The panel during the G77 event on debt restructuring. Credit: G77/IPS.

By Tharanga Yakupitiyage and Lyndal Rowlands
UNITED NATIONS, Nov 8 2016 (IPS)

Despite many developing countries facing a very real risk of falling into debt crisis – the current options available to assist countries to manage their debts are surprisingly lacking.

This scenario formed the basis of discussions on Monday 31 October at a Group of 77 (G77) seminar on “Sovereign Debt Vulnerabilities and the Opportunity for a New Debt Workout Mechanism building on the UN General Assembly process.”

“The challenging fact is that many countries…remain vulnerable to debt crises,” said Thai Ambassador and G77 Chair Virachai Plasai in his opening address.

Other speakers at the event echoed Plasai’s sentiments, during discussions moderated by Ambassador Ruben Zamora permanent representative of El Salvador to the UN.

“The dramatic fall in commodity export prices and historically low interest rates have been key ingredients for a scenario which shows disturbing similarities to the build up phase of the third world debt crisis of the 1980s which cost in many countries a ‘lost decade of development’,” said Ambassador Sacha Llorenty, Permanent Representative of the Plurinational State of Bolivia to the United Nations.

Ambassador Llorenty was also the Chair of the United Nations General Assembly Ad Hoc Committee on Sovereign Debt Restructuring Process that resulted in  the adoption of UNGA resolution 69/319 that approved the nine UN principles for sovereign debt restructuring processes.

Speakers also noted that underlying issues, which contributed to previous debt crises, have not been adequately addressed.

“The root of the debt problem has not been tackled or solved therefore the debt crisis should be on the top of the policy agenda,” said Bettina Luise Rürup, Executive Director, Friedrich-Ebert-Stiftung New York Office.

Executive Director of Jubilee USA Eric LeCompte echoed these sentiments noting the importance of preventative measures:

“Financial crisis is a recurring problem. Unless we have something in place that actually is a preventive measure for crises, we are going to see crises become worse and we’re going to see no particular ways to protect vulnerable populations,” he said.

Dessima Williams, Special Advisor of Implementation of SDGs in the Office of the President of the General Assembly noted that despite debt forgiveness efforts for the world’s poorest countries in the 1980s and 1990s debt has again begun to increase since the global economic crisis.

Williams also noted that debt is not only owed to other governments and development banks, but that “a large share of debt is owed to the private sector.”

Marilou Uy, Director of the Secretariat of the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development (G-24) also noted that increasing private sector debt could be a potential cause for concern:

“A particular worry expressed in the recent International Monetary Fund fiscal monitor … is that while government debt has remained moderate the debt of the corporate sector across major emerging markets has risen sharply in the past few years.”

However despite the serious threats debt crises pose to sustainable development, currently the international mechanisms that exist to address the problem are remarkably lacking.

In his keynote address, American Economist Joseph Stiglitz told delegates at the G77 event that these issues stem from the lack of a sound financial structure.

“The current non-system is flawed and doesn’t work,” he stated as he called for a new debt restructuring process.

Existing “gaps” in the international financial and legal systems have created opportunities for entities such as vulture funds to take advantage of distressed developing nations undermining any progress towards a new debt structure, Stiglitz noted.

Meanwhile, as LeCompte pointed out, governments which fall into debt crisis are unable to declare bankruptcy, since bankruptcy is a measure which is only available at the domestic level.

Previous rounds of debt forgiveness have also proved to be only temporary fixes.

Raphael Otieno, Director of Debt Management Programme, Macroeconomic and Financial Management Institute of Eastern and Southern Africa, said that many African countries “started accumulating debt very aggressively,” after previous rounds of debt forgiveness.

Debt increases in countries like Angola and Ethiopia are “very worrying,” said Otieno.

Meanwhile, the measures imposed on countries to manage their debts can also be financially crippling, as Isidro López Hernández, Deputy and Spokesman on the Audit of Public Debt, Assembly of Madrid, Spain explained. “We are tied in a sort of metal cage,” said Hernández, noting that when the government in Spain has even minor a surplus this must be directed back into debt repayment rather than investing in Spain’s future.

A Fair Debt Workout

Plasai urged for the creation of a “fair, speedy and efficient debt workout” that involves close collaboration between debtors and creditors to resolve unsustainable debt levels.

In order to restore debt sustainability, Stigliz called for the implementation of a “soft law regime” based on the UN General Assembly’s principles on debt restructuring adopted in 2015. These international principles of laws will help encourage cooperation and a “healthier environment” for debtors and creditors, said Stiglitz.

LeCompte echoed similar sentiments, highlighting the importance of laws around responsible and sustainable lending and borrowing.

“We need to figure out, at the United Nations, how do we start to move [debt restructuring] into soft law, how do we start to create a framework and structure that allows…for problems to be worked out in a more responsible way,” he told IPS.

While the threat of debt crises can have significant negative impacts on development, speakers at the event also acknowledged that sustainably managed debt levels can also be beneficial for governments seeking to achieve the Sustainable Development Goals.

“Borrowing is an important tool to finance sustainable development investments. Debt financing can support growth and smoothen the business cycle,” said Nabeel Munir, Deputy Permanent Representative of Pakistan to the United Nations and Vice-President of the Economic and Social Council.

“At the same time, debt needs to be managed prudently,” said Munir.

There sentiments were echoed by Dian Triansyah Djani, Permanent Representative of Indonesia to the United Nations and Chair of the Second Committee at the 71st session of the UN General Assembly:

“I think most people in this room agree that sovereign borrowing is crucial in supporting government to finance investment, particularly in this time, to achieve sustainable development,” said

“At the same time however, it is also equally important to manage the sovereign debts,” said Djani

“We have witnessed one too many instances in which the debt default of one country could put the growth of the global economy into a halt, and hamper efforts to attain its development course.”

However as Ambassador Llorenty noted in closing remarks:

“(Although) the current scenario makes the effort of working towards a statutory framework for debt crisis resolution very relevant, (it is) not feasible in the short term.”

“Nevertheless,” he said, the current General Assembly process is a “step in the right direction.”

The Caribbean Debt Network meets in Grenada. Credit: Bernard Lauwyck

By Eric LeCompte
WASHINGTON, May 5 2014 (IPS)

Last Fall, I witnessed the Grenada Council of Churches insert themselves into negotiations between their government and the International Monetary Fund (IMF) around the island’s debt restructuring and presumed austerity policies. Religious leaders called from pulpits across the tiny island for a “Jubilee” or national debt cancellation.

When I recently returned to the Spice Isle, I was awed by what I saw – the religious experiment in Grenada was spreading like wild fire to other Caribbean countries."Our churches are on the front lines of fighting poverty in the Caribbean. We see how the debt crisis is hurting the poorest people on the islands." -- Presbyterian Minister Osbert James

At Blessed Sacrament Catholic Church, overlooking the Caribbean Sea, the Caribbean Council of Churches, four Catholic Dioceses and various religious leaders from across the region gathered to launch the Caribbean Debt Network.

They came from St. Vincent’s and The Grenadines, Barbados, Dominica, Trinidad and Tobago, Jamaica and Grenada, knowing their unity is more vital than ever.

Out of the 20 most heavily indebted countries in the world, six are Caribbean countries.

The islands are dotted with makeshift shacks, where depending on the island, 20 percent to 50 percent of the population lives in poverty. Various islands see high unemployment rates from 30 to upwards of 50 percent.

Like dominoes, island after island is going through International Monetary Fund IMF debt restructurings that demand austerity policies that hurt millions of people living in extreme poverty.

Among most Caribbean tourist areas, you can’t avoid the working poor.

In fact, the plight of the vulnerable along with infrastructure challenges are so palpable on the small islands, you scratch your head wondering why the IMF calls these countries “Middle Income.” When a poor country is defined as Middle Income, they cannot apply for existing debt relief processes such as the Heavily Indebted Poor Countries Initiative or HIPC.

The process by which economists define a country as Middle Income is by averaging the total income of everyone in the country (per capita). In other words if 99 people make one dollar and one person makes 100,000 dollars, the average income per person is 1,001 dollars.

In a place like Grenada, where the poverty rate ranges from 38 to 50 percent, the income levels are skewed. The religious community uses the words “social sin” to describe how income inequality is hidden from us as struggling Caribbean economies are denied relief because of what they are called.

Even with HIPC, any poor country will tell you it’s not a walk in the park. The IMF and other international financial institutions acknowledge that the process offers too little debt relief, too late, with too many benchmarks. However, when struggling economies go through the painful act of debt restructuring without even the framework of HIPC, it’s wrangling a hurricane.

And real hurricanes are real threats. In 2004, 200 percent of Grenada’s GDP was wiped out in three hours by Hurricane Ivan. With powerful hurricanes landing every 10 years and financial crises in other parts of the world impacting the Caribbean’s primary industry of tourism, countries across the region seem destined for never-ending cycles of austerity and debt.

“Our churches are on the front lines of fighting poverty in the Caribbean. We see how the debt crisis is hurting the poorest people on the islands,” notes the new chair of the Caribbean Debt Network, Presbyterian Minister Osbert James.

James’s historic cathedral, among many structures unrepaired since the 2004 Hurricane, still lacks a roof.

While it’s still too early to assess Grenada’s debt restructuring, we can see that the Jubilee model is opening up shop on other Caribbean islands.

At Blessed Sacrament Catholic Church, the regional Caribbean religious leaders launched the new coalition in a conference room aptly named The Upper Room. For Christians, it evokes Pentecost when the Holy Spirit empowered religious leaders to inspire others. Pentecost is derived from the more ancient Jewish holiday, Shavuot, which celebrates the gift of our covenant with God and God’s abundance.

At the founding conference last week, the religious community sought to spread Pentecost and Shavuot. They resolved the following:

1. To raise the awareness of the effects of the sovereign debt on Caribbean Countries

2. To establish a structure within which our countries can resolve indebtedness fairly

3. To build a Jubilee coalition to achieve debt resolution, sustainable development and fiscal responsibility at all levels

4. To illustrate how sovereign debt impacts issues of concern, such as human trafficking, drug trafficking, climate change and HIV/Aids.

5. To work with governments and with our international partners on all aspects of debt

6. To encourage the Governments of Grenada and Antigua & Barbuda to champion the cause of a special initiative for resolving Caribbean indebtedness to achieve a sustainable debt level

Eric LeCompte is the Executive Director of Jubilee USA Network and serves on UN expert working groups that focus on debt restructuring and financial reforms. He recently returned from Grenada where he supported the launch of the Caribbean Debt Network.

After Hurricane Sandy struck Jamaica a year ago, critics say the country's recovery was hampered by the IMF budget. Credit: European Commission/cc by 2.0

By Samuel Oakford
UNITED NATIONS, Nov 18 2013 (IPS)

On May 23, shortly after wrapping up negotiations on the International Monetary Fund’s (IMF) 958- million-dollar loan – its second in three years – to keep Jamaica out of default, the fund’s mission chief in the country, Jan Kees Martijn, set out to visit Croydon, a former plantation settlement in the mountainous northwest of the island.

Also in Croydon that day was Verene Shepherd, professor of social history at the University of the West Indies and chair of the national reparations commission."There’s been a lot of talk about the new IMF... but what they are still pushing is from 15 years ago.” -- Jake Johnston

Shepherd was recording her weekly radio show, “Talking History” – she was marking the anniversary of the hanging of Samuel Sharpe, leader of the slave rebellion of 1831-32 – when she ran into Martijn being led through town by the local chamber of commerce.

The phlegmatic Dutch technocrat listened as Shepherd discussed the brutal history and economic legacy of slavery, one difficult to compute in dollars and cents (though Shepherd has, at 7.5 trillion dollars), but something that many in the region feel should at least footnote every budget shortfall and each emergency loan taken.

“I tried to tell him that you are looking at the end result of colonisation,” Shepherd told IPS. “It’s easy to say ‘you’re independent now, stop complaining’ but it’s very hard to distance what is happening now from the past.”

Though Shepherd was aware that in October Jamaica would be one of 14 Caribbean countries to sue Britain, France and the Netherlands for slavery reparations, she wished Martijn well, and the IMF team continued on to their heritage tour.

A towering crisis

Since 1990, there have been 37 debt restructurings in the Caribbean, a problem critics say international bodies like the IMF are woefully unprepared to tackle.

Barbados, Belize, Jamaica, Antigua and Barbuda, Grenada, St. Kitts and Nevis, and St. Lucia all have public debt higher than 80 percent of GDP; in Jamaica the figure is 143.3 percent.

Already this year, bondholders in Belize took 10-20 percent cuts, and in St. Kitts and Nevis, investors have seen 50-percent “haircuts” on their principal.

In a February report, the IMF found that the “main challenges for Caribbean small states looking ahead include low growth, high debt and reducing vulnerabilities from natural disaster.”

Yet even after issuing a mea culpa of sorts for pushing austerity in Europe following the 2008 financial crisis, the IMF turned around and insisted those very policies – ones that led to contractions and unemployment – were the only way out of the Caribbean’s fiscal mess.

“There’s been a split in their policies for rich countries and for developing countries,” said Jake Johnston, research associate at the Centre for Economic Policy Research (CEPR). “There’s been a lot of talk about the new IMF and in some cases they have been more lenient, but when you are talking about developing countries what they are still pushing is from 15 years ago.”

Despite successive loans from the IMF, Jamaica still spends around half its budget on interest payments, crippling the country’s ability to provide social services and prepare for natural disasters.

After Hurricane Sandy struck Jamaica one year ago, “they couldn’t repair or prepare for the next one because they were constrained by the IMF budget,” Johnston told IPS.

The IMF said it was unable to comment for this story because a team was currently in the country.

However, holding back spending can lead to a dangerous feedback loop: experts predict that for every dollar a country forgoes today on climate change mitigation, it will spend six or seven on disaster response in a few years’ time.

Media portrayals of the crisis tend to rely on sources in the IMF and investment community and adopt the same terse, tough-love language they favour that serves to distance themselves from people on the ground. Depictions often treat extreme weather and zero-growth economies as if in a vacuum, without interrogating their climactic or historical causes.

A history too quickly forgotten

Caribbean economies were ushered into independence underdeveloped and limited by colonial regimes that favoured primary exports over industrialization.

Countries came to rely heavily on preferential trade agreements that the EU offered former colonies.

The 1973 oil price shock forced many to take out dollar-denominated loans to pay for energy.

When interest rates in the U.S. shot up, payments on those loans ballooned and countries in the region had no choice but to accept the structural adjustment that accompanied IMF and World Bank bailouts, a position they’ve been in ever since.

To make matters worse, the U.S. successfully sued to end the EU concessions, effectively shuttering banana growers unable to compete with huge U.S.-owned plantations in Central America.

Before, “all the produce was sold and that was money in the pockets of people throughout the island, even in the smallest villages,” Father Sean Doggett, a catholic priest in Grenada, told IPS. “That came to a very sudden stop around 1998.”

Countries turned to tourism, but the recovery from the global financial crisis has been slow and uneven – in Grenada, unemployment doubled between 2008 and 2012.

Doggett and other members of the Grenadian Conference of Churches (COC) sat down with the IMF and the Grenadian government in October, proposing the creation of a “conference of creditors” to negotiate the terms of a two-thirds debt reduction and called on the IMF to attach greater importance to poverty reduction and unemployment.

In 2013, Grenada’s debt payments will amount to over 250 percent of what it spends on education and health.

“There is no way that Grenada can pay off its debt as it stands,” Doggett told IPS.  “We need to get out of this cycle of indebtedness and get on a development path that is more sustainable.”

“Having debt hanging around the neck of people forever and ever is contrary to the biblical concept of Jubilee, of debt forgiveness… this is as much an issue of justice and the building of a better society,” he said.

Though Grenada may one day serve as a model for more inclusive debt forgiveness in poorer countries, Johnston insists an international mechanism to settle sovereign debt disputes is needed.

“Companies go bankrupt, cities go bankrupt but when countries cannot pay their debt they end up being punished for it. It’s clear there is a need internationally and especially for the Caribbean that they have a mechanism to work these things out.”

At the Commonwealth Heads of Government Meeting in Colombo last weekend, countries discussed exploring a debt swap plan that would pay off the principal of heavily indebted countries with money already pledged by wealthier countries to combat climate change.

“In return for having their debt paid, countries would agree to set aside the principal amount into a trust fund to finance climate change mitigation” over 10 to 15 years, Travis Mitchell, economic advisor at the Secretariat, told IPS.

But for Shepherd, all of this misses the point.

“When we are talking to the international community, it’s always what you can do for us,” said Shepherd. “You need to own up to the exploitation and underdevelopment.”

For countries that are responsible for a miniscule portion of greenhouse gas emissions yet suffer the most from climate change, taking the money wouldn’t address the economic and moral offences that saddled them with debt in the first place.

Any payment, Shepherd says, should come as redress, not as a form of charity that lets the developed world clear its conscience.

“When you frame it in the post-2015 agenda and look at the (U.N.) Millennium Development Goals, you realise those aren’t realised without a change of attitude, otherwise you’ll be here talking about the same thing 50 years hence.”

Aggressive creditors and investors are seriously undermining the ability of poor countries to deal sustainably with debt issues, academics and anti-poverty campaigners told a briefing at the U.S. Capitol on Wednesday.

Further, many of these investors are now based in the United States, after other important financial centres have moved to curtail such practices. As such, national lawmakers and international experts are stepping up calls for Washington both to follow suit domestically and to lead a related international effort.“If the hedge funds win, they will have a precedent that will allow them to dismantle 15 years of core U.S. debt restructuring policy." -- Jubilee's Eric LeCompte

“We need to acknowledge that aspects of the financial crisis could have been prevented if we had basic, common-sense principles on responsible lending and borrowing within the international financial system,” said Eric LeCompte, executive director of Jubilee USA, a network of anti-debt campaigners and a co-host of Wednesday’s briefing.

“In fact, both Northern and Southern countries that have gone through severe external debt crisis may have been saved the severe shocks to their economies and austerity restructuring if these reasonable principles were in place.”

(Jubilee released a full report on these proposed principles last year.)

Maxine Waters, a member of the House of Representatives, agreed, saying in a statement, “The time has come for the world to design a formal, more efficient system for managing the restructuring of sovereign debt.”

At issue is a strategy adopted by a small number of hedge funds to purchase reduced-rate debt from poor countries with little hope of repayment. These firms then file lawsuits against those governments for failure to repay, looking to scoop up government revenues and international aid monies when they eventually start to flow.

Perniciously, these firms maintain the lawsuits even as other investors typically agree to reduce some debts, accepting lower-than-expected returns that nonetheless allow the indebted government to begin to recover. Even a single such “holdout creditor” (also known as a “vulture fund”, for having purposefully sought out governments in fiscal distress) can gum up the entire debt-restructuring process.

“One of the most obvious remedies being discussed is that of collective action clauses, which allow a super-majority of creditors to force holdouts to accept a restructuring,” Rep. Waters noted Wednesday.

“Yet it would be wrong to rely solely on such clauses … This is why I favour the establishment of a formal, institutionalised, and politically recognised mechanism for restructuring the debt of bankrupt sovereigns, which would address all forms of debt.”

Other countries, most notably the United Kingdom, have already put in place restrictions aimed at undercutting the motivation to engage in such “vulture” speculation. Yet the United States has yet to do so.

On Wednesday, Cephas Lumina, the United Nations independent expert on the effects of foreign debt, noted that the U.S. is today a “preferred jurisdiction” for holdout creditors. He called on Washington to take “robust legislative measures … to limit the ability of vulture funds to pursue immoral profits at the expense of the poor.”

High stakes

In the aftermath of the 2008-09 financial crisis, government debt has become an increasingly important topic for all countries. And as austerity measures increasingly impact on poor communities, some advocates suggest that stronger international principles on sustainable lending practices could mitigate some of these ongoing ramifications.

Perhaps improbably, the issue of holdout creditors has heated up considerably here in Washington in recent months. Much of this is due to a landmark legal fight taking place between the government of Argentina and two New York-based hedge funds – NML Capital and Aurelius – that own some of the bonds Buenos Aires, then facing bankruptcy, defaulted on in 2001.

In a widely watched decision, in August a judge ordered the Argentine government to pay the two funds nearly 1.5 billion dollars. But Buenos Aires rejected the decision, saying that it would continue to repay its debts on its own terms (indeed, it is barred from paying the hedge funds, due to a law passed by the Argentine legislature in 2005).

It also warned that agreeing to pay off NML and Aurelius would embolden the 93 percent of Argentina’s other creditors – each of which has agreed to accept lower repayment – to demand their full share. Doing so, Argentina noted, would put the government back in the situation it faced in 2001.

The case has now been appealed to the U.S. Supreme Court. Although the justices refused to take on the issue in October, following a new appeal many observers now see a high probability the court will review the case.

Jubilee’s LeCompte says the stakes are high. Most countries facing holdout creditors, it should be noted, are far poorer than Argentina.

“The outcome could have some of the most far-reaching consequences for global poverty in our lifetimes,” he says.

“If the hedge funds win, they will have a precedent that will allow them to dismantle 15 years of core U.S. debt restructuring policy. With this precedent, the hedge funds will hurt some of the most fragile economies in the world.”

In June, even the International Monetary Fund was planning to file a brief on behalf of Argentina with the U.S. Supreme Court, its first ever such move. That decision was scuttled, however, reportedly due to lack of support from the U.S. government.

Legislative momentum?

Some see the issue’s suddenly high visibility as encouraging for potential legislative action.

“It would certainly be good timing right now, so we’ll probably see something rolling out,” Nathan Coplin, coordinator of the New Rules for Global Finance Coalition, a Washington-based international network of activists and researchers, told IPS.

“This will have a major precedent for sovereign debt for middle income and low-income countries. But there could also be an impact for the United States – given that one holdout creditor can stall the entire [restructuring] process, countries may consider issuing their bonds outside the U.S.”

It is currently unclear how much appetite there is in the U.S. Congress to tighten regulations on holdout creditors. Representative Waters has repeatedly introduced legislation to do so in past years, but none of these proposals was even brought up for a full vote.

Still, despite the significant lobbying power of the U.S. financial services industry, most investors don’t want to have anything to do with “vulture funds”.

“Certainly legitimate investors are in support of having a streamlined process, in which they can restructure the debt and move on,” Coplin says. “Where exactly the pushback is coming from is an interesting question – it’s hard to see how a small group of investors and hedge funds could influence or obstruct any kind of legislation.”

As the International Monetary Fund shares initial proposals for Grenada’s debt restructuring during the Washington DC meetings this week, the Caribbean island could gain a reputation for more than nutmeg, calypso, beaches and the 2012 gold medal sprinter Kirani James.

Because Grenada is listening to the nation’s religious leaders, it may become famous for a debt resolution deal that includes the participation of its citizens, protects the most vulnerable from austerity programmes and keeps current employment on the island intact.The religious leaders, themselves long astute in Sunday School lessons on human dignity, became experts in the concepts and terminology that economists and lawyers utilise when negotiating debt restructuring.

Part of what could make possible protecting jobs and the island’s social safety net is curbing corporate and professional tax avoidance in Grenada.

The most interesting part of what propelled this debt deal is that the churches of this tiny island have staked a place at the negotiating table. On this island nation of 100,000 people, where most people on the street are debating any debt deal, religious institutions have taught or served a significant portion of the island’s government leaders.

As in so many parts of the world, often religious groups are the primary social service providers and in the case of Grenada they’ve earned the people’s respect.

Before Grenada defaulted on some of its debt this past March, the Conference of Churches in Grenada had called for a biblical Jubilee or national debt cancellation. The island’s various religious bodies didn’t stop there, and they strategically inserted themselves in the government and IMF discussions.

In fact, from almost every pulpit across Spice Isle last week, pastors and ministers asked for the faithful to pray for their national religious leaders who would meet for two days of discussions with the government, its parliamentary leadership, and an observer from the IMF. The Churches invited their own international partners and experts to support them in their discussions on Grenada’s debt deal.

The religious leaders, themselves long astute in Sunday School lessons on human dignity, became experts in the concepts and terminology that economists and lawyers utilise when negotiating debt restructuring. The meeting was opened by the head of the Conference of Churches in Grenada where participants heard what may be the first prayer on poverty that included the word “debt restructuring.”

For a place that is perhaps wrongly faulted for a Mayberry carefree attitude, one stands in awe when you see how savvy the religious leaders are. They know any reforms they move forward that protect people in Grenada could mean better IMF deals for millions of other poor people around the world who are always the most affected when a country restructures its debt.

In their discussions, the Conference of Churches set and discussed their expectations with their government and the IMF to judge the success of both the actual debt restructuring and transparency in the process. Here they are:

– The IMF should publicly recommend an upfront debt stock reduction of at least two-thirds in line with suggestions made in recent IMF staff papers and other analyses

– The Grenadian government should continue its spirit of openness. When the government of Grenada receives IMF proposals for debt restructuring it should share those documents with the broadest possible public constituencies for discussion and to seek national consensus before Grenada signs

– Grenada should seek an impartial financial assessment in addition to the IMF assessment

– Any deal should be comprehensive and include all external creditors to prevent holdout creditors from exploiting Grenada’s economic recovery or targeting public services for collection

– There must be accountable and transparent processes for the citizens of Grenada to monitor future lending and borrowing of their government

– Current employment and social protections for the poor and vulnerable should be maintained in any IMF supported agreement

Since the global financial crisis moved more than 70 million people, mostly women and children, into extreme poverty, it does not seem like the IMF has learned its lessons on austerity promotion. Perhaps, the tiny Grenada IMF Sunday School will shift how future debt restructurings take place and whether or not there are necessary protections for the poor in place.

If you ever find yourself on Grenada’s world renowned Grand Anse Beach on a Sunday, consider wandering into Sunday School at Blessed Sacrament Catholic Church; you’ll walk away with an unforgettable lesson in international economics.

Eric LeCompte is the Executive Director of Jubilee USA Network and serves on UN expert working groups that focus on debt restructuring and financial reforms. He recently returned from Grenada where he supported the Conference of Churches in Grenada during their recent debt restructuring negotiations.

The Casa Rosada, the seat of the Argentine government, which is seeking to reopen a debt swap to overcome the legal action brought by “vulture funds”. Credit: Marcela Valente/IPS

By Marcela Valente
BUENOS AIRES, Aug 29 2013 (IPS)

As a sign of Argentina’s willingness to repay its bondholders, President Cristina Fernández introduced a bill for a new swap of the foreign debt held by “holdout” creditors who refused earlier restructurings after the country’s late 2001 default.

This time around, most of the opposition backs the proposal.

In the initiative that the Senate began to discuss on Wednesday Aug. 28, the government seeks authorisation to reopen the debt restructuring process for a second time.

Although 93 percent of bondholders accepted the earlier restructurings, in 2005 and 2010, the remaining seven percent refused the offer of about 35 cents on the dollar, and insisted on full repayment.

Through the restructuring, Argentina renegotiated 90 billion dollars in debt.

The new swap, expected to be approved by Congress, would offer the same conditions as the previous deal. The difference is that it would be open-ended, whereas the earlier exchanges gave bondholders only a few months to swap their debt.

“Equity is a foundation stone of this debt restructuring process,” states the bill, which prohibits offering holdouts who have brought legal action more favourable treatment than those who did not do so.

The government initiative is in response to the Friday Aug. 23 ruling by the U.S. Court of Appeals for the Second Circuit in New York – the last step before the Supreme Court – that upheld an earlier decision that Argentina must pay the holdouts in full.

Fausto Spotorno, an economist with the Centre for Economic Studies, told IPS that the bill “is very reasonable.”

“They should never have closed the swap. But opening it now is a good political signal to the justice system and could get some more of the bondholders to agree to an exchange,” he said.

Spotorno said that if the case was accepted by the Supreme Court, a favourable verdict for Argentina was unlikely.

The hedge funds that sued in federal court in New York for full payment of 1.3 billion dollars in Argentine bonds had acquired them in 2008 at 20 to 30 percent of their nominal value.

They are known as “vulture funds” – opportunistic investors who purchase the debt of heavily indebted countries cheap and then sue for full repayment.

The lawsuit in New York is led by hedge fund billionaire Paul Singer’s Elliott Management.

The bill presented by the Argentine government stresses that the holdouts who sued represent only a small portion of the unrestructured debt. It also points out that if they were paid 100 percent of the nominal value, as they are demanding, they would make a profit of 1,300 percent.

The bill also states that “it is common knowledge that our country is the object of ruthless legal attacks and heavy political pressure by these vulture funds.”

When she unveiled the proposal on Monday Aug. 26, centre-left President Fernández said the Aug. 23 U.S. court ruling was “unfair to our country” because it ignored the restructuring agreements reached with 93 percent of the bondholders.

She also said “we are serial payers, not serial debtors.”

Since the restructuring began, Argentina has serviced its debt punctually.

By 2003, the country’s debt represented 150 percent of GDP, the bill presented to the legislature states. The country has not had access to the global credit markets since 2002.

But as the economy began to recover from the 2001-2002 severe economic crisis, the debt situation began to improve as well.

According to the latest report by the Economy Ministry, as of late 2012 Argentina held 83 billion dollars in net debt, equivalent to 18.8 percent of GDP.

And with the payment of restructured bonds scheduled for September, the foreign currency denominated private debt to GDP ratio will drop to just 8.3 percent, Economy Minister Hernán Lorenzino said.

However, the country’s successful reduction of the debt burden is threatened by the small group of litigious hedge funds, which found their first ally in District Judge Thomas Griesa, who handed down the initial sentence in New York, in March.

The Aug. 23 ruling, which will be appealed by Argentina, dealt a blow to the restructuring process that Fernández’s late husband Néstor Kirchner, her predecessor, began while serving as president from 2003 to 2007.

If Argentina was forced to pay 100 percent of what the holdouts are owed in principal and accrued interest, the bondholders who agreed to the 2005 and 2010 restructurings could invoke the “most favoured creditor clause” and demand the same treatment.

Fernández also proposed that the voluntary debt swap invite holders of foreign-law bonds to exchange them for new debt that would be paid under Argentina’s local legislation, in order to evade eventual embargoes in case the Supreme Court upholds the Aug. 23 ruling.

The Radical Civic Union, the main opposition party in both houses of Congress, responded positively to the bill overall. But some of its leaders said the measure came too late, or contained overly critical language when referring to the holdout creditors and the judges.

The right-wing PRO also called the bill “reasonable.”

“Argentina has to do whatever it can to get the Court to open the case and turn around the sentence,” PRO lawmaker Federico Pinedo told IPS.

He said it was necessary to act “responsibly and in a serious manner, and to send out a message that we want to ensure equal conditions for all of the creditors. That is an argument that holds a great deal of weight with the Court.”

Many legislators, including members of the governing Frente para la Victoria, believe it will be difficult to get the vulture funds to agree to any kind of swap. But they say it is necessary to show a willingness to restructure the debt – as long as it is under conditions set by Argentina.