why such a long debt crisis in low-income countries?
DESCRIPTION
Persistent country characteristics (bad policies) → low growth and high debts → debt relief → bad policies Moral hazard with debtors (Easterly) High debt and low growth → debt relief → more loans ( moral hazard with creditors) and, through conditions, bad policies → lower growth. - PowerPoint PPT PresentationTRANSCRIPT
UN Second Committee, 10 October 2008
Debt Restructuring in Low-Income Countries: problems and possible solutions
Dr Geske DijkstraErasmus University Rotterdam
Why such a long debt crisisin low-income countries?
• Persistent country characteristics (bad policies) → low growth and high debts → debt relief → bad policiesMoral hazard with debtors (Easterly)
• High debt and low growth → debt relief → more loans (moral hazard with creditors) and, through conditions, bad policies → lower growth
Overview
• Debt restructuring in 1980s and 1990s, and problems
• 1999 HIPC initiative and 2006 MDRI did not resolve these problems
• New problems in recent years with DSF, vulture funds
• Possible solutions
Creditor responses to debt problems in 1980s & 1990s
• Private creditors: no new loans, writing-off• Official creditors, bilateral and multilateral:
– Maintained fiction of lack of liquidity, not solvency
→ Combined rescheduling with new loans and grants
– IMF agreement always condition for rescheduling
Bilateral creditors: Paris Club
• Rescheduling of debt service, with increasing percentages of forgiveness during the 1990s
• But only on debt service due during period of IMF agreementUsually ESAF, 3 years
• No stock cancelations
Effects of debt relief,Evaluation in eight countries
Limited effects on stocks and flows
Causes:
• Debt relief too limited
• Wrong modalities: mostly on flows, not on stocks
• Too many new loans, mainly from multilateral development banks
-4
-2
0
2
4
6
8
10
12
14
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
Bilateral plus grants
Bilateral
Multilateral
Private
Net transfers on debt, Sub-Sahara Africa, in US$ billion
Moral hazard
Multilaterals were preferred creditors, so were bailed out by bilaterals
→Inefficient use of aid money of bilaterals
→Moral hazard with IFIs, so more new loans
→Perpetuation of debt unsustainability
IMF agreement as condition
• IMF three roles: gatekeeper, creditor and arbitrage: financing gap→Always new agreement in countries with high multilteral debt→ More new multi-loans → No selectivity, adverse selection→ Weakened position of debtor, dragging on of debt problems
• Uncertainty for debtors• Conditions not always appropriate
Changes with HIPC, 1999
• More debt relief, more cancellation instead of rescheduling
• But:– Not enough for debt sustainability
Financing by bilaterals→ Moral hazard continued
– Conditionality became more extensive than ever
→ Uncertainty and adverse selection continued
22 HIPCs: Average share of multilateral loans in total new loans
0
20
40
60
80
100
120
Ben Bol BF Cam Gam Gui GB Guy Hon Mad Mw i Mal Mau Moz Nic Nig Rw a STP Sen Tan Uga Zam
90-99 00-06
Multilateral Debt Relief Initiative(MDRI) 2006
• Debts reduced for HIPC graduates• But: same conditionality → uncertainty
continues for other potential HIPCs• Debt sustainability?
– Not all creditors included, vulture funds & litigation: free riding on international agreements
– Domestic debts– New foreign loans, so ...
Debt Sustainability Framework(DSF)
• Criteria: size of debt, plus policies, measured by CPIA
• Consequences:– Lower expected sustainability → more IDA
grants → new adverse selection– Additional conditionality on new borrowing:
sanctions
Conclusions: (persistent) problems
• World Bank (IDA) loans: still moral hazard, perpetuate debt problems
• IMF conditionality continues– Some countries still no access to HIPC– Leverage IMF increased: budget support
• New problem: Free riding by vulture funds
Problems and solutions
• Moral hazard WB• IMF Conditionality:
– Conflicting roles– Problem of contents of
conditions: IMF represents donors and creditors, lack of accountability
• Vulture funds
• IDA grants, not loans• IMF:
– Gatekeeper only: PSI– Proposed: International
arbitrage, no funds (Bolton & Skeel)
• Better:– More limited role IMF in
poorest countries – Independent arbitrage
• Changes in legislation creditor countries