Maybe you remember the Jubilee Movement – the push in 2000 for the debt cancellation of developing countries. Maybe you even participated in the campaign. Full cancellation wasn’t achieved in 2000, but the work has continued with some promising advances – though the vultures can be seen circling overhead.
Two years ago a victory for development was achieved when the Group of Eight major industrial countries, meeting in Gleneagles (UK) decided to cancel the debt owed to the World Bank, the International Monetary Fund and the African Development Bank by 18 impoverished countries. By the same deal, a total of 38 countries could get to benefit from the deal, provided they went through the onerous conditions established under a previous debt reduction initiative that dated back to 1999.
In spite of the narrow boundaries of the initiative, debt cancellation was, no doubt, a big step forward for countries that, year after year, are forced to devote more resources to servicing external debts than investing in health, education, and fulfilling other social needs of their population – key investments for moving from poverty to sufficiency. Unfortunately, lasting effectiveness of the G8 initiative, just as previous debt reduction initiatives, is being compromised by large loopholes in the international economic system. These loopholes now may mean that hard won debt reduction, rather than opening development opportunities to debtor governments, ends up opening profit-making opportunities for other creditors.
Just a few days ago, Zambia, one of the debt relief beneficiary countries, was on the news because Donegal, a British investment company-- was awarded a favorable judgment by a British court to enforce tens of millions of dollars in Zambia debt. As Jubilee USA reported:
In 1999, a 'vulture fund' called Donegal International bought a debt owed by Zambia, originally worth $15 million and then valued at about $30 million, for a knock-down price of $3.3 million. Now it has sued Zambia for the full amount, plus interest and costs – a staggering total of over $55 million! On 15th February 2007, a London court rejected the size of Donegal's claim, but said that under law it is still entitled to something from Zambia… The exact total is to be determined, but may be as much as $20 million.
Vulture funds are able to operate and flourish because the international economic system lacks any incentives for creditors to behave responsibly. In practice, this is the international equivalent of predatory lending in the U.S. housing market, for example.
Incentives for responsible lending can only be provided by an international and binding legal framework where countries whose debts have become unsustainable can have ALL the creditors share the costs of any needed write-off. Only if creditors face the prospect of having to take losses for lending that goes beyond responsible limits will they have a strong enough incentive to be more cautious and responsible in their lending decisions.
Similarly, beneficiary countries are also rapidly building up new debt. This is because official creditors, such as export credit agencies and some emerging countries—prominently China—, are lured by the freshly low debt levels of debt relief beneficiaries, and are willing to lend to them large amounts at market-based interest rates.
It would be disingenuous to think these developments could not be foreseen. Granted, the “emerging creditors” factor is rather new and may be deemed a surprise. But lawsuits by private creditors – notably “vulture funds” – and commercial lending by Export Credit Agencies have routinely undermined debt relief benefits in the past. “Free riding” by creditors not participating in a debt relief/cancellation scheme is the consequence of a skewed incentives structure that is embedded in the international economic system. However, with enough political will and leadership by the members of the international community, the continuation of this perverse dynamic could be stopped.
For the time being though, political will and leadership are glaringly absent. Countries awarded debt relief face the perverse choice of either refusing much needed capital for their development that nobody else offers on affordable terms or breaching prudent debt limits. Creditors that have neither participated in debt reduction schemes nor lent at concessional rates are encouraged to take unfair financial advantages of those who have, by lending at market or even higher interest rates.
However, change is in the air. The Center of Concern in coalition with our colleagues in the Jubilee movement, has developed key initiatives to address some of these concerns. To learn more about debt cancellation legislation before Congress and what you can do to stop the vulture funds, please visit http://www.jubileeusa.org/.
Posted by Aldo Caliari, Director, Rethinking Bretton Woods Project