Private lenders: Why their arguments against a new law don’t stack up  

Banks, hedge funds and asset managers have been lobbying vigorously against proposals to ensure private lenders take part in debt relief. They are using exactly the same arguments as 15 years ago, which were subsequently shown to be false. Their self-interested fake arguments should be ignored, just as they were by the UK parliament in 2010.  

In the UK we are campaigning for legislation to require private lenders to take part in international debt relief. Similar efforts are being made in New York. The UK and New York are crucial legal systems for debt because almost all international debt contracts are governed by one or the others’ laws. 

Both campaigns have made progress in recent months. In the UK, parliament’s International Development Select Committee has called for legislation. In New York, a Bill cleared the Judiciary Committee in May and will continue its progress through the Assembly in January 2024.  

This has led to a counter-campaign from private sector lobbyists. The lobbyists arguing against the legislation have two main arguments.  Firstly, that legislation will increase the cost of borrowing for debtor countries. And secondly, that legislation will lead to debts being contracted under other jurisdictions1

However,  private sector lobbyists used exactly the same flawed arguments against previous UK legislation in 2009 and 2010. The legislation was passed in 2010 –  borrowing costs for debtors did not increase, and UK law continued to be used for loans to lower income countries. 

The 2010 legislation 
In 2009 the UK government consulted on legislation which would prevent creditors suing for more than they would have got if they had taken part in the debt relief scheme of the 2000s. The government resisted the self-interested lobbying of the private sector and passed the Act in 2010. A subsequent review by the government in 2011 said “no evidence has been found of unintended or adverse effects”.2 

The arguments the banking lobby are making now are exactly the same as the arguments they made then, which proved unfounded.  

Private lenders sought to stop the 2010 Act by arguing it would cause financial disaster for lower income countries, as interest rates would shoot up and banks and other finance companies would refuse to lend. For example, in 2009 the private bank lobby group the Institute of International Finance (IIF) – whose members include financial giants such as BlackRock – said: “The IIF cautions HM Treasury against initiating legislation that has the potential to destabilize capital flows to low-income countries without achieving commensurate benefits for those countries.” 3 

Just as banks hid behind trade associations in their lobbying against the 2010 Act, vulture funds and hedge funds hid behind corporate lawyers. Dechert LLP responded to the government consultation on behalf of “a number of [unnamed] hedge fund clients” saying “At best, borrowings by sovereigns organised through the UK, and/or governed by English law, may become less available or, even if available, would be on terms inevitably more onerous for the sovereign.” 

The exact opposite of the financiers’ self-interested warnings happened. Capital flows to lower-income countries were not “destabilised”, did not “become less available” but increased. Loans by private lenders to the 36 countries covered by the Act increased from $3 billion between 2005 and 2009, to $24 billion between 2010 and 2014, and $41 billion between 2015 and 2019.4 This is exactly what  experience suggests happens – once debts have been cancelled, private lenders are more willing to lend because countries are now more able to repay. 

The Emerging Market Trade Association, whose members included Barclays, Deutsche Bank, HSBC and Goldman Sachs, even argued that “restricting market access of low-income countries will condemn them to permanent dependency on concessional aid and cripple their economic growth and development.” 

Again, the opposite happened. Following debt relief in the 2000s, economic growth increased. For the countries covered by the 2010 Act, their economic growth per person averaged -0.7% and -0.3% a year in the 1980s and 1990s, as they were stuck in debt crisis. In the 2000s, per person growth increased to 1.8% as debt relief began, and again to 1.9% in the 2010s. 

The second argument used by private lenders against the 2010 Act was that lenders would move debt contracts to be governed by other country’s laws. The Institute of International Finance told the UK government at the time that the 2010 Act “could damage the reputation of the UK legal system as a reliable situs for resolving international disputes and inhibit the use of English law in international contracts.”

Dechert LLP, the mouthpiece for the hedge funds, said “At worst, and more likely, sovereign lending will be exported to other financial centres where trust in the integrity of their legal systems remains intact.” 

In fact, the use of English law in international contracts if anything increased. 90% of bonds issued by countries covered by the Act since 2010 use English law, and the remaining 10% use New York.5 There is no sign of ‘inhibiting the use’ of English law, given that nine in ten contracts continue to be signed here.  

The private sector lobby must be resisted 
The reason private lenders tried to stop the 2010 Act, and will try to stop current proposed legislation, is because they currently give less debt relief – and so make more profit – than public lenders. This shows why legislation is needed. Private lenders will not voluntarily take part in debt relief, they need to be made to. 

See here for the responses from the 2009 consultation.


[1] In May 2023, the Institute of International Finance, International Capital Market Association, American Council of Life Insurers, The Credit Roundtable, the Investment Company Institute, and the Life Insurance Council of New York put out a statement making these arguments. They said: 
“Our analysis suggests borrowing costs for emerging market sovereigns could rise meaningfully if these laws pass in their current form.” [They didn’t make public any analysis] 
“As the bills will raise the cost of borrowing under New York law, foreign states will respond by issuing bonds in other jurisdictions.” 

[2] https://www.gov.uk/government/news/government-acts-to-halt-profiteering-on-third-world-debt-within-the-uk 

[3] All the responses to the 2009 consultation on debt relief legislation are at: https://webarchive.nationalarchives.gov.uk/ukgwa/20100401165404/http:/www.hm-treasury.gov.uk/consult_debt_relief.htm  

[4] Calculated from World Bank International Debt Statistics 

[5] Calculated by Debt Justice from bond prospectuses.

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