6 months after the official announcements of debt cancellation for the countries of the South: Where do we stand?

 1. Factual Background

In February 2020, the Covid-19 epidemic, which so far had been limited to a few countries, officially became a global pandemic. The financial and stock markets values, already in great difficulty since the fall of 2019, collapsed in the wake of the epidemic. The health crisis is coupled with an economic and financial crisis on an unprecedented scale impacting countries of the South in all sorts of ways, so that international financial institutions and other major bilateral creditors have come together to develop various plans to avoid serial defaults which would be against their interests.

At the end of March 2020, the World Bank, the IMF and the G20 communicated the implementation of emergency financing measures for developing countries. There would thus be no cancellation per se

At the end of March 2020, the World Bank and the IMF communicated the implementation of emergency financing measures for developing countries. Then they called on G20 countries to meet and coordinate to implement bilateral debt relief initiatives. There would thus be no cancellation per se.

After coming together, the G20 countries called on the 22 bilateral creditors in the Paris Club to establish a Debt Service Suspension Initiative, or DSSI, for the 73 IDA countries [3] - the poorest countries eligible for financing from the International Development Association, one of the five subsidiaries of the World Bank Group - that will apply for it. If they comply with several conditions, the volunteers selected by the Paris Club will then see the repayment of their bilateral external debt (including principal and interest) due in May-December 2020 be deferred and added to the repayments due between 2022 and 2024.

 2. Bretton Woods Institutions (BWI) measures

The IMF/World Bank’s invitation to bilateral creditors was ironic. In fact, neither institution has or will cancel multilateral debt (public debts owed to multilateral institutions such as the BWIs and other development banks). On the contrary, the measures set out below apply only to developing countries that are not in arrears with their payments.

Putting forward the argument of its solvency and a potential downgrading of the sovereign debt ratings of the countries concerned, the World Bank has instead sided with the financial markets and creditors

Putting forward the argument of its solvency and a potential downgrading of the sovereign debt ratings of the countries concerned, the World Bank has instead sided with the financial markets and creditors, players who also finance it through its bond issues. Rather than a cancellation, the World Bank will increase its leverage “up to $160 billion over the next 15 months to help countries protect the poor and vulnerable, support businesses, and bolster economic recovery”, [4] all either in the form of grants (in a small proportion) or loans (in most cases). In fact, since the beginning of the crisis, the poorest countries have repaid more to the World Bank than they have received in aid from the Bank. [5]

The IMF’s strategy is broadly similar. [6] It has made available US$100 billion in emergency financing in the form of concessional and non-concessional loans. As of September 15, 2020, 80 countries had subscribed to these loans for a disbursed amount of US$87.9 billion. [7] At the same time, it proposed 28 countries a “false” cancellation of debt service owed to the IMF between April 13 and October 13, 2020. The operation consists of the creation of a “Disaster Assistance and Response Trust Fund”, funded by IMF member countries, [8] which would be paid back to these 28 countries in the form of grants and then directly redirected to the repayment of debt service owed to the IMF. The snake bites its own tail. This artificial aid, $251 million, [9] represents less than 1 percent of the total external debt payments of low-income countries in 2020... For both measures, the IMF said there was no need “to have a full-fledged program in place”. Later in the text, however, it calls on governments to implement “appropriate policies to address the crisis”. [10] In other words, a structural adjustment package that the IMF is suggesting governments should implement. The IMF did not fail to show its lack of political neutrality by refusing a $5 billion loan to the Venezuelan government in open conflict with the United States, while a few weeks later it granted $24 billion to Chile, currently presided over by Sebastian Piñera, former World Bank president, a country that has been undergoing massive mobilizations against austerity and precariousness since October 2019. At the same time, some fifteen countries have seen IMF financing, including adjustment measures, extended. [11]

As World Bank Managing Director David Malpass said at the end of March, the aim is to “reassure markets”, to “those countries that have excessive regulations, subsidies, licensing regimes, trade protection or litigiousness as obstacles, we will work with them to foster markets, choice and faster growth prospects during the recovery” [12] amidst the scandal of the institution’s Doing Business report. [13]

 3. Southern countries disavow the Paris Club

On the bilateral creditors’ side, the Paris Club launched the DSSI. Aimed at 73 countries, only 39 had applied for it by early September, 9 are awaiting the Club’s decision, while the remaining 30 have had their bilateral debt service to Club members deferred between 2022 and 2024. [14]

The low level of subscription to DSSI points to the complete disavowal of the countries of the South against the Club and its increasingly obsolete solutions

The low level of subscription to DSSI points to the complete disavowal of the countries of the South against the Club and its increasingly obsolete “solutions”. Despite the exceptional nature of the situation, the DSSI remains far below the already inadequate HIPC initiative launched in 1996. In return for deferring payment of their debt service due to the Paris Club between April and December 2020, i.e. a maximum of 0.4% of the public external debt of the so-called developing countries, countries must complete a letter of request for DSSI addressed to the Paris Club/BWI duo, in which they commit to not having any arrears to the BWIs while extending or subscribing to an adjustment program with the IMF.

Threats applied by rating agencies and private creditors, aimed respectively at downgrading their sovereign ratings and limiting future investments, may certainly partly explain this low subscription. Only in part, because the possibility that the Paris Club, which is almost always a minority creditor for these countries, could postpone 8 months of repayment in return for close IMF surveillance is not very attractive. France, which is trying to restore the Paris Club’s former influence, [15] has understood this by inviting the G20 countries to extend the ISSD to 2021. Without success for the moment. China, often the main creditor of these same countries, either directly or via its private satellites, continues to go it alone, without being more generous in terms of cancellation. [16]

 4. Where are the private creditors?

Neither calls from the BWIs nor meetings between the Club and representatives of the IIF have succeeded in convincing private creditors to concede any cancellation

In addition to 50% of poor countries flouting the Paris Club’s offer, private creditors are also on the receiving end. In spite of the privileged links between these two categories of actors, officially or behind the scenes of power and interest games, the Paris Club has met with failure. Neither calls from the BWIs nor meetings between the Club and representatives of the International Institute of Finance (IIF) have succeeded in convincing private creditors to concede any cancellation.

It is true that usually, if not always, the Paris Club and the BWI have the habit of paying them back before any debt restructuring operation. With the policy of money printing and other liberal stimulus plans applied by the major Western central banks since the beginning of the crisis, coupled with their position as majority creditor, one quickly understands how little interest they would have in showing humanity and compassion. Unless they are forced to do so...

 5. The countries of the South must unite

We notice a significant increase in public external debt, debt servicing at levels not seen since 2004, some twenty countries in default, rising interest rates, considerable bond debt repayment deadlines, end of the commodity super cycle, depreciation of national currencies against the US dollar, severe slowdown in growth, investment downturns and capital flight, falling revenues, reduction in foreign exchange reserves, uncertain future, all in a context of a health, economic, ecological and even food crisis requiring increased spending.

By putting debt back into the public, and therefore political, sphere, the states of the South would have considerable legitimacy to form a united front against debt payments and force creditors to sit around a negotiating table

In spite of the economic situation, the southern states have not received any significant support from creditors and informal influential groups (G7, G20).

In the absence of cancellation measures, it is necessary to shift the debate on sovereign debt settlements, which has become inaccessible and inaudible today because it focuses on technical issues. Debt is above all political. The States of the South have solid arguments for suspending and repudiating payments. Force majeure, a state of necessity or a fundamental change of circumstances, these three elements are invocable in international law. Contrary to the position supported in particular by the Senegalese economist Felwine Sarr, [17] it is necessary to move away from the moralist discourse that makes debt repayment a matter of honor. If it does not benefit the population, debt can be repudiated. Citizen audits could shed light on the unsustainable, illegal, odious or illegitimate nature of the debts with regard to the use of the borrowed funds or the opacity of the contracts established with the shared complicity of the signatories. It is also necessary to get out of the blackmail exercised by private creditors and rating agencies. It is not acceptable that these actors can brandish financial threats and thereby exclude themselves from any sovereign debt cancellation operation.

By putting debt back into the public, and therefore political, sphere, the states of the South would have considerable legitimacy to form a united front against debt payments and force creditors to sit around a negotiating table. While the EU and the US have been able to release US$2.5 trillion to support their economies since the beginning of the crisis, writing off the US$3 trillion debt of the 135 countries of the South, or 83% of the world’s population, does not seem to be an insurmountable obstacle.

Proofreading of the translation: Christine Pagnoulle