This is from the J2000 web page: http://www.oneworld.org/jubilee2000/index.html, which is searchable. It has some invocations of authority which might be useful. See esp. the reference to Kunibert Raffer of the University of Vienna. -bob naiman ------------------- An International Bankruptcy Clause: A proposal for resolving the current debt crisis and preventing future ones developing The current financial crisis has re-opened the debate on the process of prevention of future debt crises, and much of the discussion at the Annual Meetings of the IMF and World Bank has focused on this issue. The debate is not new. Adam Smith, Scottish philosopher and economist and universally regarded as the founding father of economics, wrote as follows: When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open and avowed bankruptcy is always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor. Wealth of Nations, 1776 More recently, the Financial Times wrote: It is now well known that countries politically incapable of meeting their liabilities need some sort of bankruptcy procedure that ensures that all creditors share the losses. Financial Times, 30th July 1992 In the current debate, Business Week contributed the following: History suggests that in times of crisis, demanding full repayment of debt can be an enormous mistake. After World War I, the victors' moves to collect war debts from each other and reparations from Germany helped create the conditions that bred the Great Depression and World War II. By contrast, the US system does not require companies or people who fall on hard times to spend the rest of their life paying debts back. Business Week, 12th October 1998 At the Annual Meetings the President of the World Bank, Jim Wolfensohn, was questioned on the issue of a world bankruptcy court. He said that this was an initiative that was being considered, although a simpler method of freezing a nation's accounts and providing additional funding could prove adequate. He said that national bankruptcy laws were being drawn up with help from the World Bank for many developing countries, who did not have operating bankruptcy laws. Below is a summary of some of the current pressures on the international financial system and the discussion amongst opinion formers and policy makers of the need for a reformed process to deal with the issue of international debt. Default and bankruptcy The western banking community does not like the word default, and the awful d-word is replaced by such euphemisms as debt moratorium, debt standstill, effective default. However, Russia, Ukraine and Indonesia have all defaulted over the past year, as their struggling economies finally gave up the pretence of trying to match the galloping costs of debt service. Pakistan will default if the World Bank does not extend loans put on hold as part of the sanctions imposed on the country following its nuclear tests. Brazil will default unless the IMF puts together a multi-billion dollar rescue package to provide short-term financing to calm the fears of investors. The likelihood is that the IMF and World Bank will act under G7 encouragement to reschedule debts in Brazil, Pakistan and South Africa, as default in these countries carries a real threat to economies in the west. Increasingly, however, world leaders and opinion formers are considering how to improve the current system of international debt management. Jubilee 2000 Coalition has called for a fair and transparent process for negotiating debt relief, and an international bankruptcy code could form a vital part of this. It is almost certain that such a code will become reality one day, and if there is a benefit of the current financial crisis, it is that this day may have come closer. National bankruptcy clauses Bankruptcy laws developed in the UK and other industrialising economies around the 1840s. They replaced a hateful system where debtors were imprisoned for being in debt, and were forced to assume a lifetime obligation to pay. Charles Dickens immortalised the inhumanity of the system in his novel Little Dorrit, the story of a child whose father was condemned to a life sentence in the Marshalsea debtors' prison in London. Governments in northern Europe and the US made decisions to introduce limited liability and permissive bankruptcy laws with the explicit intention of encouraging entrepreneurial behaviour. They were rewarded with an explosion of economic activity. The idea of a lifetime obligation to pay may have been banished to the history books in a national context, but it strikes a chilling chord when considered in the context of the international debt crisis. Creditors have shown ruthless intransigence in their demands for payment. However, the fiction that all sovereign debt can and will eventually be repaid is finally crumbling away, and the likelihood of extending a national law into the international context has been increased. An International Insolvency Clause At the Annual Meetings of the IMF and the World Bank there has been discussion of extending the USA's Chapter 11 of Title 11 (Bankruptcy) of the United States Code. The United Nations Conference on Trade and Development (UNCTAD), Nobel Laureate Lawrence Klein and economist and Harvard professor Jeffrey Sachs are amongst the many champions of this proposal. At the Annual Meetings, Canada's finance minister, Paul Martin, called for debt standstills to be formally endorsed by the IMF and World Bank. A country in debt difficulties would receive a temporary standstill on debt payments with the approval of the IMF. Creditors and debtors would come to an agreement without the rush and panic brought on by a default. Debtor countries would receive the equivalent of debtor-in-possession financing, giving special rights to those lenders who provide credit after the original bankruptcy is declared. This would allow countries to get enough foreign exchange loans, guaranteed by the IMF, to allow exporters to keep functioning. The counter argument Counter arguments to this proposal are based on the idea that differences between firms and sovereign states mean that Chapter 11 cannot be applied in an international context. [1] In the corporate case, a court has the power to knock all relevant heads together, and to punish those who refuse to co-operate. In the international context, this is not possible: no single jurisdiction covers all the creditors involved. In addition, the reorganisation that follows corporate bankruptcy usually both reshuffles the ownership and replaces the management. These are the main defences against the moral hazard that would otherwise arise from protecting owners from creditors. In an international context, however, the IMF cannot remove a government and appoint a new one. Paulo Ferraz, the Chief Executive Officer of Banco Bozano Simonsen, one of Brazil's premier investment banks, has described a Chapter 11 for nations as the worst idea I've heard in my life. It would be the end of the global financial system. [2] Such fears are clearly more imagined than real. The proposal will undoubtedly redress the balance between creditors and debtors, and the banks and their apologists are likely to be the most vehement in their opposition. However, worries that an international court would not have the jurisdiction over creditors could be addressed with an international treaty. As it is creditors co-operate with each other in the informal and unconstitutional Paris Club, and the cost of debt rescheduling and write-off is borne equally. Certainly the IMF cannot replace a government, but many of the severely indebted countries have fledgling democracies, which have inherited debts from previous regimes. They deserve the benefit of any doubt. Generous debt relief for Germany for Chancellor Adenauer's fledgling democracy in 1953 had no moral hazard repercussions. The country found its path to sustainable economic growth and within a generation had become a vital trading partner for the rest of Europe. Chapter 9, not Chapter 11 Kunibert Raffer of the University of Vienna has suggested that Chapter 9 of Title 11, which deals with local government bankruptcy is more relevant, and his ideas have received widespread support within the Jubilee 2000 Coalition. In his paper What's Good for the United States Must be Good for the World he advocates an International Chapter 9 Insolvency. This chapter deals with local government and is based on the understanding that although a municipality may fall in financial difficulties, its essential services must continue to be provided for the sake of the community it serves. The potential relevance to a severely indebted poor country is clear to see. A municipality is not expected to stop providing social services essential to the health, safety and welfare of its inhabitants in order to pay its creditors. The US Supreme Court rejected the idea that a city has unlimited taxing power stating that a city cannot be taken over and operated for the benefit of its creditors. An independent court An international, independent court would be appointed to arbitrate between creditors and debtors. Each side (the debtor country and the main creditors) would nominate the same number of persons, who in turn would elect a further member to achieve an uneven number. One of the arbitrators is elected as chairperson. Creditors and debtors would argue their separate cases, much as they do now in the Paris Club and the London Club. The vital difference is that the final decision would rest with the arbitrators, and they would only endorse an agreement that was fairly, equitably, and openly arrived at. A debtor voice The Paris and London Clubs by contrast are secretive and inequitable. Negotiations are heavily weighted in favour of the creditor nations, who in a particular sitting may outnumber the debtor nation by 30 to 1. Any rescheduling of debt is carried out purely on the basis of ability to pay, with no allowance made for the debtor government's capacity to deliver essential services. An international Chapter 9 would change this. The international court could permit any interested person or organisation to be heard. Grass-roots organisations of the poor, NGOs or international organisations such as UNICEF or the World Council of Churches could argue alongside the debtor government for the retention and increase of health and education spending. A reduction in moral hazard As well as providing a safeguard for spending on the poor, the mechanism would have the advantage that banks would never again presume that sovereign debtors will always repay. IMF bail-outs in Korea and Indonesia have led to the losses of private lenders being borne by the taxpayers of member countries of the IMF. This leads to moral hazard, the idea (in this context) that such a policy will encourage rather than discourage future reckless lending. A bankruptcy clause acts as a brake on reckless lending. If an international Chapter 9 had existed during the 1970s enormous misallocation of funds could have been avoided and the debt burden would certainly have been much smaller. An international Chapter 9 Insolvency will be resisted vehemently by many of the larger investment banks, in much the same way that the conservative, regressive forces argued against national bankruptcy laws. Currently, as the experience of the bail-outs from Korea to Russia have shown, they are in the enviable position of keeping private profits, but having (at least some of) their losses borne by governments. It is time to bring an end to what many feel is this inequitable, indefensible, indeed scandalous situation. The introduction of an international bankruptcy law could well be a step along this road. As Kunibert Raffer concludes: Economic history, not least the history of present creditors, teaches us that debt reduction is economically unavoidable. It only remains to be asked how long it will take and how much human suffering decision makers are prepared to allow before debtor countries' obligations are finally brought in line with their capacity to pay. [3] Footnotes [1] See The Economist October 3rd 1998, page 138 [2] Business Week, 12th October 1998 page 50 [3] What's good for the United States Must be Good for the World: Advocating an International Chapter 9 Insolvency. Kreisky Forum Symposium, Vienna September 1992 Home | Who we are | News | What you can do | Features | Policy | Resources | Links | Petition | Questions At 04:13 PM 1/20/99 -0800, you wrote: >Forwarded message: >>From [EMAIL PROTECTED] Thu Jan 21 00:12:38 1999 >Delivered-To: [EMAIL PROTECTED] >Message-Id: <[EMAIL PROTECTED]> >Date: Thu, 21 Jan 1999 11:03:38 +1100 >Reply-To: [EMAIL PROTECTED] >Sender: [EMAIL PROTECTED] >Precedence: bulk >From: "Sean Turnell" <[EMAIL PROTECTED]> >To: POST-KEYNESIAN THOUGHT <[EMAIL PROTECTED]> >Subject: Jubilee 2000 enquiry >X-To: [EMAIL PROTECTED] >X-mailer: Pegasus Mail for Win32 (v3.01b) >X-Listprocessor-Version: 8.0 -- ListProcessor(tm) by CREN > >Does anyone know of any economist who has written on the >"Jubilee 2000" debt cancellation programme? > >A feature in a leading Australian newspaper will shortly be devoted >to this topic, and I would like to point its author to sources which >do not necessarily follow financial market orthodoxy. > > > >-- >Michael Perelman >Economics Department >California State University >Chico, CA 95929 > >Tel. 530-898-5321 >E-Mail [EMAIL PROTECTED] > ------------------------------- Robert Naiman <[EMAIL PROTECTED]> Preamble Center for Public Policy 1737 21st NW Washington, DC 20009 phone: 202-265-3263 fax: 202-265-3647 http://www.preamble.org/ -------------------------------
