There is now widespread consensus within the international finance and development communities that a new wave of debt crises is unfurling. Global debt is reaching new peaks in all regions and across all country income groups. Middle-income countries are experiencing debt levels not seen since the ‘lost decade of development’. While debt sustainability in developing countries is considered by UNCTAD to be ‘deteriorating fast’. As of August 2019, the IMF estimates that 47 per cent of low-income countries are currently at high risk or in debt distress.
Against this deteriorating debt outlook, the persisting weaknesses of the current disorderly, opaque, and inequitable way in which sovereign debt crises are resolved, is being increasingly exposed.
As it stands, there is no systematic process under which sovereign debt restructurings take place and no possibility for a country to restructure its entire debt stock in one place and in one comprehensive procedure. There is no bankruptcy code for countries to discharge legally their debt and they can only secure debt relief with the voluntary agreement of their creditors.
Indebted countries are instead subject to a ‘non-regime’, characterised by ad hoc operations that have evolved through trial and error, and that are driven by the needs and interests of creditors and spread across a fragmented landscape of opaque, informal creditor forums. This has too often resulted in long, drawn-out situations of sovereign indebtedness, characterised by serial restructurings, and for which populations have paid a heavy price in eroded human rights and stalled development.
The deficiencies of this ‘non-regime’ are only intensifying in view of the changing dynamics of sovereign debt: from the emergence of new bilateral and non-traditional commercial lenders; to the growing use of bonds, collateralised lending, and leveraged private finance in development; and not least, the ongoing threat of aggressive litigation by vulture funds. And they starkly underline why the necessity for a multilateral sovereign debt workout mechanism can no longer credibly be ignored.
International efforts to develop and agree upon a such a mechanism must be renewed. To stimulate and inform these efforts, Eurodad along with 33 partner CSOs, who together represent more than 1500 individual organisations, have set out 10 key principles that we see as essential to the functioning of any mechanism that genuinely seeks to overturn the shortcomings of the current ‘non-regime’, and that will ensure a timely approach to orderly, fair, transparent, and durable crisis resolution.