Let’s help debtors by making borrowing more expensive
There could be a flaw in this plan:
Miliband will say resources are now more constrained – but as well as debt refinancing for a large number of countries, he will demand an overhaul of the “common framework” for restructuring the debts of countries unable to pay.
The framework is widely criticised as too slow and cumbersome. Among other reforms, the UK wants to see changes to ensure private creditors cannot hold up negotiations – as has happened in recent cases including that of Ethiopia.
An example of the new plan is here:
The UK has a critical role to play in addressing this impasse in the Common Framework. Since 90% of debt of countries eligible for the Common Framework is governed by English law, UK legislation could incentivise private creditors to agree to equal treatment to that offered by government creditors.
Why is the Common Framework failing to enable fast and fair debt restructurings?
The Common Framework for Debt Treatments Beyond the DSSI was announced by the G20 in November 2020 in response to the growing debt crisis triggered by the pandemic. However, in the three years since it was established, only four countries (Chad, Ethiopia, Ghana and Zambia) have applied, and none have yet seen any debt cancelled.
The key reason is the failure of private creditors to provide equal levels of debt cancellation to that agreed by government creditors. Although the Common Framework requires private creditors to take part, it lacks a process to ensure this. G20 governments and the IMF have urged private creditors to cooperate and provide equal treatment, but they have offered lower income countries no new tools to negotiate deals with their creditors.
That English law be changed, well, maybe. It’s always possible that the current arrangements can be improved. Possible, note.
The current arrangements are that political loans are subject to political rules - the World Bank, the IMF, varied governments lending directly and so on, those are political loans subject to political pressures. Private sector lending is, of course, private sector lending. Governed by standard commercial laws, what’s written into the lending contracts.
Yes, this does matter. When Greece went kablooie the Greek Parliament changed the laws - retroactively - which governed private sector bonds under Greek law. What’s called a “cramdown”, where creditors can be forced to accept the terms agreed to by some percentage of other creditors - in itself a perfectly sensible idea - had the rules changed. From memory, from 90% of the creditors in that specific bond issue to 75%. At which point there were enough creditors in each Greek law issue that everyone did get crammed down and everyone then lost multiple tens of percent of their money. There were some few English law bonds and the Greek Parliament did not have the power to change English law. The English law bonds were not crammed down and paid out in full. One way of looking at this is that English law meant the Greek government could not gain their righteous and fully deserved debt alleviation. Another is that English law protected creditors from having their money nicked.
Thus this idea that English law should be changed. So that what was, previously, private sector debt ruled by the contractual terms in the original instruments now be changed. So as to subject even that private sector debt to political wiles and pressures.
And, well, maybe English law should be changed?
But why is it that - just to create an example - French folk lending money to Madagascar - again, to repeat, just an example - use English law? Because English law is not under pressure from French, Madagascan, or even international politics. English law does what it says on the tin, here’s the contract, those are the terms, and?
Which is what is suggested should change. Rather than a fixed contract agreed to at the date of borrowing everything should be subject to those political whims. And, well, OK. Maybe.
It’s just that why is it that 90% of such debt is governed by English law? Because this lowers the risk to creditors. Borrowers then agree to this legal jurisdiction because it lowers the interest rate they must pay on their borrowings. Greater legal certainty does that, lowers borrowing costs.
Thus the effect of changing English law to allow more and greater cramdowns is going to be to increase the interest rate paid by every borrower. Increased political risk on a loan will do that.
The proposal is therefore to aid debtors by making it more costly for them to borrow money. Seems non-optimal, really. But that’s politics, eh?
Tim Worstall