Risks of Lending and Liability of Lenders

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6th UNCTAD Inter-regional Debt Management
Conference Geneva, 19 21 November 2007
Structured International Debt Settlements (SIDS)
Insolvency vs. Contested Claims
Kunibert Raffer http//homepage.univie.ac.at/Kuni
bert.Raffer
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The international financial system is incomplete
and insecure without a sovereign debt workout
mechanism and a new effort needs to be launched
in this regard. Argentina in 2002 demonstrated
again the need for a fair, transparent and
orderly process for sovereign debt
restructuring Report of the Secretary-General,
10 August 2007, General Assembly (A /62/217) UN,
pp.26f)
Present debtor strategies (Argentina, Nigeria,
Ecuador) and discussion on legal basis of debts
result from absence of fair, transparent, orderly
arbitration process
2nd to nth best solutions because first best
solution remains blocked
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• Creditor Litigation

Purely legally claims remain valid and
enforceable nearly one fifth of vultures
accepted arbitration
Paris Club violates other creditors basic
rights, forces debtors to do so, simultaneously
denying them any protection

• Illegitimate, Odious and Other Types of Debts

Moving from unpayable to scrutinising legal
base criminal, odious, illegitimate debts,
abusive credits Norway creditor
co-responsibilty
Clear tendency to advocate applying generally
accepted legal principles finally also to
Southern sovereign debts
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Defining Illegitimacy
Type A illegal debts legally null and void
incurred in violation of national laws, of
international law, in breach of legal obligations
or IFI-statutes violate general universally
accepted fundamental legal principles (human
rights) ex turpi causa non oritur actio
creditor liabilities, criminal debts - abusive
credits (Bohoslavsky )
Type B debts that might be legal by strictly
formal standards, yet whose existence or
servicing violates socially established
norms Often, servicing cannot be enforced or even
expected gambling debts equity in common law
public interest (US railways Subchapter IV,
Chapter 11, Title 11 USC ) Norways ship export
debts(?)
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Distributing Losses Insolvency and Contestable
Claims - Bona Fide Creditors and Haircuts
Country A total debt stock 100 IFI claims
40 A can only service debt stock of
50 haircuts suffered by recognised creditors
ALL CREDITORS EQUAL all lose 50
40 null void 16.67
IFIs EXEMPT (no IFI debt declared null
void) all others lose 83.33
40 null void 50
DEBTOR ALWAYS GETS 50 OFF BECAUSE 50 IS
UNPAYABLE
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Article IV.4.c, IBRDs AofA If a member
suffers from an acute exchange stringency, so
that the service of any loan contracted by that
member or guaranteed by it or by one of its
agencies cannot be provided in the stipulated
manner, the member concerned may apply to the
Bank for a relaxation of the conditions of
payment. If the Bank is satisfied that some
relaxation is in the interests of the particular
member and of the operations of the Bank and of
its members as a whole (ii) The Bank may
modify the terms of amortization or extend the
life of the loan, or both. NO Conditions
Required except exchange stringency
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Insuring against Losses and Stablising Financial
Markets Cheaply and Effectively
100(1 - p) - reservestig p repayment
probability, hence 100p is expected value, t
tax rate ig interest rate at which the
Treasury itself borrows
t 40 percent ig 4 difference of 100
costs of 1.60 per year.
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The increase of concessional and
non-concessional lending, including by emerging
creditors, would point to the need for work on an
internationally accepted debt workout mechanism
that involves all creditors. Countries thus need
to agree on a set of principles for resolving
potential debt crises that provide for fair
burden-sharing between the public and private
sectors and among debtors, creditors and
investors. Report of the Secretary-General, 10
August 2007, General Assembly (A /62/217) UN,
pp.27
"I would go a step further and propose that, in
the future, we consider an entirely new approach
to handling the debt problem. ... establishing a
debt arbitration process to balance the interests
of creditors and sovereign debtors and introduce
greater discipline into their relations. Kofi
Annan (2000) Freedom from Want, in We, the
People, Millenium Report, p.38)
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Thank you Merci Gracias Shukran ??
A???? ? ?
Kunibert Raffer http//homepage.univie.ac.at/Kunib
ert.Raffer