The Basel bung



Abuse of a legal loophole provides sanctuary for billions in creditors' unpaid assets

Keith Boyfield is a Senior Fellow at the Adam Smith Institute; Brian Sturgess is Managing Editor of the Journal of World Economics

The Bank for International Settlements (BIS) - the central bankers’ banker - is a widely respected body that, as the FT’s Martin Wolf points out, was one of the first to warn about the financial tsunami that engulfed global capital markets in 2008. It’s odd then that the institution allows itself to be used as a safe haven by controversial jurisdictions seeking to avoid paying their creditors.

Argentina is the worst abuser. No less than 86 per cent of its total foreign currency reserves - US$45 billion – have been stashed away in Basel, the home of the BIS. That’s twenty times the average share of foreign reserves that central banks hold at the BIS. (Source: derived from the Bank for International Settlements Annual Report 2011) It is astonishing to discover that recently around one third of all deposits held at the BIS relate to two central banks – Argentina and Nigeria. (Source: Wikileaks reference to US embassy (Abuja) note on meeting between Ambassador Robin R Sanders and Nigerian Central Bank Governor Soludo on 3rd November 2008).

A driving factor behind this allocation is the fact that money held on deposit at the BIS is less vulnerable to legal action by unpaid creditors. In the case of Argentina, there are an awful lot of creditors. Argentina ranks as the biggest defaulter in history, reneging on over US$81bn in outstanding loans in 2001. The country remains in default on over US$15 billion in government bonds issues. And pressure is mounting on Argentina to repay its debt. Earlier this month Britain’s Supreme Court removed legal immunity afforded to Argentina with regard to unpaid holders of its defaulted bonds. A similar decision was reached by a court in New York. While these are welcome decisions it remains the case that bondholders are barred from seeking repayment from Argentina’s rapidly accumulating reserves held at the BIS.

Ironically, the Argentine Central Bank is pulled in many directions and may even view the role of the BIS as protection against demands from its own government. Last year, Martin Redrado had to be restored to his position as Bank Governor after Argentine President Christine Cristina Fern├índez de Kirchner conspired to remove him through an emergency decree. He was hounded out of office for having resisted the release of US6.6 billion from the bank’s reserves to lend to the government.

In order to maintain its hard earned reputation the BIS should crack down on this abuse. Sovereign nations should be deterred from exploiting loopholes in international law that damage the rights of creditors. And if the BIS won’t act, the Swiss government should. The litany of abuse surrounding governance issues at FIFA, also based in Switzerland, has triggered calls for the Swiss government to intervene in soccer’s ruling world body.

The problem is that the Swiss government could not do so, even if it so desired. The BIS was set up by inter-state agreements in 1930, signed in The Hague between France, the United Kingdom, Belgium, Italy and Germany. The BIS’s original goal was to smooth German reparation payments following the First World War. The Swiss government granted the BIS a Charter which was reaffirmed in 1987.

This forbids Switzerland from abrogating or changing the Charter without the joint agreement of the original signatories to the 1930 Hague Agreements. Furthermore, Article 24 of the 1987 agreement absolves Switzerland from any international responsibility for acts or omissions of the Bank or its officials on Swiss territory. So far as the Swiss authorities are concerned, one could say that the BIS might as well be located on the Moon.

Given the widespread abuse of the legal privileges enjoyed by the BIS, there is clearly an urgent case for reform. The governance of the BIS is wrapped in obfuscation and just like commercial banks it needs to be far more transparent about its activities. It is significantly unaccountable for its actions.

The onus therefore lies with the original signatories to the 1930 Treaty along with the 56 central banks who now constitute the Bank’s stakeholders. In this context, Sir Mervyn King, the Governor of the Bank of England, could demonstrate a leadership role in calling for reform. Action is required now if creditors are to receive justice.