Complexities of sovereign debt
Interview with Pål Børresen, Senior Sovereign Debt Expert in the Division of Globalization and Development Strategies for UNCTAD
By Marit Fosse
In an office high up on the 10th floor of the E-building at the United Nations Headquarters in Geneva, hidden far away out of sight, you will find a group of four working on guidelines for the contracting of loans by sovereign states. What most people do not know is that there are no international laws or regulations in this area, nor are there guidelines for sovereign bankruptcies obliging sovereign states to honor their debts.
One of the initiative-takers for this program is a Norwegian financial expert, Pål Børresen. We had the opportunity of meeting him and to learn more about this interesting initiative. He and his colleagues keep a low profile because it’s a sensitive undertaking to develop guidelines at a time when many countries are facing debt problems. The general public would be surprised to learn about this lack of regulations, especially when they do not benefit from the same arrangements. People can face all kinds of problems if they default on their debts, but countries…
Let Pål Børresen explain.
Q: You are working for an important program here in UNCTAD. Could you tell us how it all started?
It began with the NGOs who started to question whether certain sovereign debts should be repaid or not. They argued that some of the loans that had been granted to developing countries although legally binding, should for moral reasons not be paid back. I will give you one example. A loan is awarded to the president of a country. The loan is paid by a foreign bank into the president’s personal bank account. Two weeks later the president flees the country. The loan is signed in the name of the country, but the money went into the president’s pocket. The loan remains the liability of the state. In one particular case, Costa Rica asked for the arbitration of the United States Attorney-General, who decided that the country was not required to pay back this debt. This is the exception, however. In most cases the loan simply remains the obligation of the borrowing state. There have been lots of cases like this.
The agreements are totally legal according to the law, but there are other reasons why these loans should not be paid back –– that is what the NGOs are saying. So UNCTAD picked up this issue at its biannual debt conference back in 2003. In 2005 this issue came up again. Then, in 2007 we started to think about a concrete project based on some very interesting observations in the area of sovereign lending and borrowing. Trade, for instance, is much regulated through the WTO. However, when you deal with sovereign lending and borrowing internatinal rules and principles are totally lacking.
Here at UNCTAD we said to ourselves: let’s see if we can find a donor who can finance a project; we will start to study the issue and write up some simple rules that are acceptable to all. We obtained funding from the Norwegian government — in 2008 we received about USD 3 million.
So we began to look into this issue. We had to be broad in our approach and include all the stakeholders, and also to be very transparent about what we were doing.
The first thing we did was to put together a group of experts. These were all internationally renowned experts in their respective fields. The lawyers in the group, for instance are those who are now assisting Greece and the other countries. These are the THE lawyers! They not only accepted to join our group of experts, they volunteered!
Our group of experts consisted of lawyers, top economists, the private sector, NGOs and international organizations. We realized that a large number of institutions would be interested in our group, so we decided to limit them to four seats each. There were, for instance, many NGOs who were interested. We did not choose them, but sent out information through their international information network. We told them: you have four seats; give us four names and we will not ask any more questions. So we got four names: one each from Africa, Asia, South America and Europe.
The expert groups had several meetings and proposed 15 rules. We distributed them in 2011, and we put them up on the Internet so that people could read them and make comments.
We also held regional consultative meetings with the countries. We started out in South America, then Africa, Asia and the Arab countries. All of these meetings have taken place in collaboration with our regional partners. In the expert group, the International Monetary Fund, the World Bank, the Paris Club and one organization of international auditors also took part as observers. The latter was there because auditing the debt is very important.
Q: Among these 15 rules, which one do you consider the most important?
They are all important. Most of the rules are so obvious that you simply have to accept them. They are “motherhood and apple pie” as the representative from the World Bank expressed it. Some of the rules are more severe and are for instance linked to the rescheduling of debts. They concern the obligation to make sure that the borrower is actually in a position to repay the loan. This is a normal obligation in private banking, but it has not been normal when lending to sovereign states –– simply because there were no rules.
Q: Many European States are over their heads in debt. From what you are saying I draw the conclusion that a country like Greece does not have to repay its loans unless it wants to. Is this correct?
Yes, they do not have to do it. But the price of reneging would be high and they would surely be excluded from the international financial markets like Argentina and Ecuador currently are. They would probably be better off negotiating a way out, although theoretically they do not have to as there are no rules forcing them to do so.
Q: During the UNCTAD XIII Conference, what will happen? Will these rules be adopted?
Certainly not unanimously – adoption or not is the decision of individual countries. After discussing these rules during the consultative meetings, we have seen that many countries are prepared to endorse them and write them into their national legislation. There are several ways of implementing these rules. The rules are what we call “soft” law. That means that there are no mechanisms for punishing anyone who doesn’t adhere to these principles, but generally accepted principles do in the long term change the mentality. When these principles form part of your thinking, and when you give financing to a sovereign state, you will slowly see attitudes changing over time. Once this new attitude sinks in, these soft principles become harder, and in the end they basically become law.
Nobody nowadays questions the Universal Declaration on Human Rights and our principles function much in the same way, although it will not take the form of a declaration.
What is going to happen next is that we are going to present these principles to UNCTAD XIII for endorsement by individual countries. We already know that quite a number of countries are prepared to endorse them.
Q: How has the feedback been?
There are various forms of feedback depending on whom you are talking to. When NGOs sit on the same expert group as the IMF, there is going to be a discussion! So actually arriving at a set of principles was an achievement in itself. Of course, the NGOs think it is too soft, and IMF thinks it’s too hard. But we did come to a consensus.
Q: So this has been an ongoing process since 2008?
It was actually in July 2009 that the project started to take shape, since the project did not have any staff until that date. Today, four people are working on the project. Funding will allow us to continue until the end of 2012, and then we will have to look for more funding –– from Norway and other sources. Very much depends on what will happen during UNCTAD XIII.
I must say that generally the reactions have been positive. Some countries, however, would not like to see this to happen and they resist because they fear the perception among national stakeholders that these principles might put external constraints on their domestic banking system.
Let us, for instance, take the duty of investigating your borrower’s ability to repay the loans. In the past, about ten years ago, nobody would question lending to a sovereign state, because it was considered as being the best borrower you could have. They would always repay! One of the consequences of these rules is that this will no longer be the case. You will have a duty to investigate the borrower’s ability to repay. Let us take an example. One of the small Caribbean islands is billions of dollars in debt. How can any responsible institution lend so much money to such a small country? A country of that size cannot possibly repay such an amount.
Q: Why are the banks lending out all this money? How do they expect to get their money back when they know that there is no legislation forcing countries to repay the loans?
In fact, Greece was a victim of the Euro. Since Greece was inside the Euro zone everybody was happy to lend them money, because they knew that the European Central Bank would back them up. They did not consider individual countries, such as Greece as a risk because it was part of the E.U.
Q: This raises lots of questions. Do the people actually lending money know that there are no rules for the repayment of these loans?
They know, of course, but for them the rules are spelled out in the loan contract. For them, the contract is a legal instrument. In such a contract, it would normally be said that “a dispute may be settled according to the law of New York” or “under British law,” which is common for bond issues.
Q: If there is no obligation to pay back the loans, the only ones to make money out of this situation are the lawyers?
Of course, the lawyers will make a lot of money out of this. However, most of the time these issues do not end up in court. If these are guaranteed loans, normally they will go to the credit guarantee institutions and from there to the Paris Club –– but only when the lenders are members of the Paris Club. Many big lenders today are not members of the Paris Club, such as India, Brazil or China, because they were not members when it was established. Nevertheless, they are huge lenders. There have been countries that have, for instance, not repaid India. However, they negotiated bilaterally and reached some kind of agreement. We are now, in fact, getting into an area beyond the UNCTAD principles. If they are accepted worldwide, these principles will be the basis for negotiations.
Q: If these regulations are accepted and the legislation is in place, who, in your opinion, should be in control?
Well, that is the big question! Ideally, it should be the United Nations. Some countries are reluctant to be regulated from the outside, whereas the Europeans are more accustomed to it.
Q: In other words, it means that you still have a long way to go?
Ah yes! I think I will have retired long before these discussions will be finished. For now it’s only a set of guidelines. There is a long way before it becomes legislation.
This article originally appeared in the May 25, 2012 issue of the Norwegian American Weekly. To subscribe, visit SUBSCRIBE or call us at (800) 305-0271.