By Mary Ongore
Executive Summary
ILP’s paper Debt Relief in the Global South: an Overview of the Political Economy of Debt Relief by the UK, the US, France and Germany considers the legal, institutional and political framework for debt forgiveness of four creditor countries: the United States, the United Kingdom, France and Germany. The aim of the study is to better understand the conditions under which these creditor countries forgive debt.
The case for a sovereign bankruptcy regime
Governments finance investments and social programmes by levying taxes and by contracting public or sovereign debt. At sustainable levels, debt can promote growth and stability and can enable countries to achieve their development goals. On the contrary, when countries enter into debt distress and are unable to continue servicing their debt, there can be significant negative implications for those states and their citizens. Defaults can result in the loss of market access by borrowing countries as well as increased borrowing costs and can stunt economic growth. To remedy the situation, states can restructure their debt. This can give governments the much-needed fiscal space to restore market access and bring back debt to sustainable levels.
Unlike legal persons, sovereigns do not have a bankruptcy regime. Such a regime would allow them to have their debt forgiven or cancelled and give the distressed sovereigns a fresh start. The distressed sovereigns would thus be able to continue providing essential public services for their citizens while ensuring that creditors receive the maximum possible return.
Given the increasing indebtedness of several countries that are still recovering from the impact of external shocks such as the COVID-19 pandemic, supply chain issues, high interest rates, the Ukraine war and soaring food and energy prices, this paper comes at an opportune time.
The paper highlights the key actors involved in making the decision to forgive debt and the legal provisions governing debt forgiveness. In addition, it considers the laws that govern the provision of debt relief by private countries and makes recommendations for how existing laws can be modified to support debt relief efforts by both creditor countries and private creditors. Finally, the paper makes a case for the development of a sovereign bankruptcy regime to coordinate debt forgiveness efforts and provide certainty to both creditor and debtor countries.
Although the profile of creditors has changed over time with majority of the debt being held by private creditors such as commercial banks, insurance companies and investment banks rather than bilateral and multilateral creditors, the case study countries could still wield significant political power to influence the decision to forgive debt. This study thus makes a case for the development of a sovereign bankruptcy regime.
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Mary Ongore is Legal Manager of our Sustainable Finance Programme. Mary is a Kenyan legal professional with extensive experience in taxation including research on international tax, fiscal policy, illicit financial flows and human rights aspects of tax policy.
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