What they say: “The rise in global debt vulnerabilities is of concern and I can assure you that HM Treasury, supporting the FCDO, are doing all that we can to holistically address this. The UK is actively pushing for progress on debt issues at the G7, G20, Paris Club and the newly-convened Global Sovereign Debt Roundtable, which for the first time brings together creditors, borrowers, the private sector and International Financial Institutions in one place. In these fora we recognise the need to deliver not just on individual debt treatments, but to tackle cross-cutting issues like transparency and how to ensure restructurings happen as efficiently as possible.“
What we say: The G20 created a debt relief scheme in late 2020. Four countries have applied for the scheme since, none have had any debt cancelled.[1] Zambia has been waiting two-and-a-half years and counting.
On transparency, the G20 endorsed a private bank scheme in 2019 for banks to voluntarily disclose the existence of their loans to lower income country governments. In the four years since, only two banks have disclosed any loans, and only six loans have been disclosed in total. This helps highlight how voluntary action by banks does not work – if you want them to do something, they need to be made to do it.
What they say: “On the topic of private sector debt, specifically the Paris Club, and now the G20 as part of its commitment to coordinate on debt treatments under the Common Framework, are clear on our collective expectation that private creditors must participate in restructurings on terms at least as favourable as those provided by the official sector (sovereign creditors). This has always been the case for Paris Club debt treatments and has in the past functioned effectively. I therefore welcome the formation of bondholder committees for the current Common Framework cases, whose engagement to date indicates a willingness to constructively participate in these restructurings.“
What we say: Engagement to date shows no willingness by private lenders to participate in debt restructurings. In the last two-and-a-half years of negotiations, no private lender has agreed to cancel debt through the G20 debt relief scheme. Under the previous G20 debt suspension scheme, private lenders refused to suspend debt payments, while governments, including the UK and China, took part.
In Chad, Glencore delayed the negotiations while continuing to be paid in full. In Zambia bondholders have refused to accept the IMF’s Debt Sustainability Assessment, the basis for the debt relief deal, using this to hold up negotiations.[2] Zambia’s largest bondholder, BlackRock, has refused to even respond to the Zambian Civil Society Debt Alliance’s request that they cancel some of the debt. In Ethiopia, bondholders have proposed lengthening the maturity of the debt by five years while keeping the interest rate the same, which would increase Ethiopia’s total debt payments and bondholder profit.[3]
Outside of the Common Framework, in Suriname bondholders have reached a debt restructuring deal which reduces the interest rate from a ridiculously high level (9%+) to just a high level (7%+), plus they will receive 30% of future oil royalties. This means the bondholders still stand to make large profits. Moreover, the terms of the new debt are still less generous than the original loans from governments such as China, showing that private lenders are not being made to make the terms of their debt as favourable as sovereign creditors.
During the previous round of debt relief in the 2000s, the private sector did not willingly take part in debt relief. The UK government therefore passed the 2010 Debt Relief (Developing Countries) Act to make them.
Academic research has found that the private sector have received better deals than governments in past debt restructurings. One piece of research concludes that “Private creditors are typically paid first and lose less than bilateral official creditors”.[4]
What they say: “The UK Government’s work on private debt has focused on enhancing the so-called ‘market-based’ approach to private debt restructurings, rather than approaches that would ‘force’ private sector participation, such as legislation. Beyond the potential unintended consequences that legislation could have for access to finance, it is worth noting that under 50 per cent of debt contracts are drawn up under UK law, so any move to legislate would in any case likely result in contracts simply being drawn up less transparently elsewhere.“
As has been continually made clear by the private sector’s failure to give adequate debt relief, or make its loans to governments transparent, the market-based approach has failed.
Just under 50% of international debt contracts are governed by UK law, with the other 50% governed by New York law. However, for countries covered by the G20 debt relief scheme, 90% of their contracts are governed by UK law. Moreover, the New York Assembly is currently considering legislation similar to that we propose in the UK. They are more advanced than the UK government and parliament – the UK needs to catch-up with them.
English and New York law are used by lenders because of the long case law history – there would be huge risk for lenders to move to a different legal system. Following the introduction of the UK Debt Relief Act in 2010, lenders did not stop using English law. In fact, of bonds issued by countries covered by the Act since 2010, 90% use English law, and 10% New York[5] – the same proportion as for lower income countries more generally.
The Treasury clam that legislation could have “unintended consequences” for “access to finance” is not based on any facts or research. This would not happen for the following reasons:
1) One of the legislative options we are calling for replicates the UK’s 2010 Debt Relief (Developing Countries) Act, but updates it to apply to the current G20 debt relief initiative (the 2010 Act applied to the debt relief initiative of the 2000s, which has now largely ended). This legislation requires private lenders to take part in debt relief agreed by the IMF and implemented by the G20, on the same terms as governmental lenders.
The UK Act did not lead to lenders providing less finance. In fact, in the 2010s 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.[6] A 2011 review of the Act by the Conservative-Liberal Democrat government found that “no evidence has been found of unintended or adverse effects” from the introduction of the Act.[7]
2) The other legislative option we are calling for replicates existing English law for corporate debt restructurings. The existence of this legislation for corporate debt has not led to loans to corporations ending. Having clear systems for restructuring debt down to a sustainable level is a key part of our economic system, but it is an aberration that this only exists for corporate debt and not government debt.
3) The evidence from the IMF and ratings agencies such as Scope Ratings is that effective debt relief does not lead to lenders being unwilling to lend, but actually regains access to lending for countries in debt crisis. A problem for countries in debt crisis at the moment is that they cannot borrow more from private lenders, because those lenders are unwilling to lend to countries with unsustainable debts. But once debts have been reduced, the evidence is lenders are willing to lend again.
Scope Ratings has said: “If an economy’s debt sustainability is adequately enhanced via public and private sector debt relief, this could support stronger market access and lower borrowing rates longer term, and with this, potentially a stronger credit rating long term.”I[8]
This has continually been seen in individual cases such as Argentina, Greece and the 36 lower income countries which had significant debt cancelled in the 2000s.
The IMF has said:
“debt restructurings have often been too little and too late, thus failing to re-establish debt sustainability and market access [new loans from private lenders] in a durable way”[9]
ie, it is the absence of effective debt relief mechanisms which is preventing new lending from taking place.
4) Current debt crises in lower income countries have been driven by excessive high interest lending. The current system where private lenders can avoid debt relief, and get bailed out when debt problems arise, incentivises them to continue to act recklessly. Instead, if a clear system existed for them to be included in debt restructuring, it would incentivise them to lend more responsibly. More responsible lending would help prevent future debt crises and ensure the money that is lent is well used. The IMF has found this has not been the case with recent loans:
“Access to international [debt] markets has often coincided with worsening debt dynamics and greater vulnerabilities … [for] 20 countries that accessed international bond markets for the first time after 2005, [their] debt service to revenue ratios rose consistently… This is to be expected but growth rates in the five years afterwards have typically not picked up, contributing to weaker internal debt dynamics.”[10]
Our proposed legislation would not stop private lenders giving new loans. But it would incentivise them to be more responsible, and so help to prevent debt crises in the future.
What they say: “The Government’s position is in line with a paper that the International Monetary Fund wrote in 2020, which concluded that the market-based approach has generally functioned well in recent years, most notably since the introduction of enhanced Collective Action Clauses in private bonded debt.”
What we say: The IMF is governed by rich country governments, so has a vested interest in protecting rich country creditors, such as banks and hedge funds. However, the IMF does not regard the system for debt relief as working well and has repeatedly over recent years said that debt restructurings happen too late and cut debt by too little. They have also specifically called for legislation to help borrowers negotiate debt relief with private lenders.
Head of the IMF 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.”[11]
Head 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.”[12]
The need for legislation has also been supporting by African governments. African Finance Ministers have called for “major sovereign debt issuance jurisdictions to require enhanced collective action clauses and enhanced force majeure clauses in all sovereign debt contracts and to implement comprehensive anti-vulture fund legislation in major creditor countries”.[13]
What they say: “These contractual clauses work by allowing a qualified majority of bondholders to bind the minority to agree to amendments to payments terms – including across bond series. However, the paper also made recommendations on areas where this approach could be enhanced. As part of our G7 Presidency in 2021, the UK established a Private Sector Working Group that took heed of these recommendations and delivered a set of contractual innovations that, if adopted widely, will make restructurings more efficient and equitable.”
What we say: There are two main forms of debts owed by governments – bonds, and other forms of loans.
The contractual clauses the UK government refer to allow a vote of 75% of holders of a particular type of debt to agree a debt relief deal, which is then binding on 25% of the other owners of the debt. At the moment, these clauses only exist in bonds.
Until recently, each clause was individual to a bond issuance, which means private lenders who are less willing to give debt relief can buy up blocking stakes in individual bond issuances. Because of this problem, following the Greek debt crisis in the 2010s, clauses were put in new bonds which allowed for a vote across owners of all the bonds with that clause. But because these have only been added recently, they are not much use in response to current debt crises. For example, Zambia has three bonds, but only one with the enhanced clause. So, there will be an individual vote for each bond as to whether to accept a debt relief deal, allowing holdout creditors to easily buy-up a blocking stake in a particular bond.
For debts other than bonds, there are no such clauses. In Zambia, 51% of its debt to private lenders is bonds, and 49% is other forms of loans.
The “Private Sector Working Group” was set up by the UK to see if these clauses could be added to other forms of private loans than bonds. None have yet been added, so they are no use in addressing existing debts. Even if they are added, they will not enable one vote between bondholders and other forms of debt, just increase the number of votes and parties a debtor has to negotiate with.
In contrast, the UK has law for corporate debt restructurings which allows a Court to look at the general support for creditors to a debt restructuring deal and enforce it on unwilling creditors. Given this law exists for companies in debt, there is no reason it could not exist for governments.
What they say: “Finally, to address the points your constituents raise on Pakistan, I would like to highlight how the UK is contributing to efforts to help manage the devastating impact of floods there. In addition to technical assistance, we contributed £26.5 million in aid, while the DEC Pakistan appeal has raised over £42 million from the British people, which includes £5 million of UK Aid Match funding from the FCDO.”
This year Pakistan is spending £62 million a day making external debt payments. Twice as much money leaves Pakistan in debt payments each day than the UK government is giving in total in response to the horrific floods in the country.
[1] Chad did complete the scheme but got virtually no debt relief. Chad’s one private creditor – Glencore – delayed the negotiations while continuing to be paid in full. In autumn 2022 Glencore agreed to move some debt payments due in 2024 into the future, and the G20 concluded that this was enough ‘debt relief’.
[2] https://www.reuters.com/world/africa/zambias-bondholders-slam-imf-debt-relief-targets-arbitrary-2022-09-14/
[3] https://www.reuters.com/world/africa/some-investors-offering-ethiopia-maturity-extension-2024-bond-sources-2023-02-23/
[4] https://www.nber.org/papers/w25793
[5] Calculated by Debt Justice from World Bank International Debt Statistics database and individual bond prospectuses.
[6] Calculated from World Bank International Debt Statistics
[7] https://www.gov.uk/government/news/government-acts-to-halt-profiteering-on-third-world-debt-within-the-uk
[8] https://www.scoperatings.com/ScopeRatingsApi/api/downloadstudy?id=d89d0b31-d96a-4cfb-a7a7-6558e499080d
[9] https://www.imf.org/external/np/pp/eng/2013/042613.pdf
[10] https://www.imf.org/en/Publications/Policy-Papers/Issues/2020/02/05/The-Evolution-of-Public-Debt-Vulnerabilities-In-Lower-Income-Economies-49018
[11] https://www.imf.org/en/News/Articles/2022/04/21/tr220421-transcript-of-the-imfc-press-briefing
[12] https://www.worldbank.org/en/news/speech/2020/10/05/reversing-the-inequality-pandemic-speech-by-world-bank-group-president-david-malpass
[13] https://www.uneca.org/eca-events/sites/default/files/resources/documents/com2023/E_ECA_CM_55_6_E.pdf page 30