Thank you for all for joining us this morning. Today’s subject, debt transparency and sustainability, is one that I have been deeply engaged in – dating back to my work at the US Treasury in the 1980s for Secretaries Baker and Brady. In the 1970s, Latin oil producers had borrowed heavily in dollars from foreign banks who lent way too much when the dollar was weak, oil prices were high, and bank loans were readily available. Then circumstances changed. Interest rates rose and oil prices fell, triggering the Latin debt crisis. It left a decade of workouts and US bridge loans to the IMF and the World Bank. This series of crises extended the debt maturities and gradually shifted debt to multilaterals, but poverty rose massively. The debt wasn’t sustainable until the net present value of the commercial bank debt was substantially reduced under the Brady Plan.
The current debt crisis is again one of the biggest obstacles to development. I have worked hard to shift the system toward transparency and sustainability, both as Undersecretary of the Treasury for International Affairs in 2017 and 2018 where I testified on these topics; and as President of the World Bank Group.
Debt sustainability matters a lot for development. It is essential in attracting new investment, boosting growth, and breaking the poverty cycle.
Even before the arrival of COVID, when global interest rates were still close to zero, it was already clear that developing countries had amassed far too much debt. The World Bank’s Global Waves of Debt report in December 2019 noted that the world was in the midst of “the largest, fastest, and most broad-based” debt surge in nearly five decades. In the report, we urged policymakers “to recognize the danger and move countries into safer territory in terms of the quality and quantity of investment and debt—sooner rather than later.”
Yet here we are today—with 60 percent of low-income countries either in debt distress or at high risk of it. Interest rates are climbing at the fastest pace in four decades, and economic growth is slowing nearly everywhere.
It is clear that the global instruments to tackle debt sustainability and debt restructuring have been ineffective. Debt sustainability assessments have often proven to be overoptimistic—especially in terms of projections of the key variables such as growth, inflation, interest rates, tax revenues and government spending restraint. Not enough attention has been given to the rising danger of domestic debt and its consequences for growth.
Recent debt-restructuring efforts, meanwhile, have been painfully slow. The G20 Common Framework has been exceedingly slow and unpredictable, causing countries to delay their restructuring efforts until it is harmfully late. It reminds us painfully of Latin America’s lost decade in the 1980s when there was no path to sustainability.
We launched the Global Sovereign Roundtable as a forum to discuss pathways forward. It brought the debtors and private sector creditors into the discussion, which I think is a necessary step. We agreed at the April meeting to hold a workshop on Comparability of Treatment in the next few weeks. A common understanding of NPV reductions and the importance of a common discount rate is necessary to achieve fair burden sharing among commercial and official bilateral creditors.
Rapid resolution of unsustainable debt is in everyone’s interest. Progress under the Common Framework has been limited so far to a two-step restructuring that does not provide a predictable or credible path to sustainability.
While we are properly focused on making headway on any of the current Common Framework tasks to avoid the Chad outcome – in Zambia, Ghana, and Ethiopia – we also need to work toward a better system for the future. We need to tackle two dimensions: (i) enhance debt transparency, and (ii) rebalance the creditor and debtor balance, which heavily favors the creditor during debt restructurings, as we see clearly every day.
There needs to be more emphasis on transparency in individual contracts by strengthening public transaction disclosure practices. Today’s contracts are oftentimes hidden behind non-disclosure clauses, collateralized arrangements, and escrow accounts. Sovereign borrowers seeking restructurings should be able to fully disclose all their debt and debt-like contracts. We also need a faster and more accurate debt reconciliation process between debtors and creditors.
To achieve a better balance between debtors and creditors during future restructurings, we should move toward an aggregate collective action clause in all new official sector and private sector debt and debt-like instruments. Other measures which could facilitate restructurings include limiting creditor recoveries, immunizing sovereign assets from attachment, or introducing a most favored creditor clause.
I’m eager to hear from all of today’s panelists. What can be done to break out of the debt impasse and create a better system for the future?