Spotlight G-20: An Exit from Debt Crises: The Need for Fair and Transparent Arbitration

Melinda St. Louis, Guest Blogger
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.

South Korea’s painful experience of the Asian financial crisis has led the current G-20 chair to ensure discussing ways to strengthen the “global financial safety net” is high on the meeting agenda. The IMF has already made steps in this direction by creating its pre-qualified Flexible and Precautionary Credit Lines.

A global financial safety net that allows countries to ramp up borrowing in a crisis may well be needed.   But as lending increases, the G-20 must also work toward creating a fair and transparent sovereign debt workout mechanism.  A neutral insolvency procedure for governments – along the lines of national bankruptcy courts for individuals or corporations – is needed to ensure an orderly and equitable distribution of responsibility for unsustainable sovereign debt burdens.

Without an appropriate debt workout mechanism, a financial safety net risks an increase in irresponsible lending by the private sector.  To avoid a deeper financial crisis, a country may use an IMF line of credit to bail out private creditors in danger.  Thus, the country’s public debt would grow, and the burden of the crisis would be ultimately borne by workers and citizens through wage, budget and service cuts down the road.

In addition to high profile cases like Greece, the global financial crisis created new risks of debt distress across the developing world. In early 2010, the IMF reported 27 low-income countries at high risk or in debt distress. In poor countries, chaotic debt crises can have especially devastating human costs, as national safety nets to protect the most vulnerable are virtually nonexistent.

It is critical that the G-20 make progress toward a sovereign debt workout mechanism as it pursues its global financial safety net.  This would protect citizens from ending up bearing a disproportionate burden of financial crises, avoid free-riding by some creditors, and create incentives for responsible lending and borrowing in the future.

Melinda St. Louis is the Deputy Director of the Jubilee USA Network, an alliance of more than 75 religious denominations, faith-based organizations, development agencies, and labor, environment and community organizations working to generate the political will for more responsible lending and cancellation of unjust debts to fight poverty in Africa, Asia, and Latin America.