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Specter 11



E. The Need for an International Chapter 9 - Lessons by History


 The present evolution towards debt relief as well as historical lessons show that economic constraints finally enforce debt reduction.[100] The final outcome of the Latin American debt crisis in the 1930s, offers excellent illustrations.[101] The case of Mexico after 1914, where debt service was finally geared to its capacity to pay is a particularly good example. Creditors finally received less than 10 per cent of face values. Some big European debtors were themselves delinquent with regard to their debts after World War I. The British and French governments defaulted in the 1930s, considering the needs of their peoples more important that legal obligations to creditors. The essence of this argument is, by the way, familiar to bankruptcy specialists. In the 1940s nine US states - sovereign as far as debts are concerned pursuant to the 11th Amendment - suspended interest payments on loans they had received to build railways and canals, when the price of their main export good, cotton, left them short of foreign exchange. US states have, by the way, a long history of defaulting. The term repudiation was apparently coined by Mississippi in the last century when it simply refused to honour its debts.

 The management of the Egyptian debt crisis of 1876 is an economic success story contrasting vividly with present BWI-policies. How this debt accumulated is not discussed here, nor its role in Anglo-Egyptian relations, only the technicalities of the solution. The administrator appointed to protect creditor interest, Evelyn Baring, did not apply the “lemon squeezer” approach. He lowered, e.g. taxes, postal fees, financed expenditures in public health and education, or encouraged improvements in irrigation. Wages and pensions were paid out in full. After a surprisingly short time his concept was economically successful for creditors and the debtor alike.[102] A hard nosed 19th century capitalists managed this debt crisis much better and more quickly than international public sector institutions did after 1982. It remains to be noted that the representatives of private bondholders had decided to use Egyptian insolvency law as the yardstick for the solution. This underlines that Adam Smith was right. His advice should finally be heeded to avoid further unnecessary damages to debtor economies and further unnecessary suffering by vulnerable groups. It also shows that private, hard nosed nineteenth century capitalists may not only deal with a debt problem more efficiently but also in a much more humane way - compared with international public sector institutions such as the BWIs.

  Two spectacular cases of de facto composition after World War II deserve special mentioning: the London Accord with Germany and the Indonesian solution of 1969. Both roughly halved the present values of these countries' debts.

 Germany in 1953 is a very prominent case, also because the international Jubilee Campaign - and most notably the German Erlaßjahr 2000 - picked it up at the end of the last millenium. Comparing Germany’s debt indicators with those considered "generous" for the poorest countries by the Cologne Summit shows an inexplicable difference regarding the treatment of debtors. During the years before the London Accord Germany had e.g. a debt service ratio of less than 4%,[103] which was considered unsustainable though well below the 15% of HIPCs after Cologne. Table 2 reproduces Hersel’s calculations of Germany’s debt indicators as used after 1982 for sovereign debtors.

Table 2: Germany’s Debt Indicators 1949-53 (% of export earnings)


Year               Debt Ratio       DSR

1949                     358                       13,71

1950                     173                         6,78

1951                     99                         3,89

Jan-Jul 1953           90                         3,52

1952                     85                         3,35

Source: Hersel 1998


 These figures based on data of Germany's Statistisches Bundesamt show quite a difference between what was considered unbearable in the case of Germany and any HIPC. Payments scheduled for 1953-60 were so low that the scheduled DSR fell to 3.06 in 1953, 2.57 in 1954, 2.21 in 1955, and to 1.84 in 1956. After that year it only rose once to slightly higher than 2 per cent: in 1958 2.07 per cent of export earnings were scheduled for debt service. This is explained by the fact that amortisation started in 1958 after five years grace. Germany's economy boomed so dynamically after this debt reduction that the country outdid its schedule, using the contractual possibility of early repayments. Paying more than agreed and scheduled in any year between 1953-60 it always paid less than 5 per cent of export earnings and never more than 60 per cent of its trade surplus. Based on this fact the German campaign Erlaßjahr 2000 demanded an upper limit of 5 per cent for debt service. As Hersel shows creditors accepted a German trade surplus, and they agreed that debt service cannot generally exceed this surplus - another important difference vis-à-vis present (Southern) debtors.

 Germany’s debt burden was vanishing rapidly once trading activities started to pick up again after WWII. Any SC recording a similar quick improvement would certainly not be considered a case for debt relief nowadays. One cannot contradict Hersel[104] conclusion: "if the West Germany of 1952 were analysed under the current conditions of the HIPC-Initiative, it would not be eligible for any debt reduction". Fortunately it was not. Nor was it forced to adopt present Structural Adjustment policies. The successful economic policies Germany was allowed to pursue, characterised by the term “social market economy” (Soziale Marktwirtschaft) were the very opposite of BWI-type “Structural Adjustment”.

 At the end of the 1960s Indonesia's new Suharto regime received a debt reduction very similar to the German case.[105] This is hardly a surprise considering that the mastermind behind the Indonesian solution was also Hermann J. Abs, accepted in this role both by creditors and the debtor. Although Indonesia - like any SC at that time - held mostly public debts, the composition covered all kinds of debts, public and private. Abs insisted on strictly equal treatment of all creditors, declaring this "indispensable for any settlement of debts"[106] As Indonesia was substantially indebted to Communist governments, this demand was also of great political importance. The West was understandably reluctant to reduce Indonesia's debts just to make repayment to the East easier.

 Legally, of course, creditors have always refused to recognise these cases as precedents. In the case of Indonesia Abs had to find arguments in favour of the singularity of the Indonesian case and its inapplicability to other debtors. These "special characteristics" are of greatest interest to anyone studying the present crisis:[107]

 - All old debts were contracted by the previous government.

 - Indonesia's debts consisted predominantly of credits with little or nor economic usefulness; practically the whole debt service had to be financed by the central budget.

 - High inflation could only be brought under control by energetic policy and exceptionally generous help from without.

 - The country was unable to repay its debts in the future.

  Indonesia's debtors, especially the Paris Club, obviously recognised these reasons as valid. It should therefore be examined whether they apply to present cases. If they do there seems to be no logical reason why the same solution should not be applied as well - without creating any legal precedent if necessary. When Ghana demanded "Indonesian type" relief soon after the Indonesian settlement, creditors were reluctant to grant comparable terms, explaining this by the desire to avoid precedents. Eventually, Ghana was granted very "generous" terms[108] that have remained undisclosed until this day. The present discussion on debt reduction has hardly made disclosure any more likely.

 More recently Poland, and Egypt received substantial debt reductions. Both were politically motivated, but they show nevertheless how quickly and simply debt reductions can be done if and when creditors agree. They, too, therefore prove that international insolvency can be done immediately once creditors decide to apply the Rule of Law and the respect for Human Rights onto their own claims as well.

 After the Asian Crisis of 1997 and the Indonesia's economic melt down the solution of the 1960s has been referred to by various authors and NGOs. In July 2000 there was a seminar on Indonesian debts, which I attended, where the debt reduction of the 1960s was also discussed in detail. Interestingly, the IBRD published a "Report" on Indonesia's debt situation, in which it conspicuously avoided the word debt reduction, using renegotiation and rescheduling instead.[109] In the discussion the IBRD official on the panel (who spoke no German) upheld the assertion that the settlement was a rescheduling, not a reduction. The fact apart that simple calculations of present values done on the basis of the Bank's own publication show that debt reduction did occur - Kampffmeyer puts the reduction granted at 57 per cent[110] - this assertion seems explicable from changes in the use of language. Abs was admittedly guilty of being unaware of "World Bank lingo" that developed years after 1982, differentiating very strictly between rescheduling (presently virtually always understood exclusively as a change of payment schedules without reductions in present values) and reduction, which, of course, is logically also a change in schedules. Abs used "Umschuldung" (rescheduling) and comparatively seldom "Erlaß" (debt reduction/cancellation) interchangeably in his paper. This appears - as further correspondence showed after I had sent a copy of Abs's paper (originally written in German) to Jakarta - to have been seen as a reason to claim that no debt reduction occurred, an error of which, of course, only a translator or a person able to read the original can be guilty. Even well after the 1960s the terms were not used in their present sense, as can be proved by looking at publications. Kampffmeyer and Raffer, e.g., both advocating an international insolvency, still used rescheduling in the broader sense including debt reductions. So does Krueger in her recent proposal, speaking of "an orderly restructuring"[111] mimicking bankruptcy procedures. Finally, as Abs himself - who never denied that debt reduction had taken place - had used Erlaß in his paper as well, the German campaign Erlaßjahr 2000 demanding debt reductions would have to be translated as "Rescheduling Year 2000" if the IBRD were right.

  While the IBRD's box on the first Indonesian settlement is not always wholly correct as regards facts - outright debt reduction happened as this was more convenient to some creditors than an interest rate of zero (as slightly preferred by Abs)[112], and the IBRD does not mention Ghana, there is one interesting passage that merits quoting. The IBRD writes

  In addition, the Paris Club permitted Indonesia, under a bisque clause arrangement similar to that contained in the Anglo-American Financial Agreement, to defer at its option up to one-half of the principal payments falling due in the early years of the new schedule. These deferred obligations were to be repaid with an interest at 4 percent per annum during the final years of the agreement.[113]

  As a quick look at the British terms shows, similarity of terms still means tougher treatment for Indonesia in comparison with the UK. Nevertheless, the BRD is right to state that the Abs-settlement was generous. Incidentally, the last years for deferred interest payments included the years 1997 and 1998.

 There is no valid economic reason for treating debtors differently and for denying people a minimum protection of human dignity because of their race, colour, or nationality. On the contrary, the assumption that sovereign debtors would not be allowed to go insolvent has caused much economically unsound lending, resulting in massive misallocations of resources. International insolvency would allow the market mechanism to work more efficiently in international financial markets. Banks would stop lending if loans were not used properly, as they usually do. If an international Chapter 9 had existed in the 1970s there might be no debt crisis now - the debt burden would certainly be lower. Both economic efficiency and the protection of human dignity therefore demand economists and lawyers to co-operate in elaborating an international Chapter 9.


F. Renewed Interest in International Insolvency Procedures

 In 1990 the Working Group Swissaid/ Fastenopfer/ Brot für alle/ Helvetas/ Caritas submitted the idea of  an international insolvency to the Swiss Bundesrat, supported by two papers written by Prof. K.W. Meessen (Augsburg/Geneva) and myself. It was taken up and discussed in the Swiss Parliament. Switzerland tried discreetly to discuss this proposal internationally, but finally stopped these attempts as no other creditor government signalled any interest. In the year 2000 this proposal was again taken up by the Swiss parliamentarian Christoph Eymann[114] in the Nationalrat. Unlike before, the Swiss government, who replied on 28 June 2000, presently prefers HIPC to insolvency.

 The lack of reactions to the Swiss initiative might to some extent also be an effect of the situation at that time. With the beginning of the 1990s and the official euphoria about new capital flows to Latin America any discussion on mechanisms for debt reduction stopped. According to the IBRD the debt crisis was over, the 1990s were touted as the years of hope and recovery.[115] The Mexican crash changed that. This euphoria of the 1990s was not the first of its kind, by the way. The 1970s saw euphoria about the well working and unregulated Euromarket, successfully "recycling" money to the Third World, a euphoria that stopped in 1982. The one about beginning recovery in Sub-Sahara Africa was already mentioned above.

  Shortly after the Mexican crash 1994/5 the Chairman of the Federal Reserve System, Alan Greenspan, suggested thinking about an international insolvency as an appropriate mechanism to settle the debt problem. The Financial Times reported that Treasury Secretary Robert Rubin said he carefully avoided the term "international bankruptcy court" but that some procedures to work out the debt obligations of debtors were needed. In an article in the Wall Street Journal of 10 April 1995 Rep. Jim Leach of Iowa, the Chairman of the House Banking and Financial Services Committee, recommended international insolvency proceedings: "What is needed today is a Chapter 11 [insolvency of firms] process for the global financial system, a technique to keep nation-states and their people from the impoverishing implications of insolvency." Mentioning the little known Chapter 9 proceedings [for debtors with governmental powers] briefly, he specifically pointed out its implicit understanding that local government must continue to function. At first it was considered informally to bring the issue to the table of the Halifax G7 summit, but this was not done. New euphoria on capital flows to East Asia soon eclipsed the Mexican shock, and the problem faded away again.

 At the end of the 1990s the idea of an international settlement mechanism based on arbitration and along the lines of US Chapter 9 has gained some cur­rency again. Many years of failed attempts by creditors to find a solution seem to be one factor explaining this. But the main reason is no doubt the strong lobbying by NGO campaigns for meaningful debt relief. The most important movement in this regard was Jubilee 2000 UK, also the first Jubilee campaign taking up this issue. Their platform demanded the cancellation of unpayable debts. To determine which part of debts was unpayable an international arbitration process as described above under the heading International Chapter 9 was demanded. The word insolvency - even more radical in those days - was not expressly used by the official platform, though. They were quickly followed by the German and Austrian Erlaßjahr-campaigns. These latter expressly demand an international Chapter 9 insolvency for states. So does the Tegucigalpa Declaration, or the German Commission Justitia et Pax, which published a paper just before and for the Cologne Summit.[116] Internationally, however, particularly in the South, the term arbitration is preferred vis-à-vis insolvency. At present an international NGO working group on FTAP (Free and Transparent Arbitration Process) pursues this issue.

  UNCTAD[117] renewed the proposal of applying Chapter 11 insolvency to sovereign creditors, initially made by it in 1986. It also referred to Chapter 9 and the arbitration mechanism contained in its international variant.[118] In its Chapter on Sub-Saharan Africa the Report demands


Nevertheless it is possible to establish the key insolvency principles and apply them within the existing international framework. The application of these principles would dictate an immediate write-off of all unpayable debts in SSA [= Sub-Sahara Africa] determined on an independent assessment of debt sustainability.[119]

  The first word refers to UNCTAD's doubts whether an international bankruptcy court applying international insolvency rules laid down in the form of an international treaty ratified by all members of the UN can be expected to be established easily. This doubt is wholly shared by most proponents of FTAP/Chapter 9 insolvency. Therefore they propose temporary arbitration panels, not the establishment of a court acting on the basis of virtually universal ratification. This is e.g. the official position of Erlaßjahr 2000 Germany, repeatedly stated by their spokesperson Jürgen Kaiser.

 In connection with the Asian crisis insolvency procedu­res for firms are seen as essential for avoiding future crises. The Reports on the International Fi­nancial Architecture published by the OECD recommend it strongly, but avoid the I-word with regard to sovereign debtors. The Working Group on International Financial Crises propo­sed an insolvency procedure in all but name, demanding the international community to provide: “in ex­ceptional and extreme circumstances ... a sovereign debtor with legal ‘breathing space’ so as to facilitate an orderly, co-operative and negotiated restructuring”.[120]

 Emulating insolvency features, such as debt reduction by qualified creditor majority or "Collective Action Clauses" for sovereign bond contracts, was recommended as a critical contribution to "creating the institutional structure needed to encourage orderly workouts"[121], because a "binding in­solvency regime for sovereign debtors is unlikely"[122]. The Re­port even admits that "a purely voluntary approach" might not be feasible because "the govern­ment may not have the bargaining power to obtain sustainable terms",[123] e.g. if credi­tors demand destabilisingly high interest rates. It remains to be asked why one shied away from the obvious conclusion - the need of an independent entity empowered to decide in such cases - and why all the advantages praised by the Working Group in the case of firms should not be equally advantageous in the case of sovereign debtors. Why emulate features of insol­vency instead of simply using the existing model, which can be adapted so easily?

 In a recent paper two employees of the Bank of England and the Bank of Canada, Andy Haldane and Mark Kruger, propose a standstill arguing that sovereign debtors need the safe harbour which bankruptcy law provides in a corporate context: "Everyone accepts this as an important part of the capital market mechanism; it supports, not supplants, market forces. The same is true in an international context, where standstill guidelines can serve as surrogate bankruptcy law."[124] Like Anne Krueger later, the authors refute many "objections" against their proposal that have also been made against sovereign insolvency, but stop short of proposing an independent arbitration panel.

 The OECD,[125] too, has come around to accepting insolvency: “Moreover, an international lender of last resort and an international bankruptcy court could help to prevent financial panics altogether.”

 The IMF, a bulwark against insolvency over years went one step further. Michel Camdessus suggested “some sort of Super Chapter 11 for countries” in an interview with the Financial Times of 17 September 1998, qualifying the need for international bankruptcy procedures “already” an “obvious lesson”. This conclusion is welcome, even though “already” is definitely the wrong word. One has to ask, however, why Camdessus demanded the legally unviable variant of a Chapter 11 rather than an international Chapter 9. While one cannot know why this was done, one can point out that Chapter 11 - made for firms - does not have the transparency of a Chapter 9 insolvency described above. It would therefore be comfortably closer to the IMF's tradition of secrecy and behind-closed-doors decisions.

 As already mentioned above the IMF's new First Deputy Managing Director on 26 November 2001 proposed a new approach to sovereign restructuring along the lines of insolvency.[126] Her speech has given this idea political momentum, and fuelled the discussion strongly. She clearly stated that the IMF should not adjudicate disputes between creditors and creditors and the debtor, like the advocates of an international Chapter 9. With this statement in mind, it is not absolutely clear what she means by saying that the Fund is "the most effective channel through which the international community can reach a judgement on the sustainability of a country's debt"[127] unless she sees the IMF as some kind of mediator, possibly giving expert advice. She differs from Raffer's proposal as the debtor country requesting this mechanism would have to get its request endorsed by the IMF, a creditor, not by an independent entity. Finally, she is not clear about whether she proposes Chapter 11 or Chapter 9 as the model, which, however, means that Chapter 9 is not explicitly ruled out either. One would have to concur with her that the IMF could play a valuable role, helping to bring such a process about. It might indeed encourage debtors

 to go down the road earlier than they do now. This is not a bad thing. At the moment too many countries with insurmountable debt problems wait too long, imposing unnecessary costs on themselves, and on the international community that has to help pick up the pieces.[128]

  The IMF - that has opposed this solution so far - could advocate it with its members instead, or offer technical help in solving problems that might come up, such as steps to avoid disruptive interference by vulture funds. The IMF could help co-ordinate bondholders. It might even lend money necessary to keep the country going during FTAP, but only if no conditionality is attached to these drawings.

  Last but not least one has to concur with Krueger that the mere existence of appropriate procedures would make solutions easier, leading to agreements "in the shadow of law", without any formal process. If their outcome are acceptable to civil society this may save anyone a lot of trouble, especially the debtor and its population.

  On the political scene the demand of an international Chapter 9 is most strongly discussed in Germany. Since Erlaßjahr 2000 started their campaign this issue has received attention by theBundestag as well as the administration. The Advisory Council of the Federal Ministry of Co-operation (BMZ) commissioned a report on it, which was widely discussed. In April 1999 the Bundestag demanded that the Government study the issue of international insolvency. A question (Kleine Anfrage) by the CDU/CSU parliamentary fraction in March 2000 requested information what the Federal Government had done to fulfil this demand, whether it considered initiating such a mechanism and if so on what basis and what concrete steps had been taken. A Hearing on this issue by the Bundestag's Finance Committee (Finanzausschuß) took place on 14 March 2001.

  The Italian Parliament passed a law on debt relief in the summer of 2000, Art. 7 of which requests an examination of present debt management. Under the title International Regulations on Foreign Debt this article reads:

 The Government will propose, to the relevant international institutions, the starting (initialize) of the necessary procedures to obtain a ruling from the International Court of Justice on the consistency between the international regulations governing developing countries’ foreign debt and the general framework of legal principles and human and people’s rights.[129]

  Considering that the serious effects of present debt management on the poor, in particular on vulnerable groups have been proved and admitted by the Managing Director of the IMF already during the 1980s - this is a very much needed action.

  In the UK the Treasury Committee of the House of Commons[130] published the proposal of an international Chapter 9 insolvency with symmetric treatment of IFIs as a measure to bring financial accountability to the IMF as an appendix of the document on their hearings on the IMF and debt management. In the summer of 2000 the International Development Committee of the House of Commons published its 9th Report on The Effectiveness of EC Development Assistance[131]. Although the topic is not debt issues specifically this Committee published a submission of mine as Appendix 10 which suggests an international Chapter 9 as the necessary precondition for any meaningful development co-operation in overindebted ACP countries. At the Ottawa meeting of the Bretton Woods Institutions in November 2001 the British Chancellor of the Exchequer, Gordon Brown, and the Canadian Finance Minister, Paul Martin, spoke out in favour of a solution modelled after the US Chapter 11 insolvency.

 Urging that "debt cancellation should become part of the dialogue within the ACP-EU Partnership and that the EU should encourage other donors also to take measures to relieve or cancel debt"[132] the ACP-EU Joint Parliamentary Assembly demanded FTAP last year, believing

 that consideration should be given to the creation of an International Debt Arbitration Panel to restructure or cancel debts where debt service has reached such a level as to prevent the country providing necessary basic social services[133]

  After the default of Ecuador's Brady-bonds civil society - possibly best represented by the demands contained in the paper of CONAIE, the Confederación de Nacionalidades Indigenas del Ecuador[134] - demanded a debt-to-development swap of all present debts, as well as international arbitration to solve problems of future overindebtedness. It was demanded that debt service be replaced by payments into a Fondo Social y Ecológico to finance social, cultural and ecological programmes (including  education). This demand is essentially the same as the counterpart fund proposed by Jubileo 2000 Red Guayaquil in a joint study with the UNDP and UNICEF[135], which specifically addressed the problem of servicing debt to public creditors, including IFIs.

 Referring specifically to US municipalities CONAIE's demand for international arbitration also seconded Jubileo 2000 Red Guayaquil, who had been one of the organisers of a conference on Ecuadorian debts in early December 1999 where this solution had been presented. Quite rightly, CONAIE pointed out that such arbitration procedures result from the very fundamental base of the Rule of Law that no one must be permitted to be judge in their own cause. Stating with clarity that this essential base of the Rule of Law is presently violated by creditors, being "judge and party"[136] CONAIE demanded creditor governments to respect the Rule of Law. The paper also states that fundamental human rights have been violated by present debt management denying otherwise customary debtor protection in the case of the poorest. However, as usual in cases of Southern debts, neither the Rule of Law nor human rights cut any ice with the Paris Club whose members keenly preach these very principles to their debtors except when it comes to their own claims.

 It is important to mention that CONAIE blames the Ecuadorian government with outmost clarity as well, identifying the important role of Ecuador's government and élites in creating the debt overhang. While the country is not simply presented as an innocent victim, the co-responsibility of creditors is properly addressed, who often granted loans quickly and easily to dictatorial regimes.

 The paper refers to Ecuador's experience with counterpart funds created in connexion with debt reductions by Belgium, Switzerland and with partial debt reductions by Germany. Especially the Swiss case, the Fondo de Contravalor Ecuatoriano Suizo (FOES) is presented as highly successful. Finally, the paper refers to Germany's London Accord of 1953 offering generous terms to a debtor whose situation was perceptibly better than Ecuador's, the basically similar Indonesian case, and the more recent cases of Poland and Egypt to show that demands for meaningful debt reduction are technically possible.

 Like CONAIE Afrodad, a platform of NGOs in Africa, has taken up the demand for an internationalarbitration court on foreign debt, stressing the same concerns as CONAIE. Speaking of "institutional imbalances" Afrodad becomes very explicit:

  As is said in West Africa: In a Jury of Foxes (the Creditors), the Chickens (the Debtors) are always the guilty! The Paris Club for example, is itself undemocratic as it is a gang of creditors against one debtor etc.

  These undemocratic practices have to be replaced by structures which respect human rights, democracy and the right of the Debtor countries and their peoples to be heard.[137]

 The document goes on, referring to the UN's Financing for Development process:


A proposal for internationalisation of  Chapter 9 Insolvency Law of the USA was presented as part of the NGO Hearings to the United Nations in the context of  the Financing for Development (FfD) Conference preparations during November 5-9, 2000 in New York by Professor Kunibert Raffer of Austria. Chapter 9 of USA Laws is a procedure for solving the insolvency of a governing body, a Municipality, without violating or undermining its governmental power. Applied to sovereign countries, the Law would not violate sovereignty of the state.

  Referring to fears that insolvency procedures might not highlight those unequal power relations at the root of the debt overhang, and that declaring bankruptcy might be seen as suggesting that debtors are solely responsible for the debt crisis, Afrodad also sees a need for an international arbitration process explicitly addressing the responsibilities of creditor countries and the effects of exogenous factors that might be influenced by creditors, such as denied market access, trade imbalances and declining terms of trade.

 Based on the Chapter 9 proposal, an arbitration court with a larger mandate is finally demanded. It should expresslydeal with both the issues of debt as well as for retrieval of money stolen by leaders and put into foreign banks, which has to be returned to its lawful owners. Compared with an international insolvency in the strict sense Afrodad's variant is more ambitious and addresses problems at the root of the debt crisis in a more direct way. Implicitly, of course, problems such as Northern protectionism cannot be ignored as well. The question of market access for instance is inseparably linked with the percentage of debt reduction necessary to reach economic viability of debtor nations.

 In the US the “Global Sustainable Development Resolution” drafted in 1999 by Congressman Bernie Sanders called for an international insolvency mechanism based on Chapter 9 of US bankruptcy laws, including arbitration as proposed within an international Chapter 9. More recently, the Secretary of the Treasury, L. Summers said in an interview in Time magazine of  24 July, 2000[138] that  "Even the toughest private lenders write off their bad debts. That's what governments - and  private lenders - need to do with bad loans they have made." His successor at the US Treasury, Paul O’Neill, has publicly confirmed the usefulness of an international insolvency procedure for sovereign governments, an idea seconded by the British Chancellor of the Exchequer, Gordon Brown, and the Canadian Finance Minister, Paul Martin a bit later. This change of mind of important G7 countries might also have been helpful for the change of attitude within the IMF expressed by Anne Krueger.

 At the UN Kofi Annan, as already quoted above, demanded FTAP/Insolvency. Unfortunately he has meanwhile - possibly so under strong pressure - totally taken back his courageous demand, speaking of mediation not arbitration in his Report.[139] Unfortunately, he seems to have felt forced to go even one step further, demanding an "independent" mediator, assisted by the IMF and other experts (one might suppose the IBRD to qualify) on a voluntary base. Clearly, this would not change the situation allowing creditors (mainly the IMF) to dominate procedures. In contrast to arbitration this would still deny sovereign debtors and the poor the principles of the Rule of Law, but might produce the wrong impression as though something had actually changed in favour of debtors. Therefore the Secretary-General’s first proposal is preferable, even though mediation was no doubt proposed after conscientious and careful deliberations.

 The FTAP-option was presented and discussed at the Civil Society Hearings of Financing for Development in New York in November 2000.[140] The High-Level Regional Consultative Meeting on Financing for Development, Asia and Pacific Region (Jakarta, 2-5 August 2000) called for an international bankruptcy procedure for states[141] - possibly a result of lessons learnt from the Asian crisis.

 Last but not least the idea was echoed in academic publications. Most notably Rogoff[142] presented an international Chapter 9 as a means to stabilise the international financial system, even though he expressed doubts about its implementability in the near future. However, with enhanced global and regional political institutions "ideas like a global bankruptcy court or an international system of financial regulation may not seem so far fetched."[143] At present, the lack of an effective international bankruptcy system allows "'Junk' country debt" to play "too large a role".

 Barry Eichengreen discusses this proposal, listing "Raffer's International Bankruptcy Court" in his "Architecture Scorecard".[144] He mentions quite a few arguments in favour of insolvency, such as the unrestricted "destructive incentive to scramble for the exits" or that - without a court or arbitrator - "talks can drag on, aggravating the macroeconomic and financial losses caused by default".[145] Eichengreen also mentions "vulture" funds,[146] and the problems they create at present. All this would speak for international Chapter 9 procedures.

 Eichengreen, however,  eventually comes down on the side of new clauses (e.g. majority voting clauses) in bond contracts as the "only practical way",[147] thinking them to be "infinitely more realistic than .... some kind of supranational bankruptcy court empowered to cram down settlement terms." There is no doubt that such clauses in loan contracts make sense, and he was perfectly right that there was not yet any political will of official creditors to allow such a procedure at that time, before the declarations by the US, the UK, Canada, and the paper by Anne Krueger. Propagating international insolvency arbitration is indeed an uphill struggle. He is wrong, though, in thinking of a supranational institution, as the source he quotes calls for an ad hoc arbitration panel to be dissolved when no longer needed - a traditional feature in international law not normally referred to as supranational.

 One may suppose this error to stem from the passage: "The reason why no court, whether located in a creditor or debtor country, should chair the procedures is self-evident: its impartiality is not guaranteed"[148], which refers to courts, not courts of arbitration. Language apart, the illustrating example - the US Court of Appeal for the Second Circuit of New York, definitely no court of arbitration - proves this beyond doubt. Eichengreen's error nevertheless suggests the use of "panel" whenever discussing arbitration. This might also be helpful to differentiate the proposed ad hoc panels from a permanent court of arbitration. Technically, a permanent entity could handle such cases as well. But ad hoc panels can be established much more quickly, and too much time has already been wasted because of creditors. Furthermore it is to be hoped that - once the backlog of cases is resolved - this kind of arbitration will not be needed frequently. Finally, ad hoc panels might have the advantage of being custom made for each case.

 In the German language area a conference volume edited by Dabrowski et al[149] discusses the proposal of an international Chapter 9 in detail. Frenkel and Menkhoff mention it,[150] summarising, however, largely Rogoff.


G. Conclusion

 In the case of an insolvent county creditors know that they will not be repaid fully. The question is thus only how to share losses, and whether to grant any debtor protection. All civilised legal systems answer this question unequivocally by giving the debtor's human dignity precedence over bona fide claims. Insolvency procedures are part and parcel of economic life nowadays, and they fulfilalso the economic function of a disincentive to lax lending, as happened in the 1970s with regard to Third World debts. Internationally, such procedures do not yet exist, although they or parts of insolvency procedures have repeatedly been emulated.

 An mechanism equivalent to domestic insolvency is needed, not least to redress the situation where only one class of debtors is denied meaningful relief, a fact that makes lending to them unduly attractive. It can be shown that the mechanism of insolvency can be applied to sovereign debtors, and that it is able to redress the present situation where the Rule of Law and human rights of debtors are only guaranteed to those living on the right and mostly white side of the North-South divide. It is important to stress that only a solution modelled after Chapter 9 safeguards the debtor's sovereignty and gives the population a voice. This is a fundamental difference to Chapter 11. Therefore one must insist that the participatory Chapter 9 not Chapter 11 be used for a really fair and transparent process. Lobbying and campaigning may still be necessary to assure that this solution for public debtors in the US be applied globally.

 There are some very encouraging signs of slow progress towards this economically, socially and legally indicated solution. Based on recent evolutions and statements it is to be hoped that Adam Smith's lucid advice will finally be heeded after decades of unsuccessful "debt management". It is to be hoped with Anne Krueger that no further delays will occur, imposing unnecessary costs on debtors and the international community. One must not give up hope that a child's life expectancy will eventually depend a bit less on whether (s)he is born in a heavily indebted municipality within an OECD-country or in a heavily indebted country in the South.

[100]For more details and literature on the following examples v. Raffer 1990, op.cit. pp. 303f; Raffer 1989, op.cit., pp.59f

[101]For a brief history of  Latin America's debts since independence as well as a comparison between the periods before and after the Bretton Woods Institutions established themselves as "debt managers" see Acosta, Alberto. La increíble y triste historia de América Latina y su perversa deuda externa. In: Chris Jochnick & Patricio Pazmiño Freire (eds) Otras caras de la deuda, Propuestas para la acción. Quito/ Caracas: CDES/ Nueva Sociedad 2001, pp.17ff (as many readers will have noticed, the paper's title is inspired by Gabriel García Márquez)

[102]cf. Dommen, Edouard. Comment un noble étranger libéra le khédive de sa dette – un conte oriental. In: Choisir (septembre) 1999, pp.26ff.

[103]Hersel, Philipp. The London Debt Agreement of 1953 on German External Debt: Lessions for the HIPC-Initiative. In: Eurodad (ed.) Taking Stock of Debt, Creditor Policy in the Face of Debtor Poverty. Brussels. Eurodad1998, p.21

[104]ibid., p.22

[105]cf. Kampffmeyer, Thomas. op.cit.

[106]Abs, Hermann J. Das Problem der indonesischen Auslandsverschuldung und Überlegungen zu seiner Lösung. 30 June 1969 (mimeo), p.9

[107]Abs, Hermann J. op. cit. (emph. mine). As Abs's expert's report has not been published v. the quote in Raffer 1990, op. cit., p. 304.

[108]Hutchful, E. (ed) The IMF and Ghana, The Confidential Record, London etc: Zed 1987, pp. 273f (Document 60: Finance Minister's Report on Ghana Debt Conference)

[109]IBRD. Indonesia, Managing Government Debt and its Risks. Washington DC & Jakarta: IBRD, p.25

[110]Kampffmeyer, Thomas. op. cit.

[111]Krueger, Anne. op.cit.

[112]Kampffmeyer, Thomas. p. 52, and p.146, footnote 21

[113]IBRD. Indonesia, Managing ...... op.cit.

[114]Schaffung eines Schiedsverfahrens zum Interessenausgleich zwischen Schuldnerländern und Gläubigern, Motion of 22 March 2000 (00.3103 Motion)

[115]For quotes amply illustrating and proving this point see Raffer, Kunibert. Is the Debt Crisis Largely Over? - A Critical Look at the Data of International Financial Institutions. In: Richard Auty & John Toye (eds) Challenging the Orthodoxies. London & Basingstoke: Macmillan 1996, pp.23ff

[116]Justitia et Pax. Neue Wege zur Lösung der internationalen Schuldenfrage, Stellungnahme der Deutschen Kommission Justitia et Pax zur Internationalen Schuldenfrage, Bonn, 27 May 1999

[117]UNCTAD. Trade and Development Report 1998. Geneva: UN 1998, pp.89ff

[118]ibid., p.91

[119]  ibid., p.130

[120]OECD (ed). Reports on the International Fi­nancial Architecture Report of the Working Group on Internatio­nal Financial Crises, 1998, p.37

[121]  ibid., p.21

[122]  ibid., p.19

[123]  ibid., p.30

[124]Haldane, Andy & Mark Kruger. The Resolution of International Financial Crises: Private Finance and Public Funds, November 2001, p.13 (mimeo). The authors "acknowledge the substantial input and involvement of Paul Jenkins, Deputy Governor, Bank of Canada and Mervyn King, Deputy Governor, Bank of England" (these two gentlemen also wrote the Foreword). One may thus presume that this proposal enjoys support beyond that of its authors.

[125]OECD. OECD Economic Outlook, no. 65, June1999, p.191

[126]Krueger, Anne. op. cit.

[127]ibid., p.7

[128]ibid., p.8

[129]Legge 25 Luglio 2000, no.209: Misure per la riduzione del debito estero dei Paesi a piú basso reddito e maggioramente indebitati, pubblicata nella Gazzetta Ufficiale n.175 del 28 luglio 2000

[130]Fourth Report: International Monetary Fund, ordered by the House of Commons to be printed on 5 March 1997, The Stationery Office, London, Appendix 12, Submission by K. Raffer, pp.159-161

[131]International Development Committee of the House of Commons. The Effectiveness of EC Development Assistance, 9th Report. Published by Authority of the House of Commons, The Stationary Office, London 2000, Appendix 10: Memorandum Submitted by Professor Kunibert Raffer, Department of Economics, University of Vienna, Austria, pp.79-83

[132]ACP-EU Joint Parliamentary Assembly. Resolution on ACP-EU partnership and the challenges of globalisation (ACP-EU 2976/A/00/fin), para 24

[133]ibid., para 26

[134]CONAIE. Propuesta de solución a la deuda externa - La Confederación de nacionalidades indigenas del Ecuador (CONAIE) a los gobiernos que conforman el Club de Paris", Quito, 10 de septiembre de 2000 (mimeo)

[135]Jubileo 2000 Red Guayaquil, UNDP & UNICEF. Ecuador: la Deuda con los Pobres, Programa para transformar el servicio de la deuda externa con gobiernos y organismos multilaterales en acciones concretas para la erradicación de la pobreza. 15 August 2000 (mimeo)

[136]  CONAIE. op.cit., p.1

[137]AFRODAD. International Arbitration Court on Foreign Debt. Document: AFRODAD.IAC.1, 2000 (mimeo)


[139]Annan, Kofi. Report of the Secretary-General to the Preparatory Committee for the High-Level International Intergovernmental Event on Financing for Development. Final Draft: 8 December 2000, United Nations, January 2001, pp.63f

[140]  The text of this short paper presented by me is available on the UN's homepage - or more simply via a link on my homepage - via Selected Publications

[141]in page 3 of the document on session 1, very last para. Downloadable from

[142]Rogoff, Kenneth. op. cit.

[143]ibid., p.40

[144]Eichengreen, Barry. Toward a New International Financial Architecture, A Practical Post-Asia Agenda. Washington DC: Institute for International Economics 1999, p.126

[145]  ibid., p.92

[146]ibid., p.66f

[147]ibid., p.67

[148]Raffer, Kunibert. 1990, op. cit., pp.304f

[149]Dabrowksi, Martin, Rolf Eschenburg & Karl Gabriel (Hg) Lösungsstrategien zur Überwindung der Internationalen Schuldenkrise (Volkswirtschaftliche Schriften, Heft 509), Berlin: Duncker & Humblot 2000

[150]Frenkel, Michael & Lukas Menkhoff. Neue Internationale Finnazarchitektur: Defizite und Handlungsoptionen. Perspektiven der Wirtschaftspolitik 1(3) 2000, pp.259ff