Policy Options for Dealing with the Impact of the Financial Crisis on the External Debt of Developing Countries

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1 U.N. Department of Economic and Social Affairs Financing for Development Office Policy Options for Dealing with the Impact of the Financial Crisis on the External Debt of Developing Countries

2 Implementation of Monterrey Consensus In Monterrey the key role of debt relief and debt restructuring was recognized by the international community for liberating resources for economic development. the imp of re-establishing financial viability including debt cancellation..(p.48 MC) Clear principles for the management and resolution of FC that provide for fair burden sharing bet public and private sectors and bet debtors, creditors and investors (p.51 MC) Review of DSF? (GA Debt Resolutions, Doha) Debt relief HIPC, Evian Private sector participation in debt restructurings (in past crises) Country efforts at sound macro polices and financial sector reform, improved governance Renewed emphasis on debt management WB, Commonwealth Sec. and UNCTAD

3 Commitment to policy actions in Doha The existing international debt resolution mechanisms are creditor-driven, while taking into account debtor country situations. More efforts are needed through international debt resolution mechanisms to guarantee equivalent treatment of all creditors, just treatment of creditors and debtors, and legal predictability[paragraph 60] We call on creditors not to sell claims on HIPC to creditors that do not participate adequately in the debt relief efforts.[paragraph 60] We will intensify our efforts to prevent debt crises by enhancing international financial mechanisms for crisis prevention and resolution, in cooperation with the private sector...[paragraph 61] We stress the need to construct debt indicators... including an assessment of domestic public and private debt in order to achieve development goals[paragraph 65]..we will consider ways to explore enhanced approaches of sovereign debt restructuring mechanisms... with broad creditors and debtors participation and ensuring comparable burden-sharing among creditors, with an important role for the Bretton Woods institutions[paragraph 67]

4 FC Resolution 2009 as a last resort, impose temporary capital restrictions and seek to negotiate agreements on temporary debt standstills between debtors and creditors, in order to help mitigate the adverse impacts of the crisis and stabilize macroeconomic developments. (para 15 FC Resolution) we affirm that the appropriate measures must be taken to mitigate the negative effects of the crisis on the indebtedness of developing States and to avoid a new debt crisis. In that regard, we support making full use of the existing flexibility within the Debt Sustainability Framework. (para 33 FC Resolution) we will also explore enhanced approaches to the restructuring of sovereign debt based on existing frameworks and principles, broad creditors and debtors participation and comparable burden-sharing among creditors. We will also explore the need and feasibility of a more structured framework for international cooperation in this area. (para 34 FC Resolution)

5 G20 Communiqué Prevention and management though: New resources to the Fund to support provision of public resources for crisis prevention and management (G20) Review flexibility in debt sustainability frameworks (G20)

6 The G8/G20 or the BWIs have not called for The role of the private sector in crisis prevention and management The balance between providing new resources, breathing space, debt restructuring and debt relief as appropriate by all creditors -- bank debt roll-overs and extension of maturities have an important role to play in crisis prevention and management

7 The emphasis is on new resources The Review of the DSF the space to enable countries to borrow more

8 Emerging and developing economies: exernal debt, B illions of U S dolla rs Emerging and developing economies Net debtor countries p 2010p Source: IMF, Statistical Appendix, World Economic Outlook, October 2009.

9 1400 Emerging and developing economies: debt-service payments, Billions of US dollars Emerging and developing economies Net debtor countries p 2010p Source: IMF, Statistical Appendix, World Economic Outlook, October 2009.

10 140 External debt in percent of exports of goods and services, Percent Emerging and developing economies Net debtor countries p 2010p Source: IMF, Statistical Appendix, World Economic Outlook, October 2009.

11 Debt-service payments in percent of exports of goods and services, Percent Emerging and developing economies Net debtor countries p 2010p Source: IMF, Statistical Appendix, World Economic Outlook, October 2009.

12 Debt owed to private creditors In 2008 Debt to private creditors was 75% of total external debt 33% in SSA 93% in transition economies of Eastern Europe and ventral Asia

13 Vulnerability 38 of the 43 countries that the World Bank calculates are the most vulnerable to the economic crisis already required substantial debt cancellation before the crisis, in order to meet the needs of the people Jubilee Debt Camapign

14 November WESS update According to preliminary UN estimates the world economy will shrink by 2.2 percent in 2009 There are indications that recovery is on its way and output may increase by 2.4%. Recovery is still very fragile

15 IMF programs procyclical A recent CEPR study (Mark Weisbrot, Jose Cordero and Luis Sandoval (2009) Empowering the IMF: Should Reform be a requirement for increasing the Fund Resources?) examines recent IMF programs and finds that the IMF is still prescribing inappropriate policies that could unnecessarily exacerbate downturns in a number of countries. Procyclicality is to be avoided at all costs.

16 EM corporate sector borrowed 1.3 trillion bet 2006 and 2008 while sovereign borrowing was reduced High yield EM Corporate sector tapping the mkt in small amts (in last two months some speculative grade too) Many will be back in the market to seek refinancing in 2010 Instability in European banks remains a risk as they account for 74 percent of the $4.7 trillion lending to EM

17 Low-income countries (LICs) are being hit hard by the global financial crisis. They are facing a sharp contraction in export growth, FDI inflows, and remittances, and lower-than-committed aid. Economic growth this year is projected to be less than half its precrisis level. The risks to the financial sector from a domestic economic slowdown are a concern. Fiscal deficits are increasing in three-quarters of the LICs Source: IMF, The Implication of the global financial crisis for low-income countries an update, 28 September 2009.

18 Increased risk of debt distress High 23% in low income countries In debt distress 13% Pre-crisis Low 30% Moderate 34% In debt distress 16% Post-crisis Low 20% High 34% Moderate 30% Source: IMF, The Implication of the global financial crisis for low-income countries an update, 28 September 2009.

19 LICs Debt to GDP ratio

20 Questions for panel and participants Are you concerned that debt sustainability and thereby development is an issue in this crisis? Is this a lending boom like the 1970s and 1980s? Can policy instruments like standstills, debt relief and debt restructuring, capital controls, debt for development play a role in crisis prevention and management? i

21 Questions contd. Any other policy instruments that we can consider in the discussion? Is the Review of the DSF satisfactory? Are the present approaches to international debt restructuring adequate?

22 Is provision of public resources sustainable for the country in the medium term and long-term? If the present forecasts for recovery and the efficacy of fiscal stimuli are not realized in the crisis-ridden countries, and the forecasts for recipient countries over-optimistic, are we increasing the probability of sovereign defaults in the future?