GMF-CIGI Breakfast Debate on New Approaches to Managing Severe Sovereign Debt Crises
The Paris office of the German Marshall Fund of the United States and the Centre for International Governance Innovation (CIGI), in partnership with the Centre d’Etudes Prospectives et d’Informations Internationales (CEPII), organized a private breakfast discussion with Richard Gitlin, senior fellow at CIGI and chairman of Gitlin & Company, Brett House, senior fellow at CIGI and Chazen Visiting Scholar at Columbia Business School, and Clotilde L’Angevin, secretary general of the Paris Club and former head of the International Debt division of the French Treasury, on the managing of sovereign debt crises. The discussion took place at the Commissariat Général à la Stratégie et à la Prospective on Thursday, November 21st and was moderated by Christophe Destais, deputy-director of CEPII.
After a short introduction by Christophe Destais, who framed the discussion by explaining why these crises still matter today despite being thought to be challenges from the past in developed countries, Brett House presented his vision of an informal and non-statutory platform that would help solve sovereign debt crises. The ‘Sovereign Debt Forum’ (SDF) would aim to facilitate more transparent resolutions of such crises and to offer a neutral body, as compared to the existing international institutions, in order to reach rapid compromises. According to Richard Gitlin, the main challenge concerning the sovereign debt is that restructuration usually takes place too late in the process, whereas potential crises need to be addressed before the more serious problems arise. He argued that a new forum such as the SDF would be particularly relevant in order to promote pre-conduct responsibility. It would also help in facing three interlinked issues: over-lending/over-borrowing, the reluctance to turn to existing institutions such as the IMF due to the political costs it entails for a government, and tendencies toward insufficient restructuring. These issues are borne from the lack of an international system that could optimize the outcomes of the efforts and encourage more regular dialogues between creditors and debtors. In that sense, the SDF would be largely influenced by the experience of the Paris Club, as it would remain a small and informal organization serving as a framework and would not have the power to enforce measures, but would aim to become more inclusive than the Paris Club. The SDF could then forecast predictable consequences of borrowing and provide an honest assessment of the sustainability of sovereign debts.
Clotilde L’Angevin presented the successes and difficulties faced by the Paris Club in order to highlight the main issues of sovereign debt solving process at the global level. She argued that the integration of China into existing institutions was today’s greatest challenge, as the Chinese regime remains reluctant to accept strong rules of conditionality that would limit its margins of manoeuver. She also underlined the necessity to integrate other developing countries which have an increasing share of the creditors in order to reach the right compromise between representativeness, transparency and efficiency.
The debate with the audience addressed larger issues of the role of the IMF and OECD in the resolution of sovereign debt crises. About thirty economists, journalists and corporate representatives were present in the attendance, along with French officials and representatives of international institutions.
The event in Paris was followed up by an event in Brussels on the same topic. Participants included leading experts from local think tanks, economists, private consultants, European officials and foreign diplomats.
After opening remarks from Guillaume Xavier-Bender, program officer at GMF in Brussels, on the relevance of dealing with crises differently especially after the crisis in the Eurozone, Brett House presented a brief history of sovereign debt restructuring mechanisms. He explained that since its initial failure in 2003 the topic has remained dormant since 2008. The proposal of a SDF would be a way to revive the conversation in order to ensure that sovereigns do not end up defaulting too late in the game. The SDF would be a non-statutory, non-institutional, and uncodified body that would provide surveillance similar to the Article 4 analysis of the International Monetary Fund (IMF). Richard Gitlin explained that this forum would not replace institutions but would rather provide a lightly staffed complementary venue. Countries often resort to the IMF at a too critical stage, and the SDF would allow earlier assessments and discussions in order to avoid contagion.
Following the presentation, participants questioned whether the creation of a SDF would be possible with the rise of China. They raised the question of the already existing Paris Club. The advantages of a SDF include: an early response for vulnerable sovereigns and a chairman that would create an environment based on transparency, trust and confidentiality. Additionally, the forum would be an independent non-profit entity with members representing all stakeholders: sovereigns, NGOs, academics, creditors, and debtors. The need for a more informal approach for the eurozone was also discussed, especially in relation to already existing mechanisms. It was repeatedly stressed that SDF would be a forum that would promote greater transparency and information sharing, including between transatlantic partners and organizations.