Why such a long debt crisis in low-income countries?

2. Persistent country characteristics (bad policies) → low growth and high debts → debt relief → bad policies Moral hazard with debtors (Easterly) High debt and low growth → debt relief → more loans (moral hazard with creditors) and, through conditions, bad policies → lower growth Why such a long debt crisisin low-income countries?

3. Debt restructuring in 1980s and 1990s, and problems 1999 HIPC initiative and 2006 MDRI did not resolve these problems New problems in recent years with DSF, vulture funds Possible solutions Overview

4. Private creditors: no new loans, writing-off Official creditors, bilateral and multilateral: Maintained fiction of lack of liquidity, not solvency → Combined rescheduling with new loans and grants IMF agreement always condition for rescheduling Creditor responses to debt problems in 1980s & 1990s

5. Rescheduling of debt service, with increasing percentages of forgiveness during the 1990s But only on debt servicedue during period of IMF agreement Usually ESAF, 3 years No stock cancelations Bilateral creditors: Paris Club

6. Limited effects on stocks and flows Causes: Debt relief too limited Wrong modalities: mostly on flows, not on stocks Too many new loans, mainly from multilateral development banks Effects of debt relief,Evaluation in eight countries

7. Net transfers on debt, Sub-Sahara Africa, in US$ billion

8. Multilaterals were preferred creditors, so were bailed out by bilaterals →Inefficient use of aid money of bilaterals →Moral hazard with IFIs, so more new loans →Perpetuation of debt unsustainability Moral hazard

9. IMF three roles: gatekeeper, creditor and arbitrage: financing gap →Always new agreement in countries with high multilteral debt → More new multi-loans → No selectivity, adverse selection → Weakened position of debtor, dragging on of debt problems Uncertainty for debtors Conditions not always appropriate IMF agreement as condition

10. More debt relief, more cancellation instead of rescheduling But: Not enough for debt sustainability Financing by bilaterals→ Moral hazard continued Conditionality became more extensive than ever → Uncertainty and adverse selection continued Changes with HIPC, 1999

11. 22 HIPCs: Average share of multilateral loans in total new loans

12. Debts reduced for HIPC graduates But: same conditionality → uncertainty continues for other potential HIPCs Debt sustainability? Not all creditors included, vulture funds & litigation: free riding on international agreements Domestic debts New foreign loans, so ... Multilateral Debt Relief Initiative(MDRI) 2006

13. Criteria: size of debt, plus policies, measured by CPIA Consequences: Lower expected sustainability → more IDA grants → new adverse selection Additional conditionality on new borrowing: sanctions Debt Sustainability Framework(DSF)

14. World Bank (IDA) loans: still moral hazard, perpetuate debt problems IMF conditionality continues Some countries still no access to HIPC Leverage IMF increased: budget support New problem: Free riding by vulture funds Conclusions: (persistent) problems

15. Moral hazard WB IMF Conditionality: Conflicting roles Problem of contents of conditions: IMF represents donors and creditors, lack of accountability Vulture funds IDA grants, not loans IMF: Gatekeeper only: PSI Proposed: International arbitrage, no funds (Bolton & Skeel) Better: More limited role IMF in poorest countries Independent arbitrage Changes in legislation creditor countries Problems and solutions