A new debt crisis around the corner?

Katarina Sehm Patomäki

The first debt crisis occured when Mexico defaulted on its loans in 1982. Despite numerous initiatives on debt relief both from the international institutions (most recently the HIPC (Heavily Indebted Poor Countries) - initiatives of the World Bank) as well as from other groupings (Clubs of London and Paris) and some governments (as late as two weeks ago from the UK in preparations for the G8 meeting) the debt managing system of the developing countries is largely the same as it was in 1982. During this same period of time, the actual debt burden of developing countries has grown around 2,5 - 3 times.

One can draw the conclusion that the debt relief programmes have not yet brought about necessary debt relief. As UNCTAD's recent research shows, due to falling commodity prices and increased debt burdens, there will most likely be a new and severe debt crisis in 5-10 years from now. Some estimates show that this time period will be shorter, and the crisis deeper if interest rates rise. The same UNCTAD research also shows that only 1,5 % of the ODA (Overseas Development Assistance) of the OECD-countries go into trade and development. If one combines this with the often quoted comparison that for every one US dollar that goes from the rich countries to the poor countries, four come back in debt service and other payments, it is clear that the global south is heading even deeper and steeper into an economic quagmire.

As Jurgen Kaiser of Jubilee Germany pointed out at a recent meeting on debt arbitration organised by AFRODAD in Lusaka, Zambia, that based on the recent HIPC analysis by the World Bank, it is clear that the indebted poor countries will have to loan more to cover their present loan servicing costs. From the angle of the international financial institutions, this means that the institutions keep "throwing good money after bad" with vanishing hope of ever receiving payments for the original credits.

Kunibert Raffer is a professor in economics at the University of Vienna. In 1987, he first suggested that the Chapter 9 Insolvency Law of the US Code could be applied to international debt. Chapter 9 is a "procedure for solving the insolvency of a governing body, a Muncipality, without violating or undermining its governmental power. Applied to sovereign countries, the law would not violate sovereignty of the state". In explaining the essence of a Fair Transparent Arbitration Process, Kunibert Raffer cites UN Secretary-General Kofi Annan who, in describing the role of the UN in the 21st century, suggested a "debt arbitration process to balance the interests of creditors and sovereign debtors and introduce greater discipline into their relations".

The global debt movement, earlier embodied to a large extent in the Jubilee 2000 movement, succeeded in raising the debt issue on the political agenda. The message of the movement was to "cancel third world debt". One way to took at the HIPC-program is to say that it in a way was the result of the global mobilisation around the debt issue in the mid 1990s. However, the HIPC is not a mechanism for debt cancellation and the overall results of the HIPC has been much criticized. Today, it is largely perceived that the HIPC will not ease the debt burden as hoped.

However, not everyone feels comfortable with debt arbitration either, much because it is seen as a function of declaring oneself (the country on question) insolvent, which in turn is perceived as humiliating. These organisations who do not support debt arbitration (the Jubilee South, for instance, an offspring to the Jubilee 2000 movement) speak for debt cancellation - full stop.

Northern NGOs and proponents of debt arbitration process/mechanism counter the demands for immediate debt cancellation by saying that also cancellation must happen as a result of a process and by some form of mechanism. There are examples of successful situations similar to debt arbitration (for instance Germany in 1953) where a German banker had de facto the authority of an arbitor as creditors were willing to follow his views. This situation arose according to some because the large debt burden was seen as hindering the development of commercial interests in Germany at that time. However, rather than commercial interests, Kunibert Raffer points out that "behind this development are indications that the Versailles treaty following the Word War I had led to the rise of Hitler and the repetition of this scenario was very much seen as advisable". In any case, this German experience suggests that debt arbitration would not disrupt international lending to the country involved in an arbitration process.

A Fair Transparent Debt Arbitration Process (FTAP) could be carried through as an ad hoc, cheap and immediate mechanism. Once the debts of the poor countries have been arbitrated, the FTAP process could be transformed into a Fair Transparent Debt Arbitration Mechanism (FTAM) that could be set up on a permanent basis within the UN system (one alternative being with the UNCITRAL, the UN Commission on International Trade Law).

In recent years, the organisations who work actively on the debt problem have not been mushrooming. However, within this past year, a number of strategizing sessions and meetings on the situation of the debt campaign have taken place, indicating a revived interest in the issue. These meetings have been hosted by, for instance, the World Council of Churches in Geneva, Switzerland (June 2003), the Third World Network in Penang, Malaysia (2004), Afrodad in Lusaka, Zambia (September 2004), CADTM in Liège, Belgium (early October 2004), and the European Social Forum in London, UK (mid-October 2004). Most of these meetings have issued proceedings in some form.