TWN Info Service on WTO and Trade Issues (July09/03)
07 July 2009
Third World Network

Conference panel calls for debt moratorium and arbitration system
Published in SUNS #6729 dated 29 June 2009

New York, 26 Jun (Meena Raman) -- Avoiding a new external debt crisis in developing countries has become a high-profile issue at the UN conference on the economic crisis, with prominent members of a roundtable calling for a debt moratorium and the setting up of an international court for debt arbitration and restructuring.

The Secretary-General of the UN Conference on Trade and Development (UNCTAD), Dr. Supachai Panitchpakdi, and South Centre Executive Director Mr. Martin Khor both warned that a significant number of developing countries would develop difficulties in servicing their debt during the crisis, and called for the short- term measure of debt moratorium and a structural measure of establishing an international system of debt arbitration in which countries with debt difficulties can declare a standstill and seek the restructuring of their debt.

Both Supachai and Khor also stressed the need for the issuing of special drawing rights (SDRs) on the basis of need, so that developing countries facing revenue shortfalls can have immediate recourse to financing.

They were speaking in one of four roundtables being held at the UN conference on the global financial and economic crisis. The roundtable was on "Coordinated and collaborative actions and appropriate measures to mitigate the impact of the crisis on development" held on 25 June.

The roundtable was co-chaired by Mr. Jean Asselborn, Deputy Prime Minister and Minister for Foreign Affairs and Immigration of Luxembourg and Mr. Tongloun Sisoulit, Deputy Prime Minister and Minster for Foreign Affairs of Laos. Other members of the panel included Ms. Noeleen Heyzer, Executive Secretary of the UN Economic and Social Commission for Asia and the Pacific (UN-ESCAP), Mr. Robert Johnson, former Chief Economist of the US Senate Budget Committee and Mr. Yaga Venugopal Reddy, former Governor of the Reserve Bank of India.

Supachai said that developing countries faced a $2 trillion shortfall in financial resources through the outflow of capital and from the fall in export revenues. Fiscal revenues will continue declining and even with recovery, there will be a long spell of anaemic growth.

He said that there has also been new borrowings by almost all countries. In the richest economies, the IMF prediction is that public debt will reach 106% of GDP. It will go up in the next couple of years. There could be an increase in debt of $9 trillion in three years.

There would be a dire situation in terms of public finance. There are three possible options to deal with this: allow inflation and keep printing money to meet the requirements; default on the debt and intensive competition in the debt market which will crowd out finance to developing countries.

There is need for measures to deal with this. There is need to address how to deal with vulnerable economies. About 90 developing countries may have debts beyond 100% of their GDP. The growth of GDP must be higher than the growth of debt-servicing if these countries are to avoid a problem. There is need to create more fiscal space so that countries can keep on advocating fiscal stimulus and they should be able to save on foreign exchange earnings, not for servicing debt but for payment of imports.

In calling for a debt moratorium, Supachai said that this has been done before during Hurricane Mitch (in Central America) and the Asian tsunami, and should be allowed during this crisis. He added that in 1998, UNCTAD had come out with a report on a debt-sustainability exercise which can be fair and impartial to regulate debt resolutions. The missing link is a system to deal with so-called sovereign debt insolvency.

Supachai referred to an international system that is needed, like that at the national level in the US, where there is Chapter 11 of the US Bankruptcy Code. This system involves a country obtaining a debt standstill from the court, which arranges a debt restructuring. This proposal, made by UNCTAD, was later also proposed by the IMF, and this issue should now be discussed again. Instead of limiting discussions to the IMF and the World Bank, the UN and its agencies should also be involved.

On the pledges of the G20, he said there was need to see what has been done to the $1.1 trillion given to the IMF, the World Bank and the regional development banks. There is lack of clarity on how the funds would be allocated from the IMF, as there were countries that would prefer not to go to the IMF right away because of the imposition of pro-cyclical conditionalities.

On the issue of special drawing rights (SDRs), if one deals with it by normal allocations (through quotas), then the intention of the mobilisation of financial resources would be missed out. Hence, SDRs should be based on the needs of countries.

Supachai also said that members should not be misled by remarks about the emergence of green-shoots as an indication of economic recovery. While there may be some improvement in the stock markets and the beginning of lending again by some banks in the US, if one looks at the economic indicators, the economy is far from recovering. Looking at indicators relating to real estate, the job market and international trade, we are very far away from green-shoots.

There needs to be caution in speaking about green-shoots, so that there is no step back from taking measures in relation to fiscal stimulus. When tackling the financial recovery, all effects of the stimulus measures should not be measured in terms of financial recovery but in terms of decent job creation.

On the issue of the rising tide of protectionism, Supachai said that the G20 had said that it would not resort to such measures. However, almost all countries have gone back on their commitments, being involved in economic nationalism or protectionism. There has also been renewal of domestic subsidies in some sectors and export assistance that could come close to the violation of WTO rules.

Martin Khor said that the developing countries which have had no role in causing the financial crisis have suffered the most collateral damage, with a loss of 7 percentage points of gross national income, as their economic growth is expected to fall from 8.7% in 2007 to 1.6% in 2009 on average. The so-called emergence of "green-shoots" does not apply to developing countries which are predicted to take a long time to recover.

With the $1-2 trillion external financing shortfall in developing countries, a new debt crisis is imminent. These shortfalls in revenues must be met by developed countries. This is not an issue of morality or charity but is an obligation of the developed countries, as the debt crisis is not through the fault of developing countries. Khor said that this re-financing should be non-debt creating and should be regarded as compensatory financing from developed countries and international finance.

Given the "grant-fatigue" of developed countries, one proposal is for the creation of new SDRs for developing countries, paid on the basis of need and not quotas. An allocation of $100 billion of SDRs should be allocated to low-income countries at no cost. This is quantitative easing at the international level. For other developing countries, there can be another $800 billion of SDRs that is allocated on the basis of need on a reversible basis, i. e. after the crisis, the SDRs are given back.

Khor said that the suggested amount of $100 billion for low-income countries was very low compared to the amount provided for bailouts and fiscal stimulus in developed countries. He estimated that bailout and fiscal stimulus in the US, amounting to about $3 trillion, comes out to about $8,000 per person, while the $100 billion for low-income countries would only mean an amount of $70 per person.

Khor agreed with Supachai that there was an urgent need for a debt moratorium and an international debt arbitration system, which he said, was a crucial part of the international financial system reform.

There are four components to such a system: a country applies for a debt standstill; a court organises an agreement between creditors and the debtor country; there is a write-down on the debt; and new financing is provided to the debtor, so that the country is economically viable again. This system is being applied in the bankruptcy procedures of Chrysler and General Motors, and if the principles can be applied to companies, then they could also be applied to countries in debt difficulties.

Khor added that developing countries also need policy space for undertaking fiscal stimulus measures, ensuring sufficient foreign exchange reserves, preventing financial instability and speculation. There are currently many barriers that constrain this policy space such as the loan conditionalities of the Bretton Woods Institutions, and provisions in the free trade agreements (FTAs).

The FTAs were concluded during a time when there was a different policy framework. Some of the provisions are obsolete such as those which oblige the partners to have unregulated capital flows and reductions in tariffs that could lead to loss of government revenues and widen trade deficits, which worsen the conditions of developing countries facing the crisis.

Khor said that reforms to the international financial system should include governance and policies of the IMF and World Bank, the regulation of financial markets and capital flows, strengthening of surveillance over policies of systemically important countries and the creation of a new reserves system that relies more on the SDRs.

Khor stressed the need for coherence at international level in terms of economic governance. For example, gains made in the trade area can be wiped out by gyrating foreign exchange rates and thus, there should be a coordinating body addressing the problems of policies pulling in different directions. The UN is the best place for addressing the coherence issue through the creation of an economic working group or council. The follow-up to the UN conference was important and there was need for urgency on some issues such as avoidance of the debt.

UN-ESCAP Executive Secretary Dr. Noeleen Heyzer said that 60 million jobs are expected to be lost in Asia by the end of the year due to the crisis. The average growth rate in the region decreased from 8.8% in 2007 to an estimated 2.8 % this year. She said that unlike previous crises, developing countries cannot trade themselves out of this.

What was needed was to evolve homegrown policy responses to promote domestic and regional sources of demand. Fiscal stimulus packages must target the poor who are unable to cope. There was need for a regional financial architecture. Reform of the international financial architecture should also include a new global reserves system.

Robert Johnson, who also served on the UN commission of experts chaired by Prof. Joseph Stiglitz, said that the IMF and the World Bank are institutions that embody a vision and a flawed model that believed in the existence of a perfect market with perfect competition. Because it was flawed, debtors and creditors are reluctant to come to the door of a physician who does not understand the disease.

On the provision of SDRs, Johnson said that he had been concerned for years that the volatility of international capital markets had led many countries to accumulate US dollar reserves and this had a deflationary impact on the US economy. Although there is a reluctance in the US to see the emergence of an alternative reserves currency, many countries think that a balance of commerce is very different from a balance of savings (reserves).

There is need for re-balancing the dollar overhang in a balanced way. In future, a reform will diminish the need for keeping reserves, but SDR allocation is an improvement and he hoped that the US will study this carefully.

Yaga Venugopal Reddy, who is also a member of the UN commission of experts, said that crisis management should be viewed in the context of development. If a country has limited resources, it has to balance satisfying the bondholders with protection of the poor and fostering of development. He added that finance is only a means, but the financial sector developed excesses such as excess leverage which must now be corrected. We cannot avoid the fundamental requirement of removing the excesses.

When the international community proceeded with the globalization of finance, the assumption was that capital will move from North to South to help development. This did not happen. Now, we are faced with a situation in which the developed countries are using more financial resources to recapitalise. Alluding to this drawing capital away from developing countries, Reddy said this has to be managed. He added that developing countries need to manage their capital accounts, and especially in relation to the management of their debt.

There is increasing recognition that financial regulation should be counter-cyclical. Financial regulation cannot be viewed in isolation and has to be linked with fiscal and monetary policies in an integrated manner. Thus, the relations between the institutions dealing with financial regulation, and fiscal and monetary policies have to change and be coordinated.

On the international coordination of financial regulation, Reddy cautioned that it is difficult to have the same regulation for all countries. There should be international coordination over systemically important institutions and countries, but not over developing countries in general, which should adhere to national regulations with some minimal guidelines.

There is a need for re-balancing between states and market, between the financial and real sector, and between the financial sector and fiscal and monetary sector and institutions, whether for preventing or managing crises.

Reddy also emphasised the importance of policy space for national governments, as global institutions and governance have not kept pace with the globalization of finance. If the global governance is not there, each country should have the policy space to formulate its own national policies.