Source:
erlassjahr.de
Jürgen Kaiser
Thu Oct 19 2006
On Aug. 15th and 16th 2006 debt campaigners, public officials and academics met for a seminar sponsored by ILDIS in Quito in order to discuss experiences of successful debt reduction efforts by some debtor countries, contrasting them with experiences of other countries, which had continued to service a foreign debt which must often be considered as neither sustainable nor legitimate. The aim of the seminar was to gather best practices, and identify elements of a successful strategy to reduce a sovereign’s foreign debt.
On the positive side, the experiences of Nigeria (2005) and Argentina (2004) were presented by Jaime Delgadillo of UNCTAD and Alejandro Vanoli, representing the Argentinean think tank "Grupo Fenix", respectively. Filomeno Santa Ana co-ordinator of "Action for Economic Reform" in Manila presented the negative experiences of the Philippines, which never seriously confronted creditors for debt relief beyond a Brady deal in the 1980ies. Participants, who in their majority were Ecuadorean, added Ecuador’s experiences with a strategy of paying the debt at any price, ever since the country went into financial turmoil in 1999.
The following is a summary digest of the four cases discussed and the major lessons learned through those historical experiences.
Elements of a succesful strategy:
• Countries need to negotiate out of a situation of default.
Creditors will not be prepared to provide concessions as long as the country does not demonstrate factually that it is unable and unwilling to pay up. Nigeria limited its payments to the Paris Club members to US-$ 1 bn annually. However, multilateral and commercial creditors’ claims were serviced faithfully. This "selective default" strategy already indicated that the country would go for a reduction by its PC creditors, which held some 80% of all claims. London Club creditors are now being approached for a reduction of their claims in line with the "comparable treatment clause" in the Paris Club agreement with official creditors.
Comparably, Argentina failed to obtain any debt relief from its bondholders, before it defaulted in 2001.
• Countries need to have strong internal structures for the negotiations.
Nigeria created the national Debt Management Office (DMO) in 2000. The DMO was to become the key actor on the Nigerian side during the negotiations. Before, responsibility for the external debt, its recording, payment and negotiation strategies had been split between a multiplicity of institutions.
• Debtors need to clean up their own houses, in order to enhance credibility in international negotiations.
In Nigeria an internal auditing process was launched in 2004. It scrutinized the debt management operations and procedures. Given the extremely poor image of Nigerian institutions of the time, the auditing was commissioned to the Auditing Office of South Africa, which not only contributed substantially to the quality of results, but also to the process’s respectability. One important measure adopted by the Nigerian government on the fiscal front was the establishment of an "Excess Crude" account to capture extra budgetary revenues in a transparent manner. Additionally the first time ever publication of revenue allocations and payments from the central to the state governments improved Nigeria’s bargaining position, because it allowed ordinary citizens at least in theory to follow-up those financial flows, which traditionally are a hotbed of internal corruption.
The creation of credible anti-corruption institutions and spectacular arrests of people in Nigeria have underlined the government’s credibility. Strong action on the debtor side can even have positive repercussions among creditors. It has been reported that the Prodi government has started a law project in order to investigate the role of Italian banks in the process of the Argentine bonds sale; it thus paid tribute to the fact that Italian small investors were particularly involved with hot Argentine paper, while investors in f.i. France or the UK were not.
• Debtors need to find a "Godfather" on the creditor side, who will support their efforts in critical phases.
In the Nigerian case the British government with the personal prestige of chancellor Gordon Brown assumed this role. From technical to political support the British were instrumental in overcoming the Paris Club’s deadlock. Argentina did not have such a deliberate support.
• Debtors need to demonstrate that they are not going for a free lunch, but offering a fair deal to creditors.
Although fiercely criticized by creditor organizations at first, the 75% haircut was finally accepted by the majority of the Argentine bondholders. They obviously preferred a settlement, which would provide them with quite some security that 25% would actually be paid up (i.e. converted into credible official paper). Nigeria reached a breakthrough when it made clear that it would make its oil windfalls available for reaching a settlement.
• There must not only be one and final offer.
Debtors can lead creditors to accept compromises, if they start with strong demands, which they are prepared to use as tokens in their negotiations. Argentina outlined its major position in its Dubai proposal of 2003. That one met with overall rejection from creditors as expected. The government then declared Dubai would not be substantially altered; subsequently it then gave in on some minor issues, which let the broad line of Dubai appear as an acceptable compromise.
Comparably the Nigerian government suggested to the Paris Club a buy-back at market prices, which would not have been substantially different from what later on became the final agreement. However, the proposal, leaked informally at the Spring Meeting of the WB/IMF 2004, served to facilitate a solution that would formally ignore proper Paris Club procedures and thus put the Club as an institution into question. Against this scenario Club members then agreed to a broad quantitative outline of the proposal, although up to then they had upheld that Nigeria would not qualify for a partial write-off, particularly in its position as the world’s eighth largest oil exporter.
• Parliaments can play a key role, if they actively become part of the country’s negotiation strategy.
Particularly, they can strengthen the government’s position by legally preventing any backing-off. The Argentine "Ley Cerrojo" forbade the government to improve the final offer made to its bondholders. Although the law has certainly not been passed against the will of the Kirchner administration, it drew the government’s negotiators out of the creditors’ fire. In Nigeria parliament played a comparable role by limiting the amounts, which the government would be allowed to spend on debt service towards Paris Club creditors. Moreover some prominent MPs played an active role in explaining Nigeria’s debt strategy to key creditors.
By contrast, congresspeople in Ecuador never bothered to deal more intrinsically with the external debt problem; known for their strong inclination towards clientelist politics, they were largely confined to securing funding for their respective constituencies.
• Public opinion is not negligible.
In Argentina 85-90% of the public supported a strategy of non-payment. This has to do with the suffering of huge parts of the poorer population due to the failed economic strategies of the Menem and subsequent interim administrations, of which the foreign debt was a paradigmatic element. The Kirchner administration succeeded in deepening this sentiment and converting it into popular support for its strategy. Nigeria’s public debates on the foreign debt were less clear-cut, but went basically in the same direction.
Thus governments are well advised to explain their strategies to the broader public at home, and seek support beyond Parliamentary decisions.
• Countries need to develop a strong economic policy beyond the traditional recepies of the IFIs, in order to not be dependent on either their advice nor their financing.
Argentina experienced an economic recovery since 2002 making several "heterodox" policies that were rejected by the IMF, like capital controls, multiple exchange rates, continued low rates for utilities, continued high levels of public spending and others. The economic recovery triggered by Argentina’s own politics is a critical element in order to increase domestic power in the negotiation without being limited by conditionalities associated with the IMF programmes.
In a less confrontational form, the Nigerian NEEDS program did also bear the political potential of such a “home-made” strategy, which helped strengthen the government’s position at home as well as in the negotiations.
Elements of failures:
• A domestically weak government will not be able to confront creditors.
In the Philippines some governmental sectors in the 90ies suggested a stronger drive for debt relief, partly related to the questionable legitimacy of debts stemming from projects like the Bata’an nuclear power plant. However, President Aquino was keen to secure international support against strong domestic opposition from the left and the extreme right and thus was not prepared to rock the boat with the creditors. Paradoxically, this was presented as an effort to secure continued inflows of hard currency at times, when there were no inflows at all.
• Godfathers can be harmful.
In the Philippines the US government played a very strong role at the times when a more vigorous debt strategy was considered. Different from the constructive role the UK played in Nigeria (see above), US influence strongly discouraged the Philippine government from taking tougher measures.
• Personal integrity and ambitions of debt negotiators are an issue and can undermine a debtor country’s stance.
In the Philippines, the finance and Central Bank officials were closely linked to national and international finance capital. And they had the same worldview, training, and culture, as their counterparts on the creditors’ side.
About Ecuador it was reported that people who negotiated with (bilateral) creditors were likely candidates for employment by the IFIs and other prestigious and well-paying institutions controlled by the country’s creditors. Therefore their personal commitment towards taking a tough stance against creditors was limited. It was demanded by conference participants, and in fact has already been debated in some countries, that negotiators should be banned from taking jobs with the IFIs for a period of, say, 10 years. However, there has not been any serious attempt to implement such restrictions anywhere yet.
A rare case of IFI staff moving into key positions of the debtor side, has been the Nigerian Finance Minister Ngozi Okonjo-Iweala, a former senior staff at the World Bank, who used her prestige at the Washington-based institutions to garner technical as well as political support for her country’s strategy.
More generally the influence of the hegemony of creditors’ world views in the training of economists and DMO staff worldwide must not be underestimated. Top staff often receives training in the US or other major creditor countries and thus do not tend to question the legitimacy of pay-up strategies.
Not exactly a strategy element
• IFI’s roles in debt management are not always clear-cut, but reflect the multiplicity of the institutions’ roles towards indebted countries.
In the HIPC process, the IFIs tend to overstate the debtors’ incomes, in order to reduce the necessary amount of debt relief, of which the institutions themselves have to provide a major share. In the countries discussed at the conference, the IFIs assessments tended to be interest-driven as well, however with a less clear focus:
The IMF gave a very positive outlook on Argentina’s overall growth expectations for the coming years, putting it at 4%, while average annual growth over last 60 years has been 2%. This obviously was meant to make the proposed swap more acceptable for creditors, as they should assume that repayment of the remainder of the claims would be all the more safe. This, however, had consequences for the sustainability of the stand-by programme between the Fund and Argentina, which ultimately led the Kirchner government to its cancellation.
With contributions from Filomeno Santa Ana, Alejandro Vanoli and Jaime Delgadillo. This article was first published in the Debt Watch list serve by Eurodad.
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