9. A: The Neoliberal Approach to Resolving Debt Crises

This ad hoc response to sovereign debt crises can be said to follow the neoliberal or neo-classical model of understanding sovereign debt, which, as we saw above, believes debt crises are seen as happening as a result of excessive government spending. As such, the solutions it emphasises also follow this neoliberal school of thought, and generally features some or all of the following characteristics: 

• New emergency loans to cover short-term debt repayments to creditors, rather than negotiating debt write downs.
• Debt restructuring but only in forms which ensure creditors are eventually paid.
• The implementation of austerity measures to decrease public spending on public sector workers, healthcare, education, social welfare supports etc. 
• Economic reforms (often in the form of conditions attached to emergency loans) which emphasise the privatisation of state-owned companies, assets or public services, the removal of protections for indigenous industry or agriculture, and the introduction of liberalised trade – often called ‘structural adjustments’.

Additionally, the neoliberal school believes that, while there is a need for greater coordination between creditors when a country faces a debt crisis, responsibility for this should lie with the IMF. However, the IMF is itself a lender, and so it is not in a position to be a neutral arbiter. Even the IMF, however, recognises that, because the sovereign debt is increasingly complex, with more and more lenders involved, and many different types of loans, there are “new challenges for potential debt resolution, including difficulties in ensuring the creditor coordination needed to produce comprehensive agreements acceptable to all major creditors.” 

Under this approach, only the borrower is responsible for their debts. It is implicitly assumed that all lending is carried out responsibly, with proper due diligence as to the ability of the borrower to repay the debt. Debt sustainability assessments (DSAs)- the way in which lenders like the IMF take into account whether a borrower country can afford to take on more debt – do not pay sufficient, or indeed in many cases any, attention to the sorts of implications for healthcare or education which increased debt repayments might have. Sustainability is considered solely as ‘ability-to-repay- sustainability; rather than sustainability in terms of reaching the Sustainable Development Goals. 

The absence of a coordinated debt moratorium mechanism has also been keenly felt during the Covid-19 pandemic. Although governments and international financial institutions agree in principle about the need for debt writedown, there is no clear forum where this can be negotiated. 

Without a coordinating forum, for example, if one country grants a debt moratorium but others don’t, the money which is freed up for the debtor country could just be used to repay other creditors – borrowing from Peter to pay Paul. Only a co-ordinated and enforceable mechanism to resolve the sovereign debt crisis, requiring the participation of all creditors, can be effective. 

Moreover, without an international legal mechanism for negotiating debt moratoriums, private creditors in particular can at any point sue debtor countries for breaching the terms of their loans. 

The absence of a clear mechanism for handling sovereign debt crises has not meant creditors have gotten off scot free. Indeed, because of the lack of a restructuring mechanism, suspension of debt repayments has often taken place unilaterally, rather than through negotiation or according to agreed rules. Since 1980, nearly a third of sovereign debt payment suspensions have been adopted through negotiations with creditors. In the rest of the cases, especially during the debt crisis in the 1980s, debt moratoriums were implemented without the approval of creditors.  

B: The Alternative: Challenging A Sovereign Debt Restructuring Mechanism, Responsible Lending, & Better Debt Sustainability Assessments   

Debt justice advocates take a more holistic approach to debt crises, and believe action to prevent debt crises is required in three areas; 

1. Prevent debt crises through better rules about lending and assessing whether debts are genuinely sustainable. This would mean that all lenders are obliged to undertake careful assessments of whether the loans they are giving can be repaid without compromising human rights. Currently, “debt sustainability assessments” only examine whether a debt can be repaid – and if it can’t, suggest cutting spending on areas like social welfare or the public sector. It would also mean that the IMF would not give loans for the sole purpose of repaying debts owed to other, reckless lenders – since this practice simply encourages further reckless lending. 
   
   
2. Deal with debt crises fairly by establishing a new international debt resolution body. This body, known as a multilateral Debt Workout Mechanism, would be a part of the United Nations, and independent of both creditors and lenders. This body would have the legal power, at the request of a borrower country which faces a debt crisis, to investigate the debt crisis and propose a resolution to that crisis. Once the Mechanism’s operation had been requested, creditors would not be allowed to sue borrower countries for repayment. The Mechanism would be tasked with considering the validity of all claims for repayment made by creditors, including which were reasonable and which were, potentially, unjust. It would engage in unbiased negotiation with creditors and borrowers, and come to an impartial and enforceable proposal to restructure a country’s debts. A UN-based Debt Workout Mechanism has significant support; in 2014, a majority of countries at the UN General Assembly backed a motion supporting its creation. But without the backing of rich countries, work to establish it has not progressed.
   
   
3. Help countries avoid greater debt by enabling them to grow their economies sustainably, and without enforced neoliberal policies. This includes international measures which help governments raise money in their own countries (domestic resource mobilisation), by, for example, collecting taxes from big corporations. Currently, international corporations pay far less tax in poor countries than they should, because of many loopholes used to minimise tax payments, and illicit financial flows. It also includes removing harmful austerity conditions often attached to loans, or encouraged by big donors.