The UK Parliament’s International Development Select Committee has called for legislation to require private lenders to take part in debt relief. In a report into debt crises in lower income countries published today, the Committee said that: “legislation may be required to compel all creditors, including the private sector, to participate in debt relief” and has called on the UK government to “consult on the introduction of legislation to compel or incentivise participation of private creditors in the Common Framework”.[1]
Responding to the report, Heidi Chow, Executive Director of Debt Justice said:
“Instead of profiteering from countries in a debt crisis, banks and hedge should be made to take part in debt relief. The committee recognises that asking private lenders nicely simply doesn’t work. As most bond contracts eligible for the G20 debt relief scheme are governed by UK law, the government needs to introduce legislation that would compel private lenders to cancel debt for countries that need it.”
During the Covid pandemic the G20 created a scheme to suspend debt payments for up to 73 countries. While governments such as China did suspend debt payments, private lenders, including asset managers such as BlackRock, refused. This refusal led to less than a quarter of debt payments being suspended for the countries which applied.[2]
At the end of 2020 the G20 created a scheme to give debt relief, including debt cancellation, not just suspension. But none of the four countries which have so far applied for the scheme have had any debt cancelled, with private lenders holding up the process in Chad,[3] and refusing to cancel enough debt to make it sustainable in Zambia.[4]
The UK has a vital role to play, as 90% of bond contracts of countries eligible for the G20’s debt relief scheme are governed by English law.[5] The other key jurisdiction is New York. The New York State Assembly is considering options for legislation to put pressure on private creditors to take part in debt relief.[6] The IMF and World Bank have both called for the UK and New York to pass legislation to help enable private lender participation in debt relief.[7]
Of external debt payments by low and lower-middle income countries between 2023 and 2029:[8]
- 41% are to private lenders (non-Chinese)
- 33% are to multilateral institutions
- 14% are to other governments (excluding China)
- 12% are to Chinese public and private lenders
Notes
[1] Debt Justice gave written and oral evidence to the inquiry and has seen an embargoed copy of the report.
The press release for the report says “Intervention and/or legislation may be required to compel all creditors, including the private sector, to participate in debt relief.” The detailed recommendation in the report is “The UK Government should consult on the introduction of legislation to compel or incentivise participation of private creditors in the Common Framework, such as those proposed by the World Bank. This should include proposals either:
a) to prevent low-income countries facing debt distress from being sued by private creditors for a sum greater than that those creditors would have received had they participated in the Common Framework; or
b) to make debt restructuring agreements binding for all private creditors, if the agreement is supported by at least two-thirds of private creditors.”
[3] https://twitter.com/tim_jones6/status/1613841238729302016
[7] For example: https://www.reuters.com/markets/europe/world-bank-calls-sovereign-debt-changes-ahead-looming-crises-2022-06-28/
IMF Managing Director Kristalina Georgieva has said: “We also are pressing for some of the changes, legal changes that need to happen in New York, in London, to close loopholes for vulture funds and others to prevent debt resolution. We are discussing how we can bring more contingency measures in debt agreements, how to press for more debt transparency.” https://www.imf.org/en/News/Articles/2022/04/21/tr220421-transcript-of-the-imfc-press-briefing
President of the World Bank David Malpass has said: “Given the depth of the pandemic, I believe we need to move with urgency to provide a meaningful reduction in the stock of debt for countries in debt distress. Under the current system, however, each country, no matter how poor, may have to fight it out with each creditor. Creditors are usually better financed with the highest paid lawyers representing them, often in U.S. and UK courts that make debt restructurings difficult. It is surely possible that these countries—two of the biggest contributors to development—can do more to reconcile their public policies toward the poorest countries and their laws protecting the rights of creditors to demand repayments from these countries.” https://www.worldbank.org/en/news/speech/2020/10/05/reversing-the-inequality-pandemic-speech-by-world-bank-group-president-david-malpass
[8] Calculated by Debt Justice from World Bank International Debt Statistics database.