UN Second Committee, 10 October 2008

Debt Restructuring in Low-Income

Countries: problems and possible
solutions

Dr Geske Dijkstra
Erasmus University Rotterdam
 Why such a long debt crisis
in low-income countries?

• 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
 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 agreement
Usually 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
 Net transfers on debt, Sub-Sahara
Africa, in US$ billion

14 Bilateral plus grants

12 Bilateral
Multilateral
10
Private
8
6
4
2
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
-2
-4
 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

120 90-99 00-06

100

80

60

40

20

0 Ben Bol BF Cam Gam Gui GB Guy Hon Mad Mw i Mal Mau Moz Nic Nig Rw a STP Sen Tan Uga Zam
 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 • IDA grants, not loans
• IMF Conditionality: • IMF:
– Conflicting roles – Gatekeeper only: PSI
– Problem of contents of – Proposed: International
conditions: IMF arbitrage, no funds (Bolton
represents donors and & Skeel)
creditors, lack of • Better:
accountability
– More limited role IMF in
• Vulture funds poorest countries
– Independent arbitrage
• Changes in legislation
creditor countries