Sixty-third General Assembly

Second Committee

Panel Discussion (AM)

think tank chief prescribes financial risk-sharing to put

 

global financial system on ‘healthy track’

 

Mechanisms to Tackle Historical Debt Problem, Repatriate

Looted Capital Would Also Help, He Says in Second Committee Panel Discussion

Financial risk-sharing between developed and developing countries, coupled with comprehensive, transparent international mechanisms, to address the historical debt problem of developing nations and repatriate their stolen capital, were urgently needed to put the global financial system on a healthy track, Sony Kapoor, Executive Director of Rethinking, Development, Finance and Environment (Re-DeFinE), an international financial system reform think tank, said at Headquarters today.

Speaking during a panel discussion titled “Challenges and emerging issues in external debt restructuring in the context of the current financial crisis” and hosted by the Second Committee (Economic and Financial), he said that, as the crisis deepened, banks and finance ministries could no longer hold sole responsibility for calling the shots on risk and debt.  “We all must have a direct stake.  Nothing short of an international global government mechanism, under the auspices of the United Nations, is the way forward.”

He said that while banks were historically best equipped to understand and cope with credit risk, in recent years, they had dispatched much of that task to insurance companies, hedge funds and other players who did not understand it, thrusting risk onto poor, vulnerable nations.  At the same time, developing countries were blamed for their large debt loads, and told to resolve the problem by running surpluses, maintaining low inflation, obtaining credit ratings, and liberalizing current and capital accounts.  Countries like Brazil, which had played by those rules, and Ghana, which had recently begun issuing bonds on markets for the first time, now found those markets closed to them.

“ Brazil has done everything right, but it and least developed countries are paying the price because of the folly of other people,” he continued.  Moreover, the Stolen Asset Recovery Initiative of the United Nations Office on Drugs and Crime (UNODC) and the World Bank Group were not sufficient to address international capital flight, especially in an environment where trade flows had grown exponentially.  As much as $5 trillion in capital had been extracted from developing countries, in the past 30 to 40 years, and invested in the real estate and hedge funds of wealthy nations.  Resource flows must be transparent and linked to basic human rights, so that “flows lying in banks in London and Switzerland are not stolen from people in sub-Saharan Africa”.

Countries with populations dying of AIDS had no choice but to borrow money on whatever terms possible, he said.  The stock of developing nation debt stood at approximately 30 per cent of gross domestic product.  Their debt crises were symptomatic of a fundamental lack of resources and gaps in the international system.  Developing and developed countries were interconnected through trade, security and the financial system.  The Doha Round of trade negotiations was a one-time opportunity for them to address debt, domestic resource mobilization and other issues together.

In a similar vein, Stephany Griffith-Jones, Executive Director of the Initiative for Policy Dialogue at Columbia University, said there was an emerging consensus on the need for more complete and effective financial regulation to support a country’s real economy, rather than stifling it.  The combination of liberalized financial sectors and deregulation had implied that financial market risk had replaced automatic stabilizers with destabilizers.  Future crises must be averted by avoiding systemic risk build-up.

She said future financial regulation must be built on two broad-based principles:  counter-cyclicality, in order to correct the main market failure of banking and financial markets, or their “boom-bust” nature; and comprehensiveness to avoid moral hazard, as an ever-increasing range of financial institutions had to be bailed out with likely massive costs to taxpayers.  For regulation to be effective, the domain of the regulator had to be the same as the market to be regulated.

Geske Dijkstra, Associate Professor of Economics at Erasmus University, Rotterdam in the Netherlands, said World Bank and International Monetary Fund (IMF) loans to developing countries were a moral hazard because they perpetuated the debt problem, and were subject to conditionality, which did not work.  Also, the debt relief offered through the 1999 Heavily Indebted Poor Countries (HIPC) Debt Initiative and the 2006 Multilateral Debt Relief Initiative (MDRI) was too limited, and confined mainly to flows rather than stocks.  It failed to resolve the debt and debt-restructuring problems of the 1980s and the 1990s.  At the same time, vulture funds engaged in “free riding” on international agreements and aggressive legal tactics to recover debt from HIPCs.  The IMF should have a more limited role in the world’s poorest countries, while independent arbitrage and legislative changes were needed in creditor countries to prevent HIPCs from being subjected to aggressive litigation by commercial creditors and vulture funds.

Committee Chairperson Uche Joy Ogwu ( Nigeria), opening the discussion, said private capital flows had increased substantially and private debt had risen significantly since the 2002 Monterrey International Conference on Financing for Development.  Those flows were now much larger than official flows in many developing countries.  With more liberalized capital markets and floating exchange rates, the risk associated with global financial uncertainties and high oil prices had implications for debt sustainability.

She noted that some Member States had stressed the need for a debt-resolution mechanism that would provide equal burden-sharing between creditors and debtors, whether dealing with official or commercial debt.  They had also drawn attention to the proposed establishment of an independent debt arbitration mechanism to assess, adjudicate and pass judgment on debt-reduction options.

Steven Kargman, President of Kargman Associates, a New York City-based strategic advisory firm specializing in international restructuring, cross-border insolvency, distressed debt and non-performing loan situations, with a special focus on emerging markets, stressed the need for more orderly, efficient and predictable sovereign debt restructuring, noting that he had proposed the creation of a sovereign debt tribunal to handle disputes.  To date, four major approaches addressed that issue:  a statutory approach put forth by the IMF a few years ago; the contractual approach, which focused on the use of collective action clauses in bonded debentures used in sovereign debt issuance; the voluntary approach, which involved implementing codes of conduct and recommending various guidelines to follow during a restructuring; and an approach involving existing institutions, such as the Paris Club and the London Club.

He said his approach focused on creating a sovereign debt tribunal, which was one of the elements proposed for the IMF’s sovereign debt restructuring mechanism.  In the restructuring of Iraq’s debt, for example, an arbitration method had been used, particularly to verify and reconcile creditor claims.  A sovereign debt tribunal would have several key advantages:  it would be based on consensus among the key restructuring stakeholders; establish a neutral forum for the resolution of those disputes; provide structure and cohesion to the process; and create the perception of an existing pool of experts to address those complex disputes.  In setting up such a tribunal, the participating parties would have to agree on basic requirements, jurisdiction, governing law, financing and support.

During the ensuing discussion, panel moderator Paul Lolo, Director of the First United Nations Division in Nigeria’s Ministry of Foreign Affairs, asked about the responsibility of rating agencies, given the influence they had on markets.

In response, Ms. Griffith-Jones said rating agencies were at the heart of the problems in the United States because they were actually complicit with the banks.  They had downgraded paper in bad times, and did not evaluate risks in good times.  The case was now very strong for regulating rating agencies, and developing countries must be involved in those discussions because they suffered the effects as much as developed countries.

On the effect of the current financial crisis on the debt landscape and developing countries, Mr. Kapoor said there were both short-term and long-term problems, which were strongly interrelated.  Developing countries must have a say in how their problems would be addressed, especially those affecting them.  Also, the Doha Review Conference on Financing for Development was happening at a timely juncture, but a final blueprint of what the world would look like was not a necessary outcome of that meeting.  What was necessary was a “meeting of the minds”, and a consensus on a politically authoritative international conference, under the aegis of the United Nations, to address the problem of global financial regulation.

As for whether developing countries had the room to exceed some of their IMF ceilings in order to respond to domestic challenges, Ms. Dijkstra said the Fund’s ceilings were indeed too rigid, but when rich countries like the United States wanted a financial bailout package of $700 billion and reduced interest rates, the IMF had no say in those decisions.  That was why it was better for the IMF to have a smaller role.

Regarding the function of his proposed sovereign debt tribunal, Mr. Kargman’s said he did not envisage a big bureaucracy or another national institution.  Rather, it would be as user-friendly and modest in scale as possible.  Parties would resort to the tribunal if they felt it would be useful in resolving international disputes.  As to whether the issue of odious debt was controversial, it could be put before the tribunal.

Participating in the discussion were the representatives of Austria, Brazil, France, the United Republic of Tanzania and the Philippines.

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For information media • not an official record