applied globally.
There are some very encouraging signs of slow progress towards this economically, socially and legally indicated solution. Based on recent evolutions and statements it is to be hoped that Adam Smith's lucid advice will finally be heeded after decades of unsuccessful "debt management". It is to be hoped with Anne Krueger that no further delays will occur, imposing unnecessary costs on debtors and the international community. One must not give up hope that a child's life expectancy will eventually depend a bit less on whether (s)he is born in a heavily indebted municipality within an OECD-country or in a heavily indebted country in the South.
* An earlier version was published as by the Arbeitspapier 35, OeIIP (Oesterreichisches Institut fuer Internationale Politik/ Austrian Institute for International Affairs), Vienna as Arbeitspapier 35 in June 2001
 Raffer Kunibert. The Necessity of International Chapter 9 Insolvency Procedures. In: Eurodad (ed.) Taking Stock of Debt, Creditor Policy in the Face of Debtor Poverty. Brussels: Eurodad 1998, p.25
 Meltzer, Allan H. (chair) et al. Report of the Meltzer Commission. March 2000, p.16 [downloaded from http://phantom-x.gsia.cmu.edu/IFIAC/Report.html - pages refer to the downloaded version totalling 72 pages, which deviates from the pagination shown by the list of contents]
 ibid., p.27
 ibid., p.29
 Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations, vol.II, Glasgow edition by R.H. Campell, A.S. Skinner & W.B. Todd, Oxford etc: Oxford University Press 1979, p. 930 [book originally published in 1776]
 Annan, Kofi. Freedom from Want, Chapter in: We, the People, The Role of the United Nations in the 21st Century. New York: UN 2000, p.38
 Krueger, Anne. International Financial Architecture for 2002: A New Approach to Sovereign Debt Restructuring. http://www.imf.org/external/np/speeches/2001/112601.htm The word "new" seems worth commenting on, considering that the history of this proposal starts in 1776.
 Raffer, Kunibert. International Debts: A Crisis for Whom? In: H.W. Singer & Soumitra Sharma (eds) Economic Development and World Debt. London & Basingstoke: Macmillan 1989, pp.51ff [Conference volume of selected papers presented at a Conference at Zagreb University in 1987] Reprinted (unabridged. orig. vers.) in Trziste, Novac, Kapital - Market, Money, Capital, vol. XXII, no.4 (Oktobar-Decembar 1989), pp.7ff
 Pearson, Lester B. et al. Partners in Development: Report of the Commission on International Development. New York: Praeger, 1969, pp.153ff
 ibid., p.156
 ibid., p.159
 OECD. Development Co-operation, Efforts and Policies of the Members of the Development Assistance Committee, 1999 Report [The DAC Journal 1(1)] Paris: OECD 2000, p.43
 Raffer, Kunibert & H.W. Singer. The Foreign Aid Business: Economic Assistance and Development Co-operation. Cheltenham (UK) & Brookfield (US): Edward Elgar 1996 [paperback edition: 1997], pp.30ff, and the literature quoted there.
 For a more detailed argument cf. Raffer, Kunibert & H.W. Singer. The Economic North-South Divide, Six Decades of Unequal Development. Cheltenham: Edward Elgar 2001, pp.123ff
 Abbott, George C. Aid and Indebtedness - A Proposal. National Westminster Bank Review May 1972, pp. 55ff
 Wionczek, Miguel S. El endeudamiento público externo y los cambios sectoriales en la inversión privada extranjera de América Latina. In: H Jaguaribe, A. Ferrer, M.S. Wionczek, T. Dos Santos (eds) La dependencia político-económica de América Latina. Mexico: SXXI (10th ed) 1978, p.118
 Helleiner, G.K. Relief and Reform in Third World Debt. World Development 1979, no.7, pp.113ff
 Hardy, Chandra S. Commercial Bank Lending to Developing Countries: Supply Constraints. World Development 1979, no.7, p.196
 Wionczek, Miguel S. Editor's introduction. World Development 1979, no.7, p.93
 Kanesa-Thasan, S. The Fund and adjustment policies in Africa. Finance & Development 1981 (vol.18, no.3), pp.20ff.
 ibid., p.20
 Crockett, Andrew. Issues in the use of Fund resources. Finance & Development 1982 (vol.19, no.2), pp.10ff
 Nowzad, Bahram. Debt in developing countries: some issues for the 1980s. Finance & Development 1982 (vol.19, no.1), p.13
 cf. Raffer, Kunibert. “Structural Adjustment”, Liberalisation, and Poverty, Journal für Entwicklungspolitik (JEP) 1994 (vol. X, no. 4) , pp.431ff
 cf. Raffer, Kunibert. International financial institutions and accountability: The need for drastic change. In: S.M. Murshed & K. Raffer (eds) Trade, Transfers and Development, Problems and Prospects for the Twenty-First Century, Aldershot: E. Elgar 1993, pp.151ff
 Sachs, Jeffrey. New Approaches to the Latin American Debt Crisis. Paper prepared for The Harvard Symposium on New Approaches to the Debt Crisis, Kennedy School of Government, Harvard University, 22-23 September 1988
 cf. Raffer, Kunibert. Is the Debt Crisis Largely Over? - A Critical Look at the Data of International Financial Institutions. In: Richard Auty & John Toye (eds) Challenging the Orthodoxies, London & Basingstoke: Macmillan 1996, p.35
 Time, 13 February 1995
 IBRD & UNDP. Africa's Adjustment with Growth in the 1980s. Washington DC: IBRD, 1989, p.iii
 cf. Raffer, Kunibert. International financial institutions and accountability... op.cit.
 Financial Times, 5 September 1995
 See Raffer, Kunibert. International financial institutions and accountability... op.cit
 Nowzad 1982, op. cit., p.14
 Versluysen, Eugene L. Der Kapitaltransfer in Entwicklungsländer zu Marktbedingungen. Finanzierung & Entwicklung [German edition of Finance & Development]1982, 19(4), pp.33ff
 ibid., p.33
 ibid., p.34
 IBRD. World Debt Tables 1992/93, Washington DC: IBRD, pp.10ff
 ibid., stress in original
 Ahmed, M. & L. Summers Zehn Jahre Schuldenkrise - eine Bilanz. Finanzierung & Entwicklung 1992, 29(3), pp.2ff
 Stern, Ernest. World Bank Financing and Structural Adjustment. In: Williamson, John (ed.), IMF Conditionality. Washington DC: Institute of International Finance & MIT Press 1983, pp.87ff
 IBRD. Global Development Finance. vol.1, Washington DC: IBRD 1997, p.44
 GAO. Developing Countries: Debt Relief Initiative for Poor Countries Faces Challenges (Chapter Report, 06/29/2000, GAO/NSIAD-00-161), downloaded from its homepage http:// www.gao.gov
 Raffer, Kunibert. Controlling Donors: On the Reform of Development Assistance. In: Internationale Politik und Gesellschaft/International Politics and Society 1997 (no.4), p.364
 IBRD. Joint Press Conference with Horst Köhler, managing Director of the IMF, James D. Wolfensohn, President of the World Bank, and Trevor Manuel, Chairman of the Board of Governors, Transcripts, Prague, 28 September 2000, downloaded from http://www.worldbank.org 2000a, p.10, emph. mine
 IBRD. Global Development Finance 2000, vol. 2, Washington DC: IBRD 2000, p.418
 Zedillo, Ernesto et al. Recommendations of the High-level Panel on Financing for Development, UN, General Assembly, 26 June 2001 (A/55/1000), p.21
 ibid., p.54
 IMF. Key Features of IMF Poverty Reduction and Growth Facility (PRGF) Supported Programs, Prepared by the Policy Development and Review Department. Downloaded from http://www.imf.org/external/np/prgf/2000/eng/key.htm#P31_2132
 Raffer, Kunibert. The Necessity of International .... op.cit.
 IBRD. Global Development Finance 1997. Washington DC: IBRD 1997, p.42
 ibid., p.44
 Raffer, Kunibert. Is the Debt Crisis Largely Over? ... op.cit., pp.23ff. The paper, which argued that Latin America’s debt situation was unsustainable, was already available as a mimeo at the Annual Conference of the Development Studies Association, Lancaster, 7-9 September 1994, viz. before the Mexican crash of 1994-5 and the Tequila Crisis.
 Raffer, Kunibert. Debt Relief for Low Income Countries: Arbitration as the Alternative to Present Unsuccessful Debt Strategies, Paper presented at the WIDER Conference on Debt Relief, 17-18 August 2001, Helsinki, http://www.wider.unu.edu/conference/conference-2001-2/conference2001-2.htm
 Raffer, Kunibert. Applying Chapter 9 Insolvency to International Debts: An Economically Efficient Solution with a Human Face, World Development 1990, vol.18, no. 2, pp.301ff is the first paper that presented it in elaborated detail. A brief survey can e.g. be found in Raffer, Kunibert & H.W. Singer. (1996), The Foreign Aid Business, Economic Assistance and Development Co-operation, Cheltenham (UK) & Brookfield US: E. Elgar 1996 [paperback edition: 1997], pp.203ff. The latter passage as well as other papers discussing this topic - among them Raffer, Kunibert. What's Good for the United States Must Be Good for the World: Advocating an International Chapter 9 Insolvency. In: Bruno Kreisky Forum for International Dialogue (ed) From Cancún to Vienna. International Development in a New World. Vienna: Kreisky Forum 1993, pp.64ff - can also be found on my homepage http://mailbox.univie.ac.at/rafferk5
 C.G. Oechsli, C.G. Procedural Guidelines for Renegotiating LSC Debts: An Analogy to Chapter 11 of the US Bankruptcy Reform Act. Virginia Journal of International Law 21 (1981), pp. 305ff.; for a survey cf. A. N. Malagardis. Ein "Konkursrecht" für Staaten? Zur Regelung von Insolvenzen souveräner Schuldner in Vergangenheit und Gegenwart. Baden-Baden: Nomos 1990
 Suratgar's proposal was published in 1984. Cf. Malagardis, op.cit., p. 181, who also quotes similar deliberations by German colleagues during 1982 and 1983.
 UNCTAD. Trade and Development Report 1986. Geneva: UNCTAD 1986
 Raffer, Kunibert. Die Verschuldung Lateinamerikas als Mechanismus des Ungleichen Tausches. Zeitschrift für Lateinamerika (Wien) No.30/31 (1986), pp.67ff
 Kampffmeyer, Thomas. Towards a Solution to the Debt Crisis: Appyling the Concept of Corporate Composition with Creditors. Berlin: German Development Institute (DIE)1987
 Raffer, Kunibert. International Debts: A Crisis for Whom? op. cit.
 The description of domestic (US) Chapter 9 procedures draws on Raffer, Kunibert. Internationalising US Chapter 9 Insolvency: Economic Problems in Need of Legal Conceptualisation. In: S.R. Chowdhury, E. Denters & P.J.I.M. de Waart (eds) The Right to Development in International Law. Dordrecht: Kluwer Academic Press/ Martinus Nijhoff Publishers 1992, pp.397-410, as well as Raffer, Kunibert. Applying Chapter 9 Insolvency ..., op.cit. The current version of US bankruptcy laws can be found at http://uscode.house.gov, the Congress website posting all presently valid laws plus their history and explanations. As this publication focusses on the basic elements of Chapter 9 it does not go into minor details or differences of formulations between current and past formulations, as these do not affect the thrust of the argument. It quotes those formulations that convey the meaning of this procedure best, even if they are not from the current version.
 United States Code Annotated, Title 11 (Bankruptcy), including 1988 Cumulative Annual Pocket Part; Rules of Bankruptcy Procedures (pre-1984), and Bankruptcy Rules and Official Forms, 1984 edition, West Publishing Co., 1988.
 §109(c), 11, USCA
 Spiotto, James E. Municipal Bankruptcy. Municipal Finance Journal 14, 1993, pp.1ff
 Rogoff, Kenneth. International Institutions for Reducing Global Financial Instability. The Journal of Economic Perspectives 13(4), Fall 1999, p.30
 This condition is presently found in §943(b),7
 Quoted from Note to §943, 11, USCA
 Rule 9-27, note 1, Rules of Bankruptcy Procedures, USCA
 Bankruptcy Rules and Official Forms, USCA
 Rule 9-27, note 1, Rules of Bankruptcy Procedures, USCA
 cf. especially §§901 and 902, 11, USCA
 Quoted from §943, note 3, 11, USCA
 Quoted from Malagardis, op.cit., p. 68
 §101, 11, USCA, note 63
 prec.§101, 11, USCA, note 61
 quoted from UNCTAD. Trade and Development Report 1986, Geneva: UN 1986, p.142, emphasis mine
 UNCTAD. Trade and Development Report 1998, Geneva: UN 1998, p.127
 Raffer 1989, p.60
 cf. Raffer, Kunibert. Introducing Financial Accountability at the IBRD: An Overdue and Necessary Reform. Paper presented at the Conference Reinventing the World Bank, 14 - 16 May 1999, Northwestern University, Evanston, Ill.; available from http://www.worldbank.nwu.edu or via my homepage. Forthcoming in the conference volume at Cornell University Press, ed. by Jonathan Pincus & Jeffrey Winters
 no. 26/1999 of October 15, 1999, stress in orig.
 v. Raffer,1990, op.cit.
 Krueger, Anne. International Financial Architecture for 2002 ....., op. cit., p.7
 Svendsen, K.E. The Failure of the International Debt Strategy, CDR-Report n.13, Copenhagen: Centre for Development Research 1987, p.27. As early as 1984 the IBRD (Toward Sustained Development in Sub-Saharan Africa - A Joint Program of Action, Washington DC: IBRD 1984, p. 24) wrote that "external financial agencies have shared responsibility" for investments qualified as "genuine mistakes and misfortunes" without, however, calling for financial consequences.
 cf. IMF Survey, August 10, 1987, Supplement on the Group of 24 Deputies' Report, para 58.
 Stern, E. World Bank Financing and Structural Adjustment. In: J. Williamson (ed) IMF Conditionality, Washington DC: Institute for International Economics/ MIT Press 1983, pp. 91ff.
 cf. Raffer, Kunibert. International Financial Institutions and Accountability ..., op.cit., pp.156f; Brazil's IBRD debts increased by 440 million $: the first 240 million $ resulted in considerable environmental damage - Bank officials admitted that they had erred - then 200 million $ were lent to control the damage done by the first loan.
 Republic of Trinidad & Tobago, Ministry of Finance and the Economy. Trinidad and Tobago Government's Relationship with the International Monetary Fund 1988, January 1989 (mimeo). Because of the government's need for the IMF's "seal of approval" to reschedule their debts Trinidad's own expert (K. Levitt) advised them not to "pick a fight" with the IMF (ibid.).
 cf. e.g. Feinberg, R.E. Defunding Latin America: Reverse Transfers by the Multilateral Lending Agencies, Third World Quarterly, vol. 11/ 3, 1989, pp.71ff.
 Raffer, Kunibert. International financial institutions and accountability...., or K. Raffer & H.W. Singer. The Economic North-South Divide ....pp.246f
 Nölling, W. Combating Capital Flight from Developing Countries, Intereconomics, vol.21/3 1986, pp.117ff.
 ILA (International Law Association) Warsaw Conference (1988), Committee on International Monetary Law. Committee Report, p. 9, para 21.
 v. Raffer, 1990, op.cit. pp.305f. and the literature quoted there.
 Pettifor, Ann. Concordats for debt cancellation, a contribution to the debate. Jubilee2000 Coalition UK, 18 March 1999 (mimeo)
 v. Raffer, 1989, op.cit., pp.54ff; a more detailed study of legal risk can be found in Bransilver, E. & E.T. Patrikis, Lending limits and regulatory constraints under US law. In: M.Gruson & R. Reissner (eds) Sovereign Lending: Managing Legal Risk. London: Euromoney Publications 1984, pp. 1ff.
 The argument is presented in greater detail in Raffer, Kunibert. Tax-Deductible Loan Loss Reserves and International Banking: An Economist's Unbiased Analysis, Working Papers in Commerce WPC 91/ 19, Birmingham University, Department of Commerce, The Birmingham Business School 1991
 For more details and literature on the following examples v. Raffer 1990, op.cit. pp. 303f; Raffer 1989, op.cit., pp.59f
 For a brief history of Latin America's debts since independence as well as a comparison between the periods before and after the Bretton Woods Institutions established themselves as "debt managers" see Acosta, Alberto. La increíble y triste historia de América Latina y su perversa deuda externa. In: Chris Jochnick & Patricio Pazmiño Freire (eds) Otras caras de la deuda, Propuestas para la acción. Quito/ Caracas: CDES/ Nueva Sociedad 2001, pp.17ff (as many readers will have noticed, the paper's title is inspired by Gabriel García Márquez)
 cf. Dommen, Edouard. Comment un noble étranger libéra le khédive de sa dette – un conte oriental. In: Choisir (septembre) 1999, pp.26ff.
 Hersel, Philipp. The London Debt Agreement of 1953 on German External Debt: Lessions for the HIPC-Initiative. In: Eurodad (ed.) Taking Stock of Debt, Creditor Policy in the Face of Debtor Poverty. Brussels. Eurodad1998, p.21
 ibid., p.22
 cf. Kampffmeyer, Thomas. op.cit.
 Abs, Hermann J. Das Problem der indonesischen Auslandsverschuldung und Überlegungen zu seiner Lösung. 30 June 1969 (mimeo), p.9
 Abs, Hermann J. op. cit. (emph. mine). As Abs's expert's report has not been published v. the quote in Raffer 1990, op. cit., p. 304.
 Hutchful, E. (ed) The IMF and Ghana, The Confidential Record, London etc: Zed 1987, pp. 273f (Document 60: Finance Minister's Report on Ghana Debt Conference)
 IBRD. Indonesia, Managing Government Debt and its Risks. Washington DC & Jakarta: IBRD, p.25
 Kampffmeyer, Thomas. op. cit.
 Krueger, Anne. op.cit.
 Kampffmeyer, Thomas. p. 52, and p.146, footnote 21
 IBRD. Indonesia, Managing ...... op.cit.
 Schaffung eines Schiedsverfahrens zum Interessenausgleich zwischen Schuldnerländern und Gläubigern, Motion of 22 March 2000 (00.3103 Motion)
 For quotes amply illustrating and proving this point see Raffer, Kunibert. Is the Debt Crisis Largely Over? - A Critical Look at the Data of International Financial Institutions. In: Richard Auty & John Toye (eds) Challenging the Orthodoxies. London & Basingstoke: Macmillan 1996, pp.23ff
 Justitia et Pax. Neue Wege zur Lösung der internationalen Schuldenfrage, Stellungnahme der Deutschen Kommission Justitia et Pax zur Internationalen Schuldenfrage, Bonn, 27 May 1999
 UNCTAD. Trade and Development Report 1998. Geneva: UN 1998, pp.89ff
 ibid., p.91
 ibid., p.130
 ibid., p.21
 ibid., p.19
 ibid., p.30
 Haldane, Andy & Mark Kruger. The Resolution of International Financial Crises: Private Finance and Public Funds, November 2001, p.13 (mimeo). The authors "acknowledge the substantial input and involvement of Paul Jenkins, Deputy Governor, Bank of Canada and Mervyn King, Deputy Governor, Bank of England" (these two gentlemen also wrote the Foreword). One may thus presume that this proposal enjoys support beyond that of its authors.
 OECD. OECD Economic Outlook, no. 65, June1999, p.191
 Krueger, Anne. op. cit.
 ibid., p.7
 ibid., p.8
 Legge 25 Luglio 2000, no.209: Misure per la riduzione del debito estero dei Paesi a piú basso reddito e maggioramente indebitati, pubblicata nella Gazzetta Ufficiale n.175 del 28 luglio 2000
 Fourth Report: International Monetary Fund, ordered by the House of Commons to be printed on 5 March 1997, The Stationery Office, London, Appendix 12, Submission by K. Raffer, pp.159-161
 International Development Committee of the House of Commons. The Effectiveness of EC Development Assistance, 9th Report. Published by Authority of the House of Commons, The Stationary Office, London 2000, Appendix 10: Memorandum Submitted by Professor Kunibert Raffer, Department of Economics, University of Vienna, Austria, pp.79-83
 ACP-EU Joint Parliamentary Assembly. Resolution on ACP-EU partnership and the challenges of globalisation (ACP-EU 2976/A/00/fin), para 24
 ibid., para 26
 CONAIE. Propuesta de solución a la deuda externa - La Confederación de nacionalidades indigenas del Ecuador (CONAIE) a los gobiernos que conforman el Club de Paris", Quito, 10 de septiembre de 2000 (mimeo)
 Jubileo 2000 Red Guayaquil, UNDP & UNICEF. Ecuador: la Deuda con los Pobres, Programa para transformar el servicio de la deuda externa con gobiernos y organismos multilaterales en acciones concretas para la erradicación de la pobreza. 15 August 2000 (mimeo)
 CONAIE. op.cit., p.1
 AFRODAD. International Arbitration Court on Foreign Debt. Document: AFRODAD.IAC.1, 2000 (mimeo)
 Annan, Kofi. Report of the Secretary-General to the Preparatory Committee for the High-Level International Intergovernmental Event on Financing for Development. Final Draft: 8 December 2000, United Nations, January 2001, pp.63f
 The text of this short paper presented by me is available on the UN's homepage - http://www.un.org/esa/ffd/NGO/1100hear/Panel3Statements.htm#raffer or more simply via a link on my homepage http://mailbox.univie.ac.at/~rafferk5 - via Selected Publications
 in page 3 of the document on session 1, very last para. Downloadable from http://www.unescap.org/drpad/fin_dev/reportses1.htm
 Rogoff, Kenneth. op. cit.
 ibid., p.40
 Eichengreen, Barry. Toward a New International Financial Architecture, A Practical Post-Asia Agenda. Washington DC: Institute for International Economics 1999, p.126
 ibid., p.92
 ibid., p.66f
 ibid., p.67
 Raffer, Kunibert. 1990, op. cit., pp.304f
 Dabrowksi, Martin, Rolf Eschenburg & Karl Gabriel (Hg) Lösungsstrategien zur Überwindung der Internationalen Schuldenkrise (Volkswirtschaftliche Schriften, Heft 509), Berlin: Duncker & Humblot 2000
 Frenkel, Michael & Lukas Menkhoff. Neue Internationale Finnazarchitektur: Defizite und Handlungsoptionen. Perspektiven der Wirtschaftspolitik 1(3) 2000, pp.259ff