Tuesday, May 26, 2009

Need to think about the upcoming debt crisis in 2015

In this One Page, Paul Ladd argues that it is time to think about restructuring debt that the developing countries will owe to the international financial institutions as they will be forced to borrow money, due to the global financial crisis, to meet domestic development expenditure. Putting an international mechanism in place for sovereign debt restructuring now will help avoid situations the culminated to multiple rounds of debt reliefs such as HIPC and MDRI in the past.

If developing-country debt problems come to a head once again—including because of how the international community is responding to the current economic crisis—we will need a new way of addressing the problem. A second round of debt relief schemes based on creditor largesse will lack credibility. The scene is set once again for an idea that almost reached fruition in 2003, albeit in an imperfect form. An international mechanism for sovereign debt restructuring, which includes provisions for temporary moratoria on debt servicing, could provide a better means of restructuring unpayable debts in a way that is fairer, more transparent and more efficient for the creditors, the indebted country, and its population.

To be effective and comprehensive, however, any such arbitration mechanism would need to cover the claims of the World Bank and IMF. These are not covered by the recent introduction of “collective action clauses” in sovereign bonds.

The time to put in place such a mechanism is before a new debt crisis emerges, not when the waters start to get choppier. Otherwise, 2015 may be remembered as the year that a new debt crisis emerged, rather than the year in which we celebrate achieving the MDGs.

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