The first debt restructurings in countries of the Global South following the COVID-19 pandemic have shown that the coordination of the many different creditors hinders a rapid and sustainable solution of debt crises in view of the significantly more complex creditor profiles.
A pattern can be seen both in the restructurings in Zambia and Chad under the G20 Common Framework and in the restructurings in Suriname and Sri Lanka outside the Common Framework: creditors must be persuaded to participate with economic incentives. The cost for involving all creditors is therefore a minimal debt relief. It is questionable whether a sustainable debt situation can be achieved in the countries concerned.
Against the backdrop of this problem, erlassjahr.de – together with Brot für die Welt and Misereor – organized the round table “Bringing all creditors on board!” on 11 December 2023, which brought together politicians, academics and civil society actors. The reform proposals formulated in advance by the organizers provided a basis for the discussions.
How can the private sector be involved in deep debt restructurings?
The first panel dealt with the question of how private creditors can be better involved in deep debt restructurings. Guillaume Chabert, Deputy Director of the Strategy, Policy and Review Department at the International Monetary Fund (IMF), emphasized that, in his view, the existing approaches to involving the private sector were working well.
Other participants, however, emphasized the need to create new binding regulations. These include, for example, a national law to enforce the participation of the private sector:
“[…] a first step, a step forward, is the promotion of this national legislations to prevent uncollaborative private creditors squeezing borrowing countries.”
– Iolanda Fresnillo, Policy and Advocacy Manager Debt Justice at the European Network for Debt and Development (Eurodad)
Dr. Daniel Reichert-Facilides, author of a proposal for a safe harbour law, showed how such a law could contribute to solving debt crises.
Does the preferred creditor status of multilateral institutions need to be reconsidered?
The second panel dealt with multilateral creditors: Although multilateral creditors such as the World Bank play an important role in many highly indebted countries, member states of the Paris Club, among others, are in favor of maintaining the “preferred creditor status”. This means that multilateral institutions are exempt from debt restructurings, i.e. they must be repaid preferentially.
Philippe Guyonnet Duperat, Secretary General of the Paris Club, emphasized the advantages of providing new money as opposed to debt relief by multilateral creditors. Among other things, he pointed out that multilateral institutions would provide financing when other actors do not, and that this function would be jeopardized if they had to accept bad debts.
Dr. Marina Zucker-Marques, a researcher at SOAS University of London, argued that the reality in critically indebted countries should instead be used as the basis for deciding whether multilateral creditors should cancel debts. In many countries, she maintained, debt problems could not be solved without the involvement of multilaterals. Proposals were also discussed as to how a fair burden-sharing with creditors which have demanded high interest rates when granting loans could nevertheless be made possible.
Matthew Martin, Director of Development Finance International, also questioned why debt cancellation through multilaterals is not possible today. He pointed out that it had already been possible to implement multilateral debt relief in the past – without multilateral development banks suffering any damage.
How can constructive cooperation with China be achieved?
The third panel focussed on the People’s Republic of China, the largest bilateral public creditor of countries in the Global South. Through the creation of the G20 Common Framework, China is involved in the joint coordination of public bilateral creditors in debt restructurings.
Participants discussed incentives for China to participate in joint debt restructurings. According to Prof Dr Deborah Bräutigam, Director of the China Africa Research Initiative and Professor of Political Economy Emerita at Johns Hopkins University, this includes China’s demand to guarantee fair burden-sharing between creditors. Dr Robert Plachta, head of the “Debt Restructuring and Paris Club” division at the German Federal Ministry of Finance, emphasised the need to address China’s demands and work towards greater trust between China and other bilateral public creditors.
With reference to Germany’s China strategy, Dr Nora Sausmikat from the China Desk at Urgewald highlighted as a weakness the fact that, among other things, the voluntary commitment to a codified sovereign insolvency procedure from the German government’s coalition agreement was not included in the strategy.
Dr Ahilan Kadirgamar from the University of Jaffna in Sri Lanka questioned the focus on China when it comes to better debt restructurings. According to him, the debt situation of Sri Lanka – a country that has been used by the West as a model example of “Chinese debt trap diplomacy” for many years – is not primarily due to Chinese investments. Instead, he emphasised commercial borrowing, which was promoted by IMF programmes, as a central factor in causing Sri Lanka’s debt crisis.
“If there was any sort of debt trap, it’s an IMF debt trap rather than a Chinese debt trap.”
– Dr Ahilan Kadirgamar, University of Jaffna, Sri Lanka
Creditor coordination – not an end in itself
At the end of the event, Malina Stutz, policy officer at erlassjahr.de, summarised that political will is crucial for solving the complex issues surrounding creditor coordination. She also reminded the audience of the greater goal to which creditor coordination contributes.
“[…] creditor coordination is not an end in itself – the real goal is to ensure sufficiently deep debt restructuring, the real goal is to avoid repeating the mistake of too little too late, the real goal is to make sure that debt is not becoming a trap […].”
– Malina Stutz, Policy Officer at erlassjahr.de
We would like to thank all participants for the constructive discussion and our cooperation partners from Brot für die Welt and Misereor for the successful collaboration!
Report: Manuel Simon, erlassjahr.de