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Jubilee Scotland Briefing March 2011

Summary Many of the poorest countries in the world are still burdened by huge quantities of debt. Much of this is unpayable, which is to say it cannot be repaid without grievous damage to key social services such as health and education.1 Much of it is also unjust, meaning that it can be traced to unethical originary loans and transactions: loans for dictators, for weapons and for environmentally unsustainable projects.2 With no unjust sovereign debts of its own, and with a worldclass arbitration framework newly in place, Scotland can and should play a role in righting this wrong by promoting itself as a seat of international debt arbitration. Background The last major rounds of poor-country debt-cancellation took place in 1996 and 2005 when respectively - the Highly Indebted Poor Country (HIPC) and Multilateral Debt Relief Initiative (MDRI) were created, which pledged the cancellation of the debts of 40 of the world’s poorest countries. To a great degree this could be credited to popular campaigning around the world, including the Make Poverty History movement when the G8 Summit was held on Scottish soil in Gleneagles in 2005. The debts of many HIPCs were cancelled, but no lasting framework was left in place through which debts could be addressed.3 As international debt experts have observed, there are problems on principle with existing debt cancellation measures.4 Specifically, moreover, they have left whole groups of countries – and millions of the poorest people in the world – falling through the net of debt-relief.

1 Mandel, 2006: Debt Relief as if People Mattered, New Economics Foundation 2 Hanlon, 2006: Defining Illegitimate Debt 3 Kaiser, 2009, An International Insolvency Framework, Erlassjahr 4 Namely that they are ad hoc, dominated by creditors, fail to take human needs into account and fail to discipline lenders. See EURODAD, AFRODAD and LATINDADD, 2010: Towards a lasting solution to sovereign debt problems: what can parliamentarians do?


Existing Debt Relief - Closing the Gaps • Many of the poorest countries in the world did not qualify for HIPC because their debts were deemed to be ‘sustainable’ by an assessment tool called the Debt Sustainability Framework. But ‘sustainable’ in this context refers to the ability to pay debt, without taking into consideration whether the countries in question would still be able to afford essential public services if they repaid. Bangladesh is a case in point – it did not qualify for HIPC despite the fact that nearly half of its population live below the poverty line.5 • Those countries which qualified for HIPC faced a lengthy wait to go through the process of having their debts cancelled. For example it took Malawi six years to complete the process from the point of qualifying for HIPC status. During this period substantial new debt was built up. • The global financial crisis has led to declining GDP and currency depreciation in the world’s poorest countries.6 The IMF foresees a ‘long and severe contraction’7 for developing countries, but neither it nor the World Bank has been able to lay out a comprehensive mechanism for dealing with these crisis-affected countries, while - even using the narrow criteria of the Debt Sustainability Framework - the debt to GDP ratio in Low-Income Countries has doubled since the onset of the global crisis.8 • Existing debt relief takes no account of the unjust circumstances in which many poorcountry debts originated. We can include in this category any debts which were incurred without benefiting - or indeed actively harming - the people who would subsequently have to repay the debt [See Case 1]. As yet the only creditor government to acknowledge the category of unjust or illegitimate debt is that of Norway, who in 2006 took the unprecedented step of cancelling $80 million of loans they were owed by Ecuador, Egypt, Jamaica, Peru and Sierra Leone on the basis of legitimacy.9

If any country can be said to epitomise all the failings of current debt relief mechanisms, that country is Haiti. Haiti became indebted in 1804 as a condition of independence. Then ‘for almost a century, successive Haitian governments dutifully paid its debt service, being all too willing to pass the bill onto Haiti’s poorest citizens.’1 The kleptocratic regimes of the Duvaliers worsened the situation in the latter half of the twentieth century (for example, a $20 million loan given by the IMF in 1980, of which $16 million disappeared almost immediately); this debt was later subject to numerous restructurings without ever being cancelled. Because of these restructurings, Haiti was initially excluded from the HIPC process in 2000 under the Debt Sustainability Framework. This judgement was later revised, allowing Haiti to finally reach completion point in 2009. In the years while it reached completion point, however, it had accrued a new $1.2 billion of debt. If the earthquake that devastated Portau-Prince in January 2010 had not struck it is unlikely that Haiti - already one of the poorest countries in the world – would have received any clemency, much less justice, in the treatment of this debt. 1 Summarised from Break the Chains of Haiti’s Debt, Jubilee USA, 2006

These countries need a fair and transparent setting in which they can meet with creditors and agree to cancel those debts deemed to be unjust and unpayable. Various proposals for how such a system would work have been articulated in the last decades. But it is a need which creditor countries and institutions have thus far largely ignored. Different models – one theme “The proposals for a sovereign debt work-out procedure for countries experiencing sovereign debt difficulties are not new. Since 1990, a number of different ideas have been tabled. Kunibert Raffer of the University of Vienna has proposed the internationalisation of Chapter 9 of the US bankruptcy code. Latin American economists, Alberto Acosta and Oscar Ugarteche have tabled the idea of a permanent ‘Sovereign Debt Arbitration Debt Tribunal’ (TIADS) under the aegis of the United Nations. In 2001, the IMF’s Anne Kreuger put forward the idea of a ‘Sovereign Debt Restructuring Mechanism’ (SDRM) to be administered by the IMF. Most recently, Christophe Paulus and Steven Kargman outlined their proposals for a Sovereign Debt Tribunal, which should be empowered to examine not just cases of unsustainable debt but also the legitimacy of individual creditor claims.” A fair and transparent debt work-out procedure – 10 core civil society principles – EURODAD, 2009

Case 1 – The Bataan Nuclear Power Plant “One of the worst examples of an illegitimate debt is the Bataan nuclear power plant in the Philippines. Every day between 1975 and 2007 it cost the Philippine Government $155,000 in interest payments. The plant, designed and constructed by US corporation Westinghouse, was built near major earthquake fault lines, close to a volcano. In 1986 it was declared unsafe, and has never produced one single watt of electricity for the country. The project initiated by the dictator President Ferdinand Marcos in 1975 was beset with scandal — Marcos is thought to have received upwards of US$100 million in kickbacks. It was hugely overpriced, costing the country over US$2.3 billion — three times as much as a similar South Korean plant. Today 45% of Filipinos live on less than $2 a day. In just one day in 2004, $155,000 could have paid for hospital facilities for 750 sick people.” – Jubilee Australia, 2010: What is Illegitimate Debt?

Case 2 - Haiti

Crisis and opportunity Protesters in the Philippines march against the Bataan Nuclear Power Plant (Photo: Arkibong Bayan)

5 Jubilee Scotland, 2010: A Tale of Two Countries 6 Grabel, 2010, Productive Incoherence in an Uncertain World, Political Economy Research Institute 7 IMF, 2009b. World Economic Outlook Update, July 8. http://www.imf.org/external/pubs/ft/weo/2009/update/02/pdf/0709.pdf 8 EURODAD calculations made on the basis of Debt Sustainability Analysis for 31 of the 40 countries defined as LICs 9 Jubilee Scotland, alongside their sister organisation Jubilee Debt Campaign, are calling for the UK government to scrutinise the debts owed to our own Export Credit Agency – the ECGD – and cancel those that are deemed to be illegtimate, see JDC, 2010:The Department for Dodgy Deals.

The debt crisis faced by many Northern countries has led to a belated recognition of the inadequacy of existing systems for dealing with sovereign debt crisis. The combination of temporary solutions, bail-outs and restructuring that has consistently plagued Southern indebted countries has now been visited on countries in the North, making its inadequacy harder than ever to ignore. In Europe particularly there is a growing movement for precisely the kind of debt arbitration framework that is so badly needed by poorer countries: with support coming in recent months from such quarters as the United Nations Conference on Trade and Development (UNCTAD) and the German government, and with a recent high level investigation by the Van Rompuy Commission. Moreover, the current President of the G20 – Nicolas Sarkozy – has demanded that if such a tribunal be brought into being, it should be mandated to address the debts of the poorest countries in the world.


What can Scotland do? The international progress towards debt justice will be long and challenging, but it is a process within which Scotland can potentially play a leading role. ‘It is important to stress that an international Chapter 9 insolvency procedure would not at all need a new international organisation, nor a costly bureaucracy. Arbitration panels are temporary.’10 And while there is disagreement as to whether a standing international insolvency court would be the final end of such a global progress, there is little disagreement that the beginning point is different arbitration panels around the world. Scotland could be the seat of one such panel. The Arbitration (Scotland) Act of 2010 lays out a robust and modern framework whereby parties can seat an arbitration in Scotland, a framework which can apply to discussions about sovereign debt as much as any others. Arbitral decisions reached in Scotland will go forward into the body of precedent that will help to develop an international consensus over what constitutes an unpayable or unjust debt.’11 By promoting itself as an arbiter of sovereign debt – as well as business disputes – Scotland will send out a clear statement that it is not just open for business, but open for justice. Norway – a small country – was able to punch above its weight by cancelling debt on the basis of illegitimacy. Scotland by, championing debt arbitration, can follow suit. 10  Kaiser, 2009: A Fair and Transparent Debt work-out procedure 11  AFRODAD, 2002: Issue Paper, Fair and Transparent Arbitration on Debt

Actions to take in 2011 1) The Charter for Responsible Financing The European Network on Debt and Development (EURODAD) are calling for parliamentarians to sign up to a new Charter for Responsible Financing which calls for a fair and transparent process for the cancellation of unjust and unpayable debts. Many MSPs have signed up to the previous charter for responsible lending. Signing the new charter – which will be released before parliament reconvenes - is a vital first step in the campaign. Ask your MSP at any local meeting or hustings, whether – if they are elected - they will pledge to support this agenda in the crucial year of 2011, and whether they will demonstrate this by signing the charter. 2) The Arbitration Motion Jubilee Scotland will be seeking sponsorship and support for a motion later in 2011, calling for Scotland to actively promote itself as an arbiter of poor country debt. Please help by sponsoring this motion, or signing it, and helping to encourage the maximum sign-up possible. Visit your MSP with signed postcards to ask them whether they have signed up to the motion.

Jubilee Scotland is a coalition of concerned individuals and organisations who work together in Scotland for the cancellation of all unpayable and unjust poor-country debt. www.jubileescotland.org.uk mail@jubileescotland.org.uk 41 George IV Bridge, Edinburgh EH1 1EL Tel. 0131 225 4321


Defuse The Debt Crisis March 2011