Skating on thin ice is an occupational hazard in my job, but it was really cracking underfoot at a recent Chatham House Rules roundtable on ‘debt crisis prevention in
No, not that debt crisis
developing countries’. The only way to survive is to stay quiet, nod and look thoughtful when people refer to completely unintelligible things like ‘the clarification of pari passu, which created difficulties in the US that we’re all aware of.’ But I don’t see why a detail like not understanding what was said should stop me from blogging about it ……
The topic – are developing countries heading for another debt crisis and if so, who/when/how/what can be done? – could hardly be more topical. As we met, British Finance Minister George Osborne was meeting his unbelievably cool Greek counterpart, Yanis Varoufakis to discuss the Greek debt crisis. The Economist was running articles on looming debt crises in Africa, affecting The Gambia, Ghana, Zambia and others.
So what did I learn from the assembled debt geeks?
First, after bottoming out in the mid 2000s, levels of developing country borrowing have risen and come from an
Sovereign bond issuances in Sub-Saharan Africa. Source: Annalisa Prizzon & Judith Tyson, ODI
increasing range of sources (‘heterogeneity’ seems to be the favourite word in these circles). Bonds (both private and government issued), Public Private Partnerships (PPPs), concessional loans, market-rate loans, aid, money from new lenders like China and Brazil. In Africa sovereign bond issuances have ‘skyrocketed’, with $6bn issued just last year. 15 African countries have joined in, including several former debt relief (HIPC) recipients.
Is that a good thing or a bad thing? All depends. The costs of different kinds of ‘instrument’ (as a percentage, net of the amount of finance provided) varies hugely – see this handy comparison from a recent Development Finance International report. PPPs turn out to cost an arm and a leg, which is alarming, given the emphasis being put on them as a source for funding the post-2015 goals, while getting money for free (aid grants) is the best value, but
Off = Official; Con = Concessional; Dom = Domestic. Work the rest out for yourselves.
there are lots of gradations in between.
There were both debt optimists and pessimists in the room, but all agreed that at least 8 African ‘problem cases’ are heading for the brink, and that some in the Caribbean and Pacific are already having a debt crisis. .
And it’s not always their governments’ fault. External shocks, such as the current commodity price collapse, often sweep all before them, and it makes little difference whether the World Bank has decreed a country well governed or not.
The traditional political dividing lines were in evidence, albeit couched in very polite terms, including ‘market-based v statutory approaches’ and ‘creditor v lender responsibility’. On the latter, there were lots of warm words on shared responsibility for both preventing debt crises, and then sharing the burden should they occur. But all the real pressure seems to be on the borrower countries to reform their economies and repay their debts (as per usual), with plentiful excuses for avoiding lenders doing their share. Sovereign Debt Restructuring Mechanism? ‘No appetite on the IMF board’ (those guys definitely show signs of an eating disorder when it comes to regulation); the UK urging other rich countries to follow its lead on banning vulture funds? ‘we need to consult with other countries first’. Endorsing UNCTAD’s Principles on Promoting Responsible Sovereign Lending and Borrowing? Um, we need to think more about that.
On a more systemic level, all that heterogeneity is creating a fragmented ‘non system’ rather than a sensible international architecture for handling debt in good times and bad. Which got me thinking about complexity and Andrew Haldane’s brilliant paper on the financial crisis. Haldane argues (delightfully) that financial regulators are like dogs trying to catch a frisbee – if they try and work it all out in advance, it’s like trying to apply Newton’s laws of motion to work out where the Frisbee lands. Hopeless. Instead, you need a few simple rules, and fast feedback (and the ability to run fast).
A lot of the people in the room still seem to be trying to apply Newton, seeking to predict the trajectory of debts in ever more fragmented and unpredictable systems. Haldane’s paper suggests two better approaches: firstly some simple ‘thou shalt not’ regulations, (in his case, separating commercial and investment banking) which are less fallible than the clever stuff, and second paying much more attention to detecting and responding rapidly (and fairly) to debt crises as they occur.
This topic is going to get louder as we approach the big Financing for Development summit in Addis in July. For some background from people who actually know what they’re talking about, check out this paper on debt sustainability, and this more general paper on FFD, both from ODI.