Kunibert Raffer
Department of Economics
University of Vienna
Austria

Commenting on Oscar's stimulating ideas is always a privilege. But as we are so very much agreed on the most essential points and directions, this also requires the hard work of focussing on those details and arguments where we do not hold precisely the same view.

Oscar's first paper (Ugarteche 2003) put the present situation perfectly well into one sentence: "So they believe globalization is fine as long as everything is globalized except the rules of the game." Having myself repeatedly pointed out double standards when it comes to the rights of developing members of the BWIs or the WTO, I cannot but agree. A new international financial architecture is indeed required. Some form of international credit laws for sovereigns, a legal code as Oscar formulates, is a sensible demand.

Naturally, I am fully agreed on all the points where Oscar seconds my own model, especially that an independent entity is required for meaningful, fair and sustainable crisis resolution, or that all creditors must be treated equally, two essential points I have insisted on since the 1980s. I am fully prepared to second Oscar's and Hersel's (1998) idea of taking the agreement with Germany as the inspiration for debt arbitration since I have myself been inspired by it (Raffer 1989, p.60; 1990, p.305, 1992a, etc.). One might notice, though, that no arbitration procedure took place in this particular case, apparently because debt relief in favour of Germany was that generous.

Seeing "an international treaty ratified by all members of the United Nations" (Raffer 1990, p.306) as one possibility of implementing my proposal, I cannot be against Oscar's demand for a code or an institution based at the UN. Meanwhile, however, I have come to prefer ad hoc panels established by the debtor and creditors for practical reasons. They can be established immediately, and too much time has already been wasted because of creditor caused delays. These panels could work without an international treaty if important public creditors ? say, the G7 - agreed. Against the G7 no solution would be possible anyway. Arbitration panels that apply the basic ideas of US Chapter 9 insolvency could start operating at once, while designing, negotiating and ratifying a treaty will take ages. Any lawyers - let alone any fairly gifted lawyers - would be able to delay for decades if they should wish to do so. Briefly, while I would not argue on principle against any treaty or code - it is one technical possibility - I believe that this should be a long term undertaking if undertaken at all, and that it must not distract from a speedy solution, which is most urgently needed not least in the interest of the poorest.

Ad hoc panels would need a small secretariat as well. I have seen a role for the UN "as the organisation where a sovereign debtor can file its request for an arbitration process fairly balancing the interests of creditors and the debtor," and an "important role" for the UN in "organising the nomination of arbitrators by the two parties, possibly also providing the limited secretarial services needed by them." (Raffer 2000, cf. also Raffer 1990 on the UN)

I am fully agreed that "The elements provided by Prof. Raffer are to be taken into account in the sense that social expenditures must be protected and civil society must be present and represented at the Court" (Ugarteche 2003, p.5) as well as with the demand of "debtor protection in suit with that provided by Chapter 9 (Raffer:1990,2002,2003)" (Ugarteche 2004, p.12). What I wonder, though, is why the Secretariat should seek debtor protection in the debtor's name. In my model there is nothing to be sought. Debtor protection is a RIGHT (all caps). Human rights and the human dignity of debtors are an indisputable right of any debtor that need not be sought but is a principle that has to be honoured. It is a human right because the human rights and the human dignity of debtor-populations must have the unconditional priority all other debtors enjoy unless one wishes global double standards for those living in North and South. I do not understand why the Secretariat would have to seek what must be guaranteed and honoured. This is a step away from my model, unfortunately into what I must regard the wrong direction.

Also, in my model stays/standstill would automatically ensue. Naturally, the panel would have to check whether the debtor's action of filing for insolvency protection was justified, but there is no need for requests to anyone. Again, I see no need to worsen the debtor's position and for reducing the debtor's rights. I thus respectfully disagree on these points.

Although I think that I emotionally understand this demand as caused by the very rough and unjust deal the South have got so far, I see a big problem with "crisis prevention" (p.10 - always Ugarteche 2004 if only pages are mentioned) as proposed, which I feel is unnecessary and would be a non-starter anyway. If the ministry of finance of the debtor could trigger changes in debt contracts because it declares to believe that growth could substantially be restricted, spreads of all Southern countries would simply skyrocket if Southern countries were not simply denied market access, which seems quite likely. To be absolutely clear: if I had money to invest in my own country's government bonds under the condition that my Ministry of Finance (Austria is AAA-rated) could do this, I would rather keep my money under my pillow. Unless one wishes to abolish international credit markets, this proposal is inefficient. It would, by the way, also be grossly unfair to creditors. This proposal is in my view unnecessary because - if an international Chapter 9 existed - creditors would be inclined to ease the burden by negotiating relief, finding an arrangement "in the shadow of the law" to quote my dear and revered colleague Anne Krueger. As Uruguay proved - even without any sovereign insolvency procedure in place - this is quite likely if such a procedure existed. If creditors would not agree and the debtor became insolvent, they would lose - economically, one would therefore assume intelligent creditors to be prepared to avoid this outcome. This, in turn would be in the common interest of creditors and debtor.

I am fully agreed that "Those countries referred to as HIPC countries should also use this mechanism and their adjustment of the size of the debt be done in proportion to the debt payment capacity" (Ugarteche 2003, p.3) because I have repeatedly demanded this myself. I have also emphasised that arbitration and my model must be applied to all countries, as it is as necessary in the case of HIPCs and Sub-Saharan as in the case of middle income countries. I am glad UNCTAD picked up this idea of arbitration for Sub-Sahara Africa. Nevertheless, I am a bit at a loss to see how the IBASD could "opt between debt refinancing and an entire rescheduling" (p.11). If they opt for refinancing - who is going to provide the money? Whom could they force to do so? Why should arbitrators only have the right to "recommend one time debt reductions" (p.11) - why not the right to decide on them as I propose? Again, I do not see why Oscar backtracks behind my demands, and indeed behind what the traditional conception of arbitration is according to which arbitrators have the authority to decide. By coining the phrase "creditor caused damage" (Raffer 1998) I have shared Oscar's view that continuous refinancing is not a good thing. However, whether creditors actually get a “rent” from this practice depends on what amount of their claims they can actually cash. In my view it still remains to be shown that commercial banks have not lost in the end (some Bresser Pereira/Miyazawa/Brady reductions were quite substantial). Bondholders, as in Argentina are sure to lose. Private creditors as a group have definitely lost money - the precise distribution within the private sector remains to be calculated, though.

Finally, I should like to draw attention to the fact that there is some overlapping - or agreement - between Oscar and myself regarding corruption. As early as 1990 - when few people had any interest in such arguments - I demanded that "socialised debts" (private debts "retroactively" guaranteed by governments) have to be declared "null and void" (Raffer 1990, p.309) and that by verifying loans on a "loan-by-loan" basis and pursuant to the same legal standards applied in all other cases some debts would simply evaporate. In particular, I mentioned loans (quoting R.H. Green) that had been "fraudulently procured ... and the lender knew or had cause to know of the fraud." While Oscar goes a bit further by introducing the International Penal Court (not yet in existence in 1989, when my paper was written, but I continue to see national courts a viable option if and when criminal activities can be discerned) I see us therefore in total agreement on this point as well as far as the principle is concerned.

The same applies to some extent as regards Oscar's assertion on page 4 that "Mistaken projections, or policies bear no cost to these institutions". As early as 1993 I went beyond this assertion, though, by demanding financial accountability of IFIs (Raffer 1993, v. also Raffer 2004). I hope that this idea may eventually be included. Doing so would reduce multilateral claims substantially, especially in HIPCs and African countries, where IFI-claims constitute a substantial chunk of all claims.

Finally, I am sorry about noticing that Oscar repeats the common but not totally correct assertion that OPEC is to be blamed for the debt crisis - at least as far as oil-importers are concerned. As can be shown by calculations and logic, this is more complex and Oscar's statement seems misleading (Raffer 1992b, OPEC Chapters in Raffer & Singer 1996 and Raffer & Singer 2001) While oil price effects had a substantial impact - especially in countries that were not well connected to oil exporters, such as Tanzania - they were not the only external shocks debtor countries suffered. I fully agree with the GATT (1980, pp.8f, emph. added)

"The overall trade deficit of the non-oil developing countries grew steadily from $15 billion in 1973 to $40 billion in 1975. The largest part of this increase resulted from an increased deficit in manufactures, essentially in trade with industrial countries; the rise of the deficit in fuels, while substantial, was relatively less important. Between 1974 and 1978, the overall deficit of non-oil developing countries levelled off, the further rise in the manufactures deficit being offset by a higher surplus on trade in non-fuel primary-products. In 1979, however, the overall trade deficit increased once again reflecting a sharp rise in the deficit on trade in both manufactures (to $ 71 billion) and fuels (to $21 billion"

In 1979/80 the rise in interest rates could also be mentioned. By putting the blame uniquely and in my view unjustifiedly on OPEC, one echoes the common assertion of many people in the North that developing countries themselves are to blame for the debt crisis as it was triggered by one group of developing countries. This is demonstrably highly debatable and would logically mean that no developing country exporters can ever increase their export prices substantially without being guilty of causing damage to other (fellow) developing countries. Calls for remunerative export prices under the NIEO would then have to bee seen under this perspective. Clearly, I hold a different view.

Last and least there are some minor remarks:

p.1: In my view it was not so much the perception that financial flows would be permanent, but W. Wriston's mistaken perception that countries cannot go bankrupt.
p.2: Yearly reschedulings prevailed initially, as mentioned. One might wish to know that the reason was that fees could be reported as income in the year the rescheduling took place. This was prohibited legally later on, which paved the way to MYRAs.
p.3: It seems of interest to note that the so-called "Brady Plan" was not only a copy of the proposal made by the Japanese minister of finance, Miyazawa Kiichi, but originated from a debtor country. It appears that the then Brazilian minister of finance, Luiz Carlos Bresser Pereira (1999), was the real author of this idea. The commendable effort to ascribe ideas to people who had them apart - which is, by the way, also a right protected by all copyright laws - it seems interesting to note that a debtor had this idea in the first place.

Re. Garcia and the 10% limit one should note that Peru did not pay more before the declaration anyway. In fact 10% would have been more than what had actually been paid in some years before this declaration. Political effect and economic reality are not always similar.
p.4
- China is an IMF and an IBRD member, though not dependent on them
- ecological debt: I wonder whether people not familiar with Martinez Alier understand the description.
p.8
- What is "dry" adjustment?
- I doubt that the IMF's failure is the reason for three MDs since 2000. Kohler was a routine replacement without any connection to success or failure. He left because he was offered the job of Head of State in his native country, an offer most people would accept whether the institution they head is hapless or successful. Someone had to replace him. Rato did so - despues de un ratito.

Bibliography
Luiz Carlos Bresser Pereira (1999) "A Turning Point in the Debt Crisis: Brazil, the US Treasury and the World Bank" (mimeo; English version, published in Revista de Economia Politica, 19(2) April 1999. Originally published as Working Paper n°.48, November 1995, Sao Paulo: Getulio Vargas Foundation, Department of Economics.

GATT (1980) International Trade 1979/80, Geneva: GATT.

Kunibert Raffer (1989) "International Debts: A Crisis for Whom?" in: H.W. Singer & S. Sharma (eds) Economic Development and World Debt Macmillan/ St. Martin's, London & Basingstoke/ New York, pp. 51ff.

Kunibert Raffer (1990) "Applying Chapter 9 Insolvency to International Debts: An Economically Efficient Solution with a Human Face", World Development, vol.18, n.2, February, pp. 301ff

Kunibert Raffer (1992a) "Internationalising US Chapter 9 Insolvency: Economic Problems in Need of Legal Conceptualisation" in: S.R. Chowdhury, E. Denters and P.J.I.M. de Waart (eds), The Right to Development in International Law, Kluwer Academic Press/ Martinus Nijhoff Publishers, Dordrecht, The Netherlands, pp.397ff

Kunibert Raffer (1992b) "The Effects of Oil-Price Changes on Peripheral Net-Importers: A Crude Estimate with Special Reference to LDACs" in: K. Raffer & M. A. Mohamed Salih (eds) The Least Developed and the Oil-Rich Arab Countries - Dependence, Interdependence or Patronage?, Macmillan/St. Martin's Press, London & Basingstoke/New York, pp.13ff [already available in 1991: Working Papers in Commerce WPC 91/08, Birmingham University, Department of Commerce, The Birmingham Business School]

Kunibert Raffer (1993) "International Financial Institutions and Accountability: The Need for Drastic Change", in: S.M. Murshed & K. Raffer (eds), Trade, Transfers, and Development, Problems and Prospects for the Twenty First Century, Edward Elgar Publishing Ltd, Aldershot (UK), pp. 151ff, link on http://homepage.unuivie.ac.at/Kunibert.Raffer

Kunibert Raffer (1998) "The Necessity of International Chapter 9 Insolvency Procedures", in: Eurodad (ed) Taking Stock of Debt, Creditor Policy in the Face of Debtor Poverty, Eurodad, Brussels 1998, pp.25ff

Kunibert Raffer (2000) "A Fair and Open Process of Arbitration to Solve the Debt Problem”, Civil Society Hearings of the UN-Initiative Financing for Development, UN, New York, link on http://homepage.unuivie.ac.at/Kunibert.Raffer Published in Barry Herman, Federica Pietracci & Krishnan Sharma (eds) Financing for Development, Proposals from Business and Civil Society, UN University Press, Tokyo, New York, Paris 2001 (“Arbitration to Solve the Debt Problem"), pp.153ff

Kunibert Raffer (2004) “International Financial Institutions and Financial Accountability”, Ethics & International Affairs 18(2), pp.61ff

Kunibert Raffer & H.W. Singer (1996) The Foreign Aid Business: Economic Assistance and Development Co-operation, Edward Elgar, Cheltenham (UK)/Brookfield (US) [Paperpack edition: 1997]

Kunibert Raffer & H.W. Singer (2001) The Economic North-South Divide: Six Decades of Unequal Development, Edward Elgar, Cheltenham (UK)/ Northampton (US) [Paperback edition: 2002, second printing 2004]

Oscar Ugarteche (2003) "The Debt, the IMF/WB in the Context of Solidarity Socioeconomy", October (mimeo)

Oscar Ugarteche (2004) "A new International Financial Architecture with an International Board of Arbitration for Sovereign Debt: a proposal", (mimeo)