When the systemic default wave never came: Joint Understanding on Global Debt Trends

Before the COVID 19 pandemic hit in late 2019, 124 countries were already critically indebted. By 2020 this number rose to 132. This prompted a recognition, even within International Financial Institutions, of the risk of an impending debt crisis and led to a re-examination of the global debt architecture. This indicates a discursive shift within international development policy, signalling an opportunity for the debt justice movement. However, despite this discursive shift, we have yet to see concrete solutions that meet civil society demands for unconditional debt cancellation and a fair, transparent, and binding multilateral framework for debt resolution. Existing debt resolution measures through the Debt Service Suspension Initiative (DSSI) have created a ticking time bomb. Pursuing a recovery process through debt restructuring will only widen the door to austerity measures at a time when there is a dire need for social spending in the Global South. At this critical juncture, Civil Society Organizations must develop a joint position and strategy to deal with the G20 Common Framework.

Demands, Themes, and Priorities

Debt restructuring/cancellation and Common Framework (CF)

Debt Architecture Reform

Private Sector Involvement


CSO positioning vis a vis the CF: Is the CF a stepping stone to a broader sovereign debt workout mechanism or is it a failure?

Strategic Acceptance

Challenges with presenting the CF as a failure: Without demonstrating that there has been a wave of defaults it would be difficult to frame the CF as a failure. The question of whether the CF is a stepping stone is not useful. The reason we need to work on the CF is not that it is an ideal solution. The reason is that it is the initiative that is there. There are critical moments in all political projects when they are fragile and open to being influenced. We are currently in one such moment with the CF since the framework as it stands lacks an agenda of its own. Therefore, it is possible for CSOs to exercise influence over it. Engaging with the existing policy would create an opportunity to influence the policy process. However, this can be achieved only by building on what is on the table rather than advocating for an ideal solution.


Strategies and Tactics


Factors that have provided opportunities for successes in the past include:

Rejection

The CF can be framed as a failure on the basis that it doesn't meet the criteria of being a timely, effective, fair, and comprehensive debt resolution mechanism. Firstly, even the IMF has publicly acknowledged that it is taking too long for creditor committees to be formed. Secondly, it is not rules-based and it is full of loopholes. Thirdly, it is not comprehensive because it does not include multilateral debt and it is unclear how the comparability clause will work for private creditors. Finally, there is already one demonstrable case of failure: the only country where the CF has been implemented (Chad) is having its programme withheld by the IMF because Glencore is not agreeing to comparability.

The CF has mainly become a pretext to stonewall efforts towards real debt reform. The only significant advancement made by the CF is the inclusion of China. If the CF is a stepping stone it is primarily one for Western creditors in the Paris Club who now have China at the table. However, it is not a stepping stone for debt relief.


Strategies and Tactics


The CF functions primarily as a creditor committee. As such, it could effectively strengthen creditor power against debtors in the guise of better coordination. While CSOs may recognize it as a stepping stone in their own work, they must exercise caution not to buy into the narrative of the CF as a debt relief mechanism, especially in public communications.

Alternatives

Identifying champion countries i.e. indebted countries that can come forward and take political leadership is of strategic importance. The debt justice movement needs a case that can play the role that Argentina did in 2015. Although the attempt at debt cancellation with Antigua and Germany didn't succeed it did reveal itself to offer some promise. A mapping process can help identify similar cases. Finally, we need an effort at debtor coordination that parallels Castro's regional debt coalition in 1985.


Strategies and Tactics


Debtor coordination

Creditor coordination shifts the power balance in favour of creditors against debtors. Therefore, the key problem is that creditors are coordinated but debtors are not.

Pilot case approach

Identify collaborators in the Global South who are critically indebted as well as positively minded players in the Global North who can support them. This must be supported by a mapping process. The mapping and matching process must be careful to connect supporting countries that have sufficient sake as creditors.

There is a need for a forum to create consensus among debtors. The last attempt to create a forum of this sort was by Fidel Castro in 1985 in Havana. While the G77 and G24 offer some promise, especially considering that they are best placed to put pressure on China, they are not homogenous enough to create a joint debtor position. This is why working with the UN matters. Although the G77 and many other regional groupings exist, they do not have the capacity to coordinate the way the UN does. It is crucial to work through these spaces that are already coordinated instead of attempting to replicate this in a vacuum.

Legal redressal

Independent arbitration alone doesn't resolve the problem of legal enforceability. Therefore, we need both a legal framework and a debt workout institution at a global level. Pursuing a multilateral legal framework is imperative to prevent the jurisdiction hopping that arises from national-level legislation. However, national-level legislation can also be pursued simultaneously. For example, there is an initiative in New York with bills introduced in the Senate and Assembly. Political parties in Germany have also put out position papers with debt workout resolutions and they have proposed discussions about a model law in November. Alongside this, legal advisory services and amicus curiae interventions that can take place even if a law hasn't been passed are also necessary. Institutional and legal innovation can also be pursued at the level of the European Union.

Private Sector Involvement: Should we target private sector actors or the G20?

Private Sector: Targets and Strategies

Naming and Shaming: Private creditors are a valuable and timely focus from a campaign strategy perspective because they play a significant role in providing financing. However, they are not held accountable by the CF. Particularly at a moment when global policy-makers are stonewalling CSOs, targeting private sector actors could be a valuable strategy. Campaigns should focus on a simple and clear set of communications. This would give the public and media easy targets to villainize in the form of large corporations. This is a promising strategy because corporations are concerned about their public image. There are also readily available tactics that can be used to target corporations such as attending their AGMs or demonstrating at their headquarters. This could in turn help put pressure on the G20 and set a narrative that bypasses the technical issues that the public won't find as relatable.

Strategic/logistical concerns

G20: Targets and Strategies

Countering the market access narrative: The dominant narrative that seeking debt relief is not in the interest of developing countries because it will entail losing market access needs to be challenged. Research shows that this narrative cannot be supported empirically. While market access may be lost, this will only be the case if debt treatment is not deep and sufficient enough to restore economic prospects and debt sustainability. Therefore, debtor countries need to be encouraged to seek deep debt relief instead of postponing their recovery. Instead of focusing primarily on private creditors, campaigns should target the G20 and hold them responsible for dealing with uncooperative creditors. The G20 should be responsible for supporting debtor countries politically, legally, and financially. They must develop legal and binding agreements that can be used to enforce the comparability of treatment in confrontations with the private sector.

Media and Communications: Communications should focus on producing outputs in relevant financial media (ex: Bloomberg) as well as creating content that is accessible to a wider audience. This can include a cartoon or film showing the irrationality of the debt resolution process wherein debtor countries are thrown into negotiations with multiple creditors who are each passing the buck. Exposing the absurdity of the process could help illuminate the issue in a way that is relatable.

Beyond the CF: Broader Considerations

Creating fiscal space: Debt relief is not adequate to address the problems of effective resource mobilization. We have an international tax system that denies developing countries their rights to tax corporations and forces them to borrow as a consequence. This is a connection that needs to be emphasized. We need to push for a reform of the international financial architecture to curb illicit financial flows, enable developing countries to mobilize resources internally, and reduce their reliance on borrowing. Addressing illicit financial flows would require G20 countries to take a tough stance on how their multinational corporations do business in developing countries. One potential demand could be to include tax justice as a conditionality. Debt relief should be tied to real economic progress and to revenues raised by debtor governments from multinationals in order to minimize illicit financial flows.

SDRs for debt relief?

Pros

Potential demand: Propose SDR allocation to finance a global debt relief scheme. Call for setting up a new funding mechanism through SDRs that MICs can access.

Cons

While countries might benefit from using the current allocation to reduce debt this cannot be equated with debt relief and will not create the necessary fiscal space or reduce the debt service that countries must perform.

Therefore it's best to keep the campaigns separate. Using SDRs for creditor bailouts undermines the position that reallocation should maximize fiscal space.

Climate-related demands:

Responsible lending and borrowing: In the context of sustainability and climate finance we must emphasize that responsible lending is just as important as mobilizing more financing. Debt relief is equally important for climate finance as mobilising new channels of financing. This can be linked with ESG finance debates.