Eurodad's comments on the Norwegian debt audit

Challenging illegitimate debt

Since it was founded in 1989, Eurodad has been campaigning for the cancellation of unsustainable and illegitimate debts that are holding back the development of poor countries. Over the past two decades, it became clear that it is not sufficient to tackle the symptoms. The roots of the problem need to be addressed too.

Illegitimate debt is the consequence of the misbehaviour of either the lender or the borrower, or often both, as there are two parties to a loan – it takes two to tango, as they say. Illegitimate debt is a key reason for unsustainable debt. Reckless lending and borrowing and/or the use of loans for inappropriate – if not outright illegal – purposes lead to debt crises. We have seen the devastating consequences of this across the world, and currently in Europe. Ultimately citizens are paying the price, and the most vulnerable citizens shoulder a disproportionately high burden.

A question that puzzled Eurodad for many years is how to make sure that such debts do not happen in the first place. The Eurodad Responsible Finance Charter was our response to this. It outlines how lending and borrowing can be improved to make sure that illegitimate debt does not occur.

Need for responsible lending

We were obviously not the only ones to discover that, in order for lending and cross-border finance to be effective, it needs to be responsible. The United Nations Conference on Trade and Development (UNCTAD) Principles on Promoting Responsible Sovereign Lending and Borrowing, developed by a multi-stakeholder group of experts including civil society organisations, was a remarkable step towards clarifying what responsible finance actually is. However, the principles do leave a lot of room for interpretation. On the one hand, they are the result of difficult consensus-finding among a diverse group of actors. On the other hand, the UN might have wanted the flexibility to adjust it to country cases as different UN member states have very different political, legal and economic systems.

As for so many policy proposals developed by international expert groups, there is an urgent need for operationalisation and implementation. Much can be won and much can be lost throughout such processes. This is why it is so important that civil society groups are actively engaged in this process, both as advocates of citizens’ interests and as watchdogs to hold state actors to account.

Debt audits - part of the solution

The Norwegian debt audit was a very laudable initiative. It was long overdue that a major creditor nation should assess its own portfolio against responsible finance standards. Norway is among the world’s largest ‘exporters’ of capital measured in terms of share of gross domestic product (GDP). For the UNCTAD principles, it was a litmus test, as it was the first time that the principles had been applied in practice, even if it was just ex post.

However, the Norwegian audit process was not optimal. In particular, a thorough (and sincere) consultation of civil society in all affected countries was missing. Moreover, it is incomprehensible for us why the sample of loans chosen for the audit was limited to export credits, while excluding the Government Pension Fund. Perhaps it should have been done by an audit commission, similar to the Ecuadorian debt audit a few years earlier, rather than by a for-profit consultancy firm.

Interpreting the principles

Civil society also has an opinion regarding how to interpret the UNCTAD principles. One of their main achievements was to put the ‘agency’ principle first and stress the need for ‘due authorisation’. It is usually state officers or politicians who take out loans. But when payday comes, none of them is liable with their personal income or assets. It is citizens who have to foot the bill, either due to the use of their tax payments and/or through foregone expenses on public services when state revenue is used for debt service. It is striking that development banks from democratic states have lent and continue to lend money to autocratic regimes, in anticipation that they will use other people’s money to repay the loan, people who did not legitimise them to borrow in the first place.

In the private sector, agents would need a solid power of attorney to act on other people’s behalf, to undersign legally binding contracts. As SLUG points out, in state affairs the equivalent would be democratic legitimisation of a borrower, and parliamentary approval of the loan. SLUG’s report also makes clear that the agency principle implies “that it is problematic to lend to a regime that does not represent nor act in the interests of its citizens”. The lender would either need to refrain from lending or “go to extra lengths to ensure that the loan does benefit the population in cases where the regime is odious”. More clarity about what these extra lengths might be would have been useful.

Ensuring democratic decisions

One key point is that the agency principle implies that lenders must not impose harmful policy conditionalities. Borrower country officers are accountable to their citizens, not to creditor governments for whom lending is often part of a package approach to pursue their vested foreign economic and policy interests. The agency principle is key to realising democratic ownership of development loans and other public spending. Questions remain about how to assess who is a legitimate agent, and what is due authorisation – and who should do it. It is clear that it cannot be left to creditor discretion.

Critique of UNCTAD principles

A deficit of the UNCTAD principles was that they did not give guidance about what to do when lenders or borrowers violated responsible financing principles. They do not include a sanction mechanism. Such a mechanism might boost the compliance rate massively. SLUG suggests that, in cases where debt restructuring is needed, irresponsible lenders’ claims will be subordinated to those of responsible lenders. They also say that legitimate successor governments have the right to repudiate debts incurred by an illegitimate predecessor. Such sanction mechanisms are absolutely necessary. They would give responsible finance principles the teeth they need to be effective. For Eurodad, they are also crucial for inter-creditor equity. Creditors whose irresponsible behaviour has caused debt crises should be held accountable under the concept of co-responsibility. Illegitimate debt must be cancelled. In many cases, cancelling the illegitimate share of the debt stock should be sufficient to restore debt sustainability and ensure that legitimate loan contacts are being honoured.

Another shortcoming of the UNCTAD principles is the gap they leave in the area of sovereign debt restructuring, or debt workout mechanisms. The principles call on the parties to reach a consensual arrangement for speedy and orderly resolution. However, SLUG correctly criticises that, given the power imbalances between creditors and debtors in a crisis, the consensus may be one-sided. Solutions as suggested in this shadow report such as arbitration clauses in new loan contracts or independent debt court could be useful innovations to fill the gaping hole in the current international financial architecture that is fair and transparent arbitration procedures. Where the UNCTAD principles already point at ‘economic necessity’ as one factor to consider when deciding about debt(re-)payment, it is clear that, from a civil society perspective, debt service is not superior to states’ responsibilities to fulfill their human rights obligations, and any decision about debt restructuring needs to take developmental needs into account.

Eurodad supports SLUG´s demand for the Norwegian government to cancel the claims that originate from irresponsible lending, including the debts of Indonesia and Egypt. This would be in line with the precedent set in 2007 when cancelling debt based on creditor co-responsibility. Norway should further use their membership in multilateral development banks to promote their compliance with responsible finance principles. The Norwegian government must continue to play a leading role in promoting responsible lending internationally. We think that an assessment of loan portfolios should be carried out by all nations, and illegitimate debt should be cancelled. Eurodad expects other creditor nations to assess their outstanding loans to developing countries against responsible finance principles too.