Don't forget the developing country debts

Article as analysis
The European debt crisis is causing a worldwide stir. It is relegating the precarious debt situation of many developing countries to oblivion. The call for a regulated and fair procedure to resolve impending state bankruptcies remains topical.

Greece's debt mountain and the drastic savings measures being forced upon other highly indebted southern European countries have grabbed the world's headlines. Moreover, a statement by Christine Lagarde, the Head of the International Monetary Fund (IMF), only added to the furore. She said that Greece could presumably solve its own debt problems, were it not for the billions being spirited abroad to avoid taxation. The renowned US research institute Global Financial Integrity has since confirmed her statement. The same is also true for many developing countries.

But owing to the numerous headlines on the euro crisis, their enormous debt burden has faded into oblivion. When little Belize declared itself to be partly insolvent in August, not even the economy section of the leading conservative Swiss newspaper «NZZ» reported it. The European media are conveying the impression that the debt problems of poor countries are water under the bridge.

Regrettably, things look different in reality. In a resolution on the debt crisis, the UN last December expressed concern that many developing countries were still suffering from a huge mountain of debt and were showing a rapidly growing risk of insolvency on the back of the global financial crisis.

Developing country debt burden

Indeed, a list recently published by the International Monetary Fund showed that 15 of 68 low-income countries studied were at risk of imminent state bankruptcy and four countries were already partly unable to pay. In their 2012 debt report, the German non-governmental organizations and Kindernothilfe, which study not just low-income countries, indicate that several middle-income countries as well are in serious danger and are on the verge of a profound debt crisis.

What is ominous is that about one-third of the countries threatened with insolvency are in this awkward situation despite having had a considerable part of their old debts cancelled under the multilateral HIPC debt reduction initiative. Other countries at risk of insolvency do not even qualify for such debt reduction. This is why the above-mentioned UN resolution underlines that in addition to the debt initiatives so far taken, further action is urgently needed to come to grips with the debt problem over the long term.

The countries at risk of insolvency include several partner countries in Switzerland's development cooperation and humanitarian aid programmes. These include Laos and Tajikistan, in which the State Secretariat for the Economy (Seco) is engaged, as well as nine others in which the Swiss Agency for Development and Cooperation (SDC) is present.  There is the danger in these cases that the development progress to which Switzerland is contributing could be quickly cancelled out again by a worsening of the debt situation. This further underscores the challenge facing Switzerland to work internationally towards a lasting and sustainable solution to the debt problem (see the short text below).

Added to this is the fact that numerous developing countries are still heavily weighed down by odious debts, which are debts incurred by authoritarian and corrupt governments and which brought no benefits whatsoever to the populations concerned. Unfair debts can also arise, however, when creditors exploit a country's desperation to grant new and overly costly credits on atrocious terms. Civil society organizations the world over are making the case for such debts to be identified by means of «debt audits» and cancelled.

Suggested solutions

The multilateral HIPC debt reduction initiative has brought initial relief to many developing countries. That is not enough, however. To help avoid future debt crises, lenders and borrowers alike must play by certain rules. It was for this reason that the European Eurodad NGO network last year published a charter for responsible lending and the African partner network Afrodad put out a set of criteria for responsible borrowing. Since then, the United Nations Conference on Trade and Development (UNCTAD) has incorporated various proposals into its draft for an internationally binding set of rules.

It would also be crucially important to introduce an insolvency procedure for over-indebted countries. The absence to date of any such clear, rules-based procedure means that insolvencies generally unleash utter chaos. Debtors and creditors then start haggling over who should renounce what part of the debt. To avoid or at least stall the haggling and head off further economic turbulence, the governments concerned often contract further loans, driving themselves deeper into debt. This costs money, creates uncertainty and cancels out significant development progress. Proposals as to what a fair and transparent insolvency procedure for States should look like have long been on the table. It is high time they were translated into policy.

More information:
European Network on Debt and Development (Eurodad)