IFI governance


Why the Bank and Fund provide too little debt relief too late – and what can be done about it

13 October 2013 | Minutes

IMF/World Bank Annual meetings 2013, Civil Society Forum

Saturday 12th October 2013


Jürgen Kaiser, Erlassjahr

Matthew Martin,  Development Finance International

Gail Hurley, UNDP

Anna Gelpern, Professor of Law at Georgetown University

Timothy Antoine, Permanent secretary of finance, Ministry of Finance, Grenada


Hosted by Friedrich Ebert Stiftung, EURODAD and Erlassjahr



Anna Gelpern

The paper produced by the IMF paper on Greece, from June, had a striking admission that the loan was driven not so much by concerns for Greece, but outside of Greece, and the concern that those outside Greece – via contagion – could not handle a Greek default.

This is a parallel all the way back to the Brady era, and the lost decade, as loans then were driven by the risk to banks.

Hence not much has changed – decisions are not driven by the imperatives of debtor countries, and in Greece’s case perhaps more so due to the EU and Eurozone context. This is also a reflection of the fragmentation of decision-making, where decisions are taken anywhere but the debtor country.

The paper reveals that the Greek authorities made the fewest decisions in determining the restructuring.

The other factor is how the debt migrates away from private creditors, mostly migrating in Greece’s case to sovereigns and to the domestic banking system, which doubles down on the problem, and makes the patient you are trying to cure gets sicker (using the medical metaphor of contagion).

This does make the mechanics of resolution far easier, as the debt is in one place, but meanwhile the country condition has gotten far worse, as the decision making locus moves away.

What the paper does not do – and the Fund is not structurally positioned to answer – is ask what can be done to slow done, stop or reverse the dynamic of making debtor countries’’ problems worse by saddling its own banks with that much debt, and how can we displace the decision-making process so that a debtor country can meaningfully participate in its debt crisis management.

It’s hard to imagine that any crucial decisions were made anywhere but Greece, as is evident in the paper. A defense of the argument is that Greece gave up its sovereignty not in the debt agreement but ex ante via its membership of the Eurozone. However, for anybody who is trying to improve this process, it’s a very troubling development and would query how this argument is valid defense of the Troika. This is because we know more or less how reviews work, whom to call who to challenge and so on. Introducing the Troika means worrying about local elections in Finland, adding instability and opacity and the process becomes extremely difficult to manage due to the further fragmentation of decision-making. Added to that is the institutional pull of the ECB with its own prerogatives: who designs conditional? Is it geared to local elections in Austria? IS Greece decision-making contingent on strategies for Portugal or Ireland. These are concerns for anyone who cares about the transparency of these processes, and their accountability.

In addition, the complication of the debt restructuring process makes what are normally conflicting views within domestic governments means that the evolution of the debt restructuring system has made this more difficult.

Matthew Martin, DFI

Three issues: lessons from HPIC, where are we now for HPIC countries, and what do we need to do to reignite interest in debt issues?

Lessons from HPIC

The IMF’s recommendations are rather pathetic given what their paper acknowledges. The pre-HPIC process for LICs was a disaster, huge arrear accumulation and massive damage to development in those countries, and Paris-club only debt relief.

HPIC was a step forward in terms of principles; fairness, transparency, speed.

E.g. non-OECD creditors became more involved, IFIs’ superiority was yield, and vulture funds remain a problem. In terms of transparency we went from basically none, to a situation where at least there was debt sustainability analyses and board papers were published.

Speed also improved. Impartiality was done objectively, at least partially, where the discussion moved a bit beyond the views of creditors and usually the most-inflexible creditors’ views.

One area where little progress has occurred is the unholy coalition of creditors ganging up and joining conditionality on their countries. For all of that, $100 billion of debt cancellation seems a lot but is in reality peanuts.

So, now where are we? We’ve abolished that process.

From my perspective, there is a fundamental justice issue out there, and if there isn’t a fully responsible debt resolution problem then the problem remains unresolved.

We still work with countries that are stuck in a process of massive over-indebtedness, and the arguments have not improved.

In the HPICs themselves, there are quite a few that given borrowing levels a debt crisis could soon return. There are huge other risks, such as the pressure to move investment to public-private partnerships, countries accessing bond markets that bears the risk of the end of quantitative easing, and the move from increasingly grant-based and/or concessional finance, to loans.

The key lesson is that we didn’t’ get a ‘Jubilee’ due to a sudden acknowledgement by financial institutions, but due to popular pressure. There was a strong coalition of everyone, and institutional interests were set aside. This is evident in tax issues at the moment.

Another important factor – as the new Global Financial Governance report by New Rules – is the increasingly marked influence of the private sector in having a say in how the official sector designed the process, beyond a resistant approach.

To get back to where we were we needed more popular mobilization and key leaders to address this. It’s perfectly understandable that debt relief, given the hurdles currently discourage debt relief- is not sought by states but they are pushed to damage their peoples. The real moral hazard, at least within the official sector – is that people suffer because governments’ fear the potentially worse consequences of relief.


Gail Hurley, UNDP

The question of debt in the Caribbean and the fiscal consolidation programmes imposed there provoke a sense of déjà vu. The government in Grenada is engaging very positively with many stakeholders. Debt service currently consumes 41% of current expenditures of the budget, where 16% is consumed by health and education combined. The situation is bleaker in Jamaica, with a much higher debt ratio and debt service consumes over 50% of budget revenues. Jamaica has restructured its debt twice.

For both countries the situation is not new.

The number of debt restructurings in Caribbean countries since 1990 is 30+, thus it is a systemic, persistent and unresolved problem for countries in the region including in particular small island states.

The Caribbean average debt to GDP ratio last year was 71%, and for the eastern Caribbean was over 90%, but specific cases are hidden by that such as St Kitts and Nevis where it is over 200%.


There is a culture of blame and counter blame. Citizens will often argue that government made poor decisions and borrowed non-wisely and non-transparently, and things need to be done better. Governments respond that they have conformed to a number of requirements and policies, while IFIs demand that governments get their houses in order.

There is truth in these arguments and counter-arguments. As such, it is inescapable that some form of insolvency and resolution arbitration mechanism is necessary.

The current approach – the strategy to look at portions of debt in isolation – is combined with fiscal austerity measures, has a dismal record notwithstanding the social consequences including alarming increases in violence and insecurity. Given the poor track record of fiscal consolidation and piecemeal restructuring efforts, this is now crucial.

A number of groups and institutions recently met with the government of Grenada of alternative approaches, and the pros and cons of an alternative or independent debt sustainability analysis of what might be needed to restore sustainability for the island, from arbitration, to creditor conferences and a number of other ideas.

Minister Joseph’s letter was published in the Guardian yesterday arguing for debt forgiveness and the need in the region for what would be – in terms of the scale of forgiveness needed – would be a drop in the ocean.

There is an opportunity for the Caribbean to be a beacon of innovation and evidence that alternatives are possible.

Timothy Antoine

The picture painted of the Caribbean’s need for comprehensive debt restructurings shows that ‘watching the same old movie’ is not a pleasant or productive experience.

In the 2009-2010 great recession, the Caribbean still struggles o recover and it has been slower than in many other regions including in Lain America. This is also due to high debt levels prevailing, but there has been a long-term decline from 80s, 90s and early 2000s of growth. There is no growth except for commodity countries such as Trinidad, Guyana and Suriname.

The Grenada case is one of a debt to GDP ratio of 110%, part of which from two hurricanes, including one, that cost twice the national income of the country. How can a country recover from that? About 25% of debt is attributed to that, and much donor commitment never arrived. In the last five years of global recessions/slowdown, Grenada had only one year of growth.

Grenada’s debt restructuring did not reduce stock, but only flow; it was useful and not enough. The projections for debt restructuring are not positive, and what occurred was that there was no growth. In the debt restructuring, the coupons on the debt rose, increasing debt service costs, as the external environment plummeted.

In March of this year the government was led to decide that a comprehensive second restructuring of the debt was necessary, learning lessons from the first, including the need for a realistic debt sustainability analysis.

The shock was added to by shifting geopolitical shifts and lost preferential status for key sectors. Being seen as middle-income countries, access to financing is inhibited by non-membership of the Inter-American Development Bank and accessing financing fully.

The work of the Jubilee network and the Grenada conference of churches have opened the eyes of many, especially the unprecedented insertion of churches in the process. The issue is a national one, and concerns development and human rights. The church’s principled stance on this issue has been crucial.

The conference of churches led to several outcomes. The first thing was that there is a need for a reduction in the debt stock; the church proposing a two-thirds reduction. Grenada has gone to the Fund and other partners, including difficult decisions regarding expenditures and revenue, but included the debt sustainability analysis and need for debt restructuring that includes all creditors.

Grenada has an experience of creditors targeting public agencies, that is a reality.

The conference demanded that the process must enable citizens to participate in a fully transparent way the process over determining fiscal rules, including the extent to how oversight bodies can monitor how the debt is addressed.

Grenada needs debt relief, we accept that debt restructuring cannot alone grow the economy, but nor can you do so when spending 30 or 40 cents of every dollar on servicing it. However we are very clear on the need to go beyond that.

The World Bank’s debt approach has some useful ideas, and we are pursuing that with the World Bank. Its pillars are promoting private sector growth, fiscal management, resilience in natural disasters, and debt resolution. The last is the are with the most need for work. The Bank is currently apparently contemplating engaging with countries’’ fiscal rules, but that is after the fact.

The Commonwealth secretariat has sought to garner support for small states and vulnerable nations, including middle-income nations who are stuck in a particular context. The secretariat has some ideas worthy of support.

Firstly there should be debt for nature swaps, via environmental commitments. This allows the long-promised climate finance resources, which are currently too slow moving. Grenada has been a leading climate adaptation and mitigation advocate; the moment arrives where we need to see the dividends.

Secondly counter-cyclical lending and grace periods in the event of shocks. The third is to use vulnerability criteria for small states classified as middle income or graduated states. Final option is building resilience.

These are ideas worthy of support, and are worthy of support.