November 2004

Kunibert Raffer

Thanks to anyone contributing to the debate for their inputs, especially to Prof. Ugarteche, as whose discussant I am officially invited to act. Also, I happened to see quite a few mails & attachments in my mail today (dated 18 Jan), when I opened my mail programme in order to send off these second generation comments. My apologies are for not having been able to take these mails into account.

I am very glad to read that he and I agree on OPEC, and that my understanding of Prof. Ugarteche's wording was a misinterpretation. I commented on this (misunderstood) point because I think that blaming OPEC (Southern nations) for the debt crisis is unfair, both from a theoretical and a quantitative perspective. To me this seems one archetype of Northern argumentation, i.e. trying to shift any blame somehow on the South. Thus, people speak of "oil crises" but I have never heard similarly loud talk about any "interest rate crisis", even though, as Prof. Ugarteche rightly points out, real interest rates have changed at least as perceptibly as oil prices. I am very happy to learn that Prof. Ugarteche and I agree so fully on the relative effects of oil prices.

I am also totally agreed that there is "no serious bargaining on the side of creditors" and that "the exertion of power" is a much better explanation for public creditor behaviour. I cannot but agree that progress is too slow, that "it is evident that what seemed to be impossible in 1988, when the Toronto terms were agreed, was totally unrealistic and useless by the time the Evian terms were signed in 2003. Fifteen years of financial bleeding to no end other than the exertion of power from the debtor's angle." Yes, progress is slow and - I dare say - mainly due to pressure and lobbying by NGOs. This is why inter alia Sir Hans and I titled one of our Chapters in our last book on the Economic North-South Divide "Too Little, Too Slowly: Dragging the Debt Problem into the Third Millennium".

Where I feel I have to disagree, though, is the "issue of debtor protection" - all along apologising for being possibly too logically minded. We are agreed that debtors are not protected at present. But the way I see it, this is that this practice is unlawful, illegal and illegitimate at least - if not on occasion a crime, because preference of human dignity and the right to live even over perfectly legitimate and legal creditor claims is a human right. No debtor must be forced to starve his/her children to be able to repay (more), as I have repeatedly written in my publications. This self-evident and natural right of ANY human being has been infringed upon and violated by "debt management" - a deplorable behaviour that must be denounced and stopped. It must be demanded (or sought/requested if that word is preferred) from our (=Northern) governments that they respect human rights (including debtor protection), i.e. respect existing and verbally recognised rights, IFIs and our governments like to tout internationally in front of "recipients"/debtors while busily violating them themselves. Prof. Ugarteche wrote: "debtor protection ・should be sought by the Secretariat in the name of the debtor", which logically and linguistically says that it is not a self evident right. One has to seek rights someone does not yet have. To this I objected, as can be read in my comments-paper. I see this as an important difference. To clarify at another example: one should not seek protection in the name of beaten wives from their husbands, but one should make it clear to husbands beating their wives that this is a violation of law and decency and demand them to stop this abuse immediately. There is nothing to seek, but every scope to stop - and to assert existing rights. I hope I could clarify why I feel this is not the same. Debtor protection would automatically be part and parcel of my model because it is already part and parcel of human rights - no need to request or seek it, but an apparent need to have it respected. Therefore the statement "In order to have the right to debtor protection, the IBASD convention would have to be established first" is patently false - this right exists already and independently of any treaty, if we assume all people to be equal.
Alas, we know that this right has continuously been violated.

I do not understand the question "where, under what jurisdiction" the debtor would seek debtor protection, because I have repeatedly said that guaranteeing it would be one task of arbitrators. While we may discuss whether there is no precedent (I recall Egypt in the 1870s, or declarations by France, Britain or US States in the past - as well as Germany 1953 and Indonesia, where the question of sufficient reductions to secure a reasonable standard of living was expressly discussed and taken into account), this principle is not yet legally established (a bit tongue in check I argued in Raffer 1990 that it already is, with logically strong arguments). If it were already, we would not need campaign for it.

Finally, I very much doubt that "UN member countries will abide" to demands by a UN agency. If I recall correctly, some UN members do not even pay their membership fees correctly (on time and in full). While this creates a lot of problems to the UN, I understand that there has not been found a way to make those members "abide", i.e. fulfill a legal obligation they have entered freely and voluntarily and would be bound to comply with by any legal theory or standard. I am skeptical whether countries will be more prepared to follow a UN request in this case. I also do not think that "an international body ・would have the power to make sure that the debtors right is honoured and guaranteed and have the capacity to coerce those who do not comply." How would the IBASD coerce the G7? This is precisely why I have always said that we - public opinion - must force them to accept the Rule of Law and the primacy of human rights when comes to Southern debts. Abolishing the quite visible diving line between people who "live on the right (and mostly white) side of the North-South divide" (Raffer 1990, p.303) and those who do not is necessary.
The co-operation of the G7 is mandatory - with it an IBASD is not absolutely needed for a solution, without it the IBASD will hardly be able to coerce compliance. But the arguments of equal treatment and human rights are a powerful argument - in my opinion the only one we have. We - public opinion, especially NGOs - have to shame Northern governments into accepting minimum standards of treating debtors. If we should have achieved that, there will be no problem to implementation. Unfortunately achieving this is thorny and difficult.

Similarly, if the IBAD has to order a standstill after the panel verifies the debtor's arguments, this deteriorates the debtor's position. First, in my model a stay/standstill would be automatically triggered by the debtor's action, as is usual in all other cases.
Ordering means in plain English that debtors remain unprotected until this order is issued. The point apart that this might leave time for vulture funds to make a quick sting, an automatic stay/standstill as I requested does not allow any further harassing of the debtor. Even without a financial sting - there would be quite some time to harass debtors while waiting for this order. Again, I fail to understand why Southern Countries should be treated worse than any other debtor (re. how to assure that stays/standhstills work, I refer to my homepage - e.g. my memorandum to International Development Committee of the House of Commons, where it is argued quite briefly; or direct link:
http://www.publications.parliament.uk/pa/cm200203/cmselect/cmintdev/256/256ap16.htm).

Finally, the passage on FTAs surprises me. Is it really tried to build bilateral arbitration boards on debts, as one would have to understand from the flow of the argument? If it only were so, I should see this as a huge step forward compared to total arbitrariness of creditors, ruling at present. To my knowledge, arbitration under FTAs is exclusively focused on trade issues - therefore, I think that this kind of arbitration has little to do with our debt problem. We may, of course, use it as an argument (as I repeatedly did), pointing out that if arbitration is welcome for trade, why not for debt as well.

Where my view differs most strongly is the passage: "IBASD is strongly related to SDRM and to the Chapter 9 mechanism also proposed in the FTAP. It owes to all of them and has as a major difference the elimination of creditor preferences. No creditor in this proposal is exempt from a global rescheduling."

First, defending IBASD against one of its fathers: while the only difference between Chapter 9/FTAP and IBASD is whether there must be an institution, a treaty, even a full-blown codex, the SDRM is so strongly driven by institutional self-interest of the IMF that calling it strongly related to IBASD does not do this idea justice.
Re. my one model, I definitely must contradict any statement asserting a strong relation to the SDRM. The SDRM would firmly and legally install the IMF as the overlord of debt management, the IMF Board would determine sustainability (= debt reductions) and the debtor's economic policy (as done so far without similar legal mandate), by incorporating the SDRM into its Articles of Agreement the IMF would get the sole mandate for, in some documents the Fund proposes that it may endorse the standstill, even sanction (!) debtors (which would increase the IMF's powers further, in my view to
the detriment of the poor). The SDRM would exempt IFI claims, thus legalising the IMF's status as a preferred creditor (which - as the Fund knows and publishes on its own homepage - the IMF does NOT enjoy at present). This is self-serving (all caps) to the extreme and about the opposite of what I propose. Except for the IMF, the SDRM is a recipe for disaster. In my humble view the IBASD is an equally far cry from the SDRM.

Second, I wonder about reading "has as a major difference the elimination of creditor preferences. No creditor in this proposal is exempt from a global rescheduling", or the passage "The SDRM is only for bondholders and private creditors while IBASD includes all. FTAP considers all willing creditors". This assertion is not true. Since the 1980s I have always made the point that ALL creditors must be included (talking e.g. of symmetrical treatment in my 1990 paper), willing or not, also offering solutions what to do with unwilling creditors. This can easily be checked, if doubted. My publications are - as the noun suggests - public. This is no difference to IBASD. I fail to see how this error could happen.

I also wonder how Prof. Ugarteche could assert "A permanent secretariat at UNCTAD or at the Secretary General's Office level could be a start. This has not been discussed yet by neither." In my first comments sent to this list I have written: "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." May this suffice to show that I am a bit at a loss to understand how anyone can assert that this was not yet discussed, even if only familiar with my comments, not my publications on the issue. I also recall that I have repeatedly discussed the question permanent institution-ad hoc panel with many friends and colleagues from universities and NGOs over the years. Thus, while anyone is entitled to find my conclusion convincing or idiotic (this would be a subjective judgement to which anyone is entitled), asserting that it was not discussed is demonstrably untrue.

Reading "I do not see why crisis prevention is such an issue", I should point out that I did not see crisis prevention as such as the problem, but referred in my comments specifically to the possibility that "the ministry of finance of the debtor could trigger changes in debt contracts because it declares to believe that growth could
substantially be restricted ・. I continue to believe that having such clauses would do a huge disservice to debtor nations for the reasons I have described. As Uruguay's swap proves, it is not necessary, at least not for private creditors used to calculate risks and costs. I also wrote that the existence of an international Chapter 9 would facilitate negotiating relief, finding an arrangement "in the shadow of the law" (agreeing with my valued colleague Krueger in this respect) - which I understand to be crisis prevention, but in a better form.

In my model the board (=panel in my language) would not recommend a new payback schedule (which means that it does not - cannot? - decide), but the panel would confirm the result of negotiations, with the duty only to confirm an outcome if debtor protection as well as a fresh start are safeguarded. It would decide where necessary. But sustainability (including schedules) would emerge in my model from open, transparent negotiation process between creditors and the debtor, with participation of the affected population exercising their right to be heard. Although it is logically possible that 3-5 people forming a board are much wiser than all the affected together, thus being able to determine THE solution, this is not that extremely likely. Even if given the same bureaucratic resources as the IMF, would they necessarily come up with a more sustainable judgment than the Fund? Why deteriorate the debtor's position vis-・vis my proposal where only the debtor has the right to present the plan (= present a
new payback schedule)?

I am also at a loss to understand the rejoinder: "With major debt reductions some creditors 'lose' in the end, but how much suffering is inflicted on the debtor nations' population until this happens? Is this necessary?" Proposing a humane solution to end precisely this suffering well in advance of most others, I suppose that I did show that my answer to the last question is clear (Should I err re. clarity: my answer is "No!")

Prof. Ugarteche wrote in is first paper:

"From the evidence of the 1980's, continuous refinancings increase the cost of the debt unnecessarily giving the bankers an additional rent at the cost of depressed economies."

I pointed out:

"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."

Assuming that an "additional rent" is only attractive (repulsive to us) if positive (=creditors get more, not less than they lent) one would have to check whether bail-outs have in the end been of such advantage to all creditors.I doubt it. I am even not sure whether creditors would not in the end have been better off (losing less) if my Chapter 9 had been implemented early on in the 1980s, when total debt stocks were much smaller, needed relief (haircut) thus also not of present dimensions. But this would have to be checked case by case to be sure. This result of debt management is one additional argument against present practice, which I believe we should use. If people in the South have suffered and many creditors lost at the end of the day, the point that a quick and fair solution is better, is greatly advanced. I see no reason not to play that trump card, begging those disagreeing to note that even if I did not play it Southern sufferings would not be reduced at all. Quite on the contrary, showing the inefficiency (from a merely Scrooge-type viewpoint) of present strategies corroborates arguments to end unnecessary sufferings.

Last but by no mans least: I doubt the statement "It is wonderful for the creditors because the cost of the debt increases and ensures net resource transfers abroad." on economic grounds. Professional creditors do not just want net transfers but positive net revenues.
To show the difference: I am prepared to send anyone 1 (one) euro a year for as long as I live (=net transfer over years) if that person grants me a million euro immediately, in exchange for this obligation. In this case we have net transfers over years, but no positive net revenue of my benefactor.

I doubt whether it helps efforts to install debt arbitration if statements are made that might be proved wrong quickly or in quite a few correct cases of creditors. I also believe that we need support from creditors as well - and statements at odds with reality are unlikely to foster such support.

True, "In personal loans, insurance is available in case the debtor dies, for example. In international loans, there is no insurance against unreasonable jumps in interest rates ・, But insurance has to be paid separately and on top. Who would have to pay for it in the case of sovereign lending? ( I guess, the debtor.) How much would that cost? Would it be worthwhile? I doubt this, but as there is no established market for this kind of risk we may well disagree.

I also fail to understand Prof. Ugarteche's point:

"I still insist that countries do not go bankrupt the way private firms go bankrupt. In this sense I would argue that a national cease payment is not a bankruptcy because assets cannot be liquidated, the firm put out of business nor management substituted."

As those willing to read my papers can check, I have always made the point that countries need a special bankruptcy model because they are different from firms. Thus I "insist[ed] that countries do not go bankrupt the way private firms go bankrupt". This was why I proposed Chapter 9 in 1987. I repeatedly pointed out that under Chapter 9 debtors cannot be liquidated (stressing that this is one reason why I recommend this Chapter), and that "management" cannot be substituted.
So, why argue against me by repeating what I said and wrote long ago?

Still, this mechanism is called Chapter 9 insolvency. Title 11 USC (of which Chapter 9 insolvency is one Chapter) is titled "Bankruptcy". Technically, insolvency does not depend on the points Prof. Ugarteche rightly identifies as impossible or unwanted in the case of sovereigns.

Should the issue hinge exclusively on the very word "bankruptcy", I beg to note that this means the incapability of debtors to pay as stipulated. Considering that Sub-Saharan Africa (as a region!!!) did pay much less than 20% of all payments legally due in some years I do not see how one can avoid calling this bankruptcy. However, unlike Andersen I am fully prepared to compromise. One may call the Emperor's new clothes an inventive new way of dressing instead of nakedness. Should it really help our cause I am hands down prepared to adopt the "inventive new way of dressing" wording - as I have proved when participating in the discussions on how to avoid the word insolvency that resulted in the acronym FTAP. As an economist, though, I remain to be convinced that this is useful - unless calling myself differently rich from Bill Gates would economically reduce the financial gap between us, I do not mind being called poor compared with Billy. Should this change in wording actually help, I would immediately advice those people in the South compared with whom I am rich to follow my example. They would need being a bit richer more than I.

Finally, some less important points:

p.1:
I carefully read Baker's speech (later called "Plan"). I failed to find any recognition of co-responsibility Prof. Ugarteche detected.
Quite on the contrary, I found it putting blame on debtors.

p.2:
I doubt that public opinion is really against IFIs. This is not to belittle our common efforts, but I feel that our views are not (yet, I hope) mainstream. Globally, mainstream public opinion is not sufficiently against IFIs to warrant Prof. Ugarteche's conclusions.

I agree fully that the world is turning increasingly less democratic at present. This is an important and sad point.

I wonder whether the conclusion holds that representatives at IFIs are not approved by national parliaments except for the US, because there might be countries where they are. In any case, reports have been regularly supplied to many Parliaments. I have repeatedly been invited on such occasions in my own country. True, not all MPs (from
all parties) have shown equal interest. But the fact that there have been regular reports and discussions does not seem to impact on Austria's policies within IFIs in any way that we would wish to cheer.

p.4:
Thanks for agreeing that China is a member of both the IMF and the IBRD. The reason I mentioned this fact is that Prof. Ugarteche wrote in his first statement (p.4) "China, not an IMF/WB member, ・. We are therefore agreed that China is "not subject to their conditions and policies" even though it is a member. There must thus be another reason then.

Re. Bresser Pereira: I should be very grateful for any quote proving that securitisation insolubly connected with partial debt reduction (as in the "Brady Plan", not just bond conversions) was advocated by someone and before him after 1982. My own research has not found anyone earlier (not looking to the 19th century, I admit, but neither did Brady look that far), therefore I am keen on knowing more. Maybe, it was a Northern idea after all (Kennen?? maybe). I must emphasise that Bresser-Miyazawa-Brady differs from just a "long payback period with a return [? I fail to understand this word here] to the original amount owed would make the debt payable" or a "consensus amongst debtors that very long term bonds were the only reasonable answer".
This contains (as phrased) NO reduction. It must be noted that the fact that "Debt reductions were nowhere near in proportion to the debt increase caused during the decade by continuous refinancings and the unusually high US$ interest rates" has nothing to do with whether someone advocates a reduction (however large or small) or not at all (as Baker did) - while, of course, larger reductions would have been better.

The point of intellectual property apart, Juergen (bringing us to p.5) rightly observed that it is difficult to find governments daring demand debt reductions. Why, if we have a case of a government (Minister of Finance) demanding it, do we brush it away like this? Is this likely to signal to other governments/ministers that we appreciate their courage to demand change and are going to support them? Why is Juergen right to remark that "this has not rung with governments in the South" (which is different from Prof. Ugarteche's formulation - "fruitless")? Because these governments are under heavy pressure. Juergen and I were both present at a meeting with high representatives of a debtor (including a cabinet member) some time ago where the idea to be the first to demand a fair arbitration mechanism was immediately answered by "So, you want us to be the guinea pig?" There is no demand (as Juergen correctly wrote), but clearly because of fear. Juergen wrote that these governments "may turn out to be crucial agents for change" - and I understand this in the sense that we have to help create circumstances where fear no longer dominates and prevents. This would be perfectly what I think too. So, if one Southern government/minister had the courage to demand considerable change - well before march 1989 that was equal to a landslide in debtor behaviour - and we brush this way as of little relevance, we shall hardly help bring about that desirable change.

Also on p.5:
Fully agreed that the problem will again become extremely serious if/when interest rates rise above present quite low nominal levels.

I wonder whether Germany and Britain are "on our side". True, the German parliament requested the government to work in favour of a just solution, of a FTAP - but what has the government done so far?
Any speeches by Schroeder or Fischer trying to convince other G7-governments? Any other attempts to implement this demand? While the UK has traditionally been quite progressive (e.g., Toronto, Trinidad
Terms, present proposal for up to 100% relief on multilateral debts, all of which I find laudable, good and needed) - is she pressing for a just and fair solution with sufficient reduction, for changing creditor-debtor relations as a IBASD or even my less ambitious
Chapter 9 would? Forming my opinion I follow the view of a Jewish rabbi, who advised to judge people by their deeds not words (trees by their fruits, so to say, not those who stammer "Lord, Lord" but those who do the will of my father etc). Doing so makes me skeptical about the side these governments are finally on.

p.7:
Mindful that merely clarifying my views in writing does not necessarily mean anything, I should nevertheless repeat that I wrote: "'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 my view this is not equivalent to "corrupt loans", thus the conclusion "corrupt loans null and void" cannot be derived from my argument. I spoke e.g. of contracts signed by people without the authority to do so. This is not (as such) corruption but signatures are null and void. It is true, of course, that large parts of such claims (sometimes all of them) were already repaid over the years. They night be history now, which they were not when I wrote it some 16 years ago. My apologies for apparently being unduly early.
However, I also wrote "If it is a criminal act in the creditor country, the criminal code must be applied" (Raffer 1990, p.309).
While unlawful pressure on debtors would not be corrupt, it would give raise to damage compensation, an avenue that could be explored, even nowadays.

My point, however, about null and void is not of purely historical interest. RED SOL Salta, e.g., informed creditors that the present swap was unconstitutional (most of you will have received their e-mail) pursuant to the Argentine Constitution because only Congress can take decisions on sovereign debts. I find this an extremely useful and smart way of acting. Whenever a swap is done by those not authorised to bind the country, such operations are null and void. Since we are talking now about 2004-5, I think that my point might still be empirically relevant. While I tend to agree that present Brady bondholders are in all likelihood holding new claims, no longer tainted by nullity (as initial syndicated claims were), the legal nature of such claims would depend in each case on how swaps were implemented, legally properly or not.

I fully agree with the point that IFIs "also have a responsibility that must be accounted for and paid." Having elaborated how to do so in detail in the early 1990s (available on my homepage) and revisited this issue recently in my paper written for the Carnegie Council, I should be happy if this demand got more support. Unfortunately, the idea that poor people suffering from unlawful, tortious or negligent IFI behaviour should get compensation has not found much support over more than a decade. I am all the more grateful to see that Prof. Ugarteche is so definitely on my side with regard to financial accountability. Two is double as many as one.

The statement that odious debt must be respected makes me point out that - even after Iraq - this doctrine remains somewhat fuzzy.
Especially in its strict form (the only of which one could argue that it had found recognition in international law) the necessary conditions for qualifying debts as odious are quite restrictive and would hardly apply to most debts. Please see that plain corruption would not be equivalent with odiousness. The very far reaching position of some NGOs - which I know from discussion lists - are definitely not shared within the international legal community, including subjects of international law (such as countries).

p.8 :
Similarly, I find the discussion on ecological debt helpful and clarifying, but not really legally convincing enough to be applicable. Having had the opportunity to discuss Martinez Allier's theories last March at a Conference, I must confess, I found them anything but clear. Disregarding my personal failure to understand, however, the conclusion that calculations have to be made in order to reduce NPV by type of creditor and nation is faulty. Prof. Ugarteche rightly pointed out only one page above that there is a problem regarding null and void claims (of the 1970s) that were already repaid. The same problem pops up here, though. Are those Italian (would be) pensioners now holding Argentine bonds the people responsible for ecological damages inflicted (= ecological debt incurred) on the debtor? If not, how could one reduce their claims? I see a certain contradiction between the two statements on Brady and on ecological debts.

p.8:
Especially after the presentation of the SDRM I am skeptical about whether the IMF can be changed into anything working less in the interest of this institution itself and its major shareholders. Why should giving the IMF (whether under another name or not) the authority to coordinate economic policy amongst all members lead to a more democratic outcome? Why should this stop domination by big members? My personal view is that this would be for the South the economic equivalent to shooting oneself into one's head - or rather stomach (which is more painful). It would be a step to roll back democracy even further.

p.9:
As a much larger stake of CSO is wanted - please allow me to point out that this would be achieved within my Chapter 9, both via the right to be heard and via the way I proposed the fund administering social expenditures under the title of debtor protection should be organized. I recall that my model would by definition include the necessity to exempt resources for the MDGs and allow public servants to protect wages sufficient to cover decent living expenses - two points Prof. Ugarteche raised with justification.

Finally, please allow me to express my surprise about seeing some misperceptions (such as: equal treatment of all creditors as IBASD's major difference to my proposal, or that a permanent institution has not been discussed yet), and express my hope that this paper can avoid any further and reduce existing outstanding points, as discussions are all the more fruitful if comments refer to what has actually been argued.

A technicality at the very end: should I re-sent my first comments paper? If so, no　problem.

Warm wishes
Kunibert