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U.N. gets backing for sovereign debt project

Principles will help prevent reckless borrowing, lending.

September 29, 2010 1:35 by



The United Nations has won backing from a range of governments and financial institutions for a plan to draw up guidelines governing sovereign debt, a U.N. debt official said on Wednesday.

The project, run by the United Nations Conference on Trade and Development (UNCTAD), aims to establish principles for both lenders and government borrowers to reduce the severity and frequency of sovereign debt crises.

The plan was discussed at a meeting in China this month attended by ministers from developing countries such as Argentina and Zimbabwe, representatives of European borrowers including the president of Iceland, the Paris Club of government creditors, and officials from the U.S. State Department, International Monetary Fund and World Bank.

“Everyone said that we need to support this initiative,” said Yuefin Li, head of the debt and development finance branch at UNCTAD. “We got unanimous support which is what our objective was for the conference,” she said in an interview.

The conference, in Xiamen on Sept. 8, reviewed comments from governments and institutions on a set of draft principles, which have not been published.

Li said UNCTAD hopes to finalise the principles in 2011.

TIMING DIFFERENCES

But the conference revealed a big gap between governments that want the principles to “bite” — to become legally binding — immediately and those who want more time to build consensus on their use before they come into force, she said.

One option in the meantime would be to publish the principles and allow borrowers and lenders to incorporate them into debt contracts voluntarily. Another would be to allow a critical mass of governments sign an international treaty.

Guidelines already exist governing some debt categories.

For instance the Organisation for Economic Co-operation and Development (OECD) has rules for export credits to low-income countries and the private-sector Institute of International Finance (IIF) has a set of principles governing capital flows to emerging markets, Li noted.

“But you don’t have a principle which will guide sovereign states in general lending and borrowing,” she said.

Sovereign borrowing can promote development but it can be used by governments to defer dealing with problems.

“You can find a quick fix — borrow some money and make this structural problem even worse, and then the next government comes in and you will have a debt crisis… there could be short-sightedness in borrowing,” she said.

The principles will guide both borrowers and lenders, as a loan is a two-way contract and those providing the money must do their due diligence to ensure it can be paid and used correctly.

Iceland’s president, Olafur Ragnar Grimsson, discussed his country’s debt crisis at the Xiamen meeting and said that principles to avoid reckless lending and borrowing should be encouraged, UNCTAD said.

The project, funded in part by the Norwegian government, aims to create rules to prevent irresponsible lending to states and enable courts to test the legitimacy of debt when disputes arise.

It is realistic to finish revising the principles next year even though a lot of technical work remains to be done, and not all governments and institutions fully understand the detail of what has been proposed so far, Li said.

An expert group will meet, probably in January 2011, to take the work further. The proposals could then be added to the agenda of one of the major conferences already scheduled next year, such as the G20 or IMF meetings in the second half of 2011 or UNCTAD’s two-yearly debt conference due in November 2011.



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