High Risk of Debt Distress: Breaking the Impasse in Global Debt Restructuring

Opening remarks

00:50 David R. Malpass, President, World Bank Group

First session: Debt Sustainability 

07:17 Overview and panel discussion
1:05:00 Live Q&A

- Carmen M. Reinhart, Professor, Harvard Kennedy School
- Pablo Saavedra, Vice President, Equitable Growth, Finance and Institutions, World Bank
- Jeromin Zettelmeyer, Director of Bruegel
- Moderator: David Malpass, President of the World Bank Group

Second panel: Debt Distress and Restructurings 

1:24:34 Introduction, overview, and panel discussion
2:21:27 Live Q&A

- Laura Alfaro, Professor, Harvard Business School
- Lee C. Buchheit, Honorary Professor of Edinburgh Law School
- Ceyla Pazarbasioglu, Director of the Strategy, Policy, and Review Department, IMF
- Moderator: Indermit Gill, Chief Economist and Senior Vice President for Development Economics of the World Bank

Closing remarks

2:42:26 Indermit Gill, Chief Economist of the World Bank Group
2:55:56 David R. Malpass, President, World Bank Group

[Paul Blake]

[Inaudible] joining us. Whether you're among the many who are joining us online or here in person, thank you for joining us today for Breaking the Impasse in Global Debt Restructuring. We've got two world class panels coming up. The first on debt sustainability, which will feature Harvard University Professor, Carmen Reinhart; World Bank Vice President, Pablo Saavedra; and Bruegel Director, Jeromin Zettelmeyer. World Bank President, David Malpass, will moderate that discussion. After that and brief intermission, World Bank Chief Economist, Indermit Gill, will moderate a discussion with Harvard University Professor, Laura Alfaro; Edinburgh University Honorary Professor, Lee Buchheit; and IMF Director, Ceyla Pazarbasioglu. But first, please join me in welcoming World Bank President David Malpass. 

[David R. Malpass]

Thank you very much, Paul, and thank you all for joining this morning. Today's subject, debt sustainability, is one that I've been deeply engaged in. It dates back to my work at the US Treasury in the 1980s for secretaries Baker and Brady. In the 1970s, Latin oil producers had borrowed heavily in dollars from foreign banks who lent way too much. That was when the dollar was weak, oil prices were high and bank loans were readily available. Then circumstances changed. Interest rates rose and oil prices fell, triggering the Latin debt crisis. It left a decade of workouts and US Bridge loans to IMF and World Bank loans. This series of crises extended the debt maturities and gradually shifted debt to multilaterals. But poverty rose massively. The debt wasn't sustainable until the net present value of the commercial bank debt was substantially reduced under the Brady Plan. The current debt crisis is again one of the biggest obstacles to development. I've worked hard to shift the system toward transparency and sustainability, both as undersecretary of the US Treasury for International Affairs in 2017 and 2018, where I testified on these topics, and as President of the World Bank Group. Debt sustainability matters a lot for development. It is essential in attracting new investment, boosting growth, and breaking the poverty cycle. Even before the arrival of COVID-19, when global interest rates were still close to zero, it was already clear that many developing countries had amassed far too much debt. The World Bank's Global Waves of Debt report in December 2019 noted that the world was in the midst of, quote, “the largest, fastest and most broad-based debt surge in nearly five decades.” In the report, we urged policymakers to recognize the danger and move into safer territories in terms of the quality and quantity of investment in debt, sooner rather than later. Yet here we are today, with 60% of low-income countries either in debt distress or at high risk of it. Interest rates are climbing at the fastest pace in four decades and economic growth is slowing nearly everywhere. It's clear that the global instruments to tackle debt sustainability and debt restructuring have been ineffective. Debt sustainability assessments often have proven to be over-optimistic, especially in terms of projections of key variables such as growth, inflation, interest rates, tax revenues and government spending restraint. Not enough attention has been given to the rising danger of domestic debt and its consequences for growth. Recent debt restructuring efforts, meanwhile, have been painfully slow. The G20 Common Framework has been exceedingly slow and unpredictable, causing countries to delay their restructuring efforts until it is harmfully late. It reminds us painfully of Latin America's lost decade in the 1980s, when there was no path to sustainability. We launched the Global Sovereign Debt Roundtable as a forum to discuss pathways forward. It brought the debtors and private sector creditors into the discussion, which I think is a necessary step. We agreed at the April Meeting to hold a workshop on Comparability of Treatment in the next few weeks. A common understanding of net present value reductions and the importance of a common discount rate is necessary to achieve fair burden sharing among commercial and official bilateral creditors. Rapid resolution of unsustainable debt is in everyone's interest. Progress under the Common Framework has been limited so far to a two-step restructuring that does not provide a predictable or credible path to sustainability. While we are properly focused on making headway on any of the current Common Framework tasks in order to avoid the Chad outcome in Zambia, Ghana, Ethiopia and Sri Lanka, well, Sri Lanka is not Common Framework, in Zambia, Ghana and Ethiopia, we also need to work toward a better system for the future. We need to tackle two dimensions, enhance debt transparency, and rebalance the creditor and debtor balance, which heavily favors the creditor, during debt restructurings, as we see clearly every day. There needs to be more emphasis on transparency in individual contracts by strengthening public transaction disclosure practices. Today's contracts are oftentimes hidden behind nondisclosure clauses, collateralized arrangements, and escrow accounts. Sovereign borrowers seeking restructurings should be able to fully disclose all their debt and debt-like contracts. We also need a faster and more accurate debt reconciliation process between debtors and creditors. To achieve a better balance between debtors and creditors during future restructurings, we should move toward aggregate collective action clauses in all new official sector and private sector debt and debt-like instruments. Other measures which could facilitate restructurings include limiting creditor recoveries, immunizing sovereign assets from attachment, or introducing a most favored creditor clause. I'm eager to hear from all of today's panelists, what can be done to break out of the debt impasse and create a better system for the future? With that, let's go to Jeromin to set the stage. Jeromin.

[Jeromin Zettelmeyer]

Super. Thank you so much, David, and it's a real honor to be here. I'm going to take the questions that I was asked somewhat seriously, and the main question is how can over-optimism bias be avoided? And then whether our current analysis is missing new risks, including climate risks, and how that can be addressed. I'm going to basically make three points, the first on the sources and diagnosis of over-optimism, the second on the need for a review or reform of the existing debt sustainability framework for low income countries, the Joint World Bank IMF Sustainability Framework. And then finally, a point about the need to capture the fiscal costs of climate adaptation. On my first point, the sources and diagnosis of over-optimism, I think it's very important to make a distinction on how over-optimism could creep into a DSA. Basically, there are two completely different channels. One, if you like, is analogous to pilot error, and the other one is sort of a faulty aircraft. Conditional on the method in its actual application to each country, the projections that drive the method, particularly on growth and exchange rates, could be too optimistic. Then the other one could be the method itself that is maybe created at a time when certain risks were not present yet, and so it also creates a bias. Although optimism, the first kind, with respect to pilot error, is very well-documented. There are many papers on that, and certainly with respect to IMF growth and debt projections. The deep reasons for this are not clear, but probably it has to do with some mixing of normative and predictive thinking. You want things to go better than they actually go and maybe too much accommodation of the authority's views. That's sort of my interpretation from the perspective of a former IMF staff member, bank staff may face somewhat different incentives. One interesting thing to check, which I'm not sure has been done, maybe it should be done, is whether bank forecasts are actually less optimistic. Now, how does one address this sort of optimism? The first way to do it is, of course, you can reduce discretion. You can simply rely less on forecasts. But by doing that, you might be throwing away a lot of information that an individual forecaster actually has about future developments. Plus, you cannot really do it in a program context. In a program context you are asking conditional on a set of adjustment measures, reform measures, is that likely to be sustainable? You cannot throw away a baseline. What you can do is you can have some methods that detect optimisms through database possibility checks, basically you compare them to a mechanical forecast and if the discrepancy is too big, you flag that and there can be peer review. At the fund we have a lot of both, and in the review of the debt sustainability framework for market access countries, which I led in the last three years, we did a lot of these optimism detection methods and it's something that should be taken very seriously in a future LIC DSF reform. Then there is the issue of whether the system itself suffers from optimism bias, even if fed with neutral projections. Prima facie, that does not seem to be the case. The reason why I say that is that LIC DSF risk ratings, they were mentioned by David, actually have been flying risks very early and very consistently. Even before the COVID-19 shock in 2019, the LIC DSF flagged 36% of LICs at high risk of debt distress, and at that time 16% were in debt distress. Then during COVID-19 the proportion of LICs at high risk increased by a few points to 43.5% by 2021, and since then it has receded modestly to 40%. But this is sort of the surprising fact, the share of LICs in debt restressed has been basically flat. It was 16% in 2019 before all these shocks. It's 17% now. That's quite a stunner. I'm not quite sure where this comes from, but there is certainly, the one obvious thing is LICs have been more resilient than you would have thought based on the predictions back then and based on these enormous shocks. Maybe we overestimated risks. Maybe it was the crisis response. There was a very strong policy response that essentially saved many of these LICs from going into this [unintelligible]. It's going to be a combination of those two things, but certainly you cannot argue that this system was too optimistic. If anything, it gives you the impression that it cried foul too frequently. Now there is a possible interpretation, which I think is probably on David's mind, which is we are yet waiting for the other shoe to drop. These risks have been building up, the countries are hanging in there, but it's about to sort of break out. One can do sort of a basic sanity check of that idea. I'm not saying it is wrong, but one can do an interesting sanity check, and that's what we did in this paper, led by former IMF colleague Chuku Chuku, who maybe is here, I'm not sure, there he is, and a bunch of other colleagues. What the idea that we had was we want to measure how far are we from a big HIPC-style disaster from the late 1990s? You cannot literally take the current LIC DSF framework and apply it back into the past because some of the data that we need to do that would be missing, like institutional ratings, but what you can do is you can apply individual indicators of the framework all the way. You can basically back, how do you say, back-cast them until 1990 and see how it changed. The result is on your screen. These are four out of the five main risk indicators in the LIC DSF, and three of the pictures there are these little thresholds that for a country with medium debt-carrying capacity would say, now there's a serious problem. Basically, the bottom line here is that in all four indicators, the present, while it looks a lot worse than it did in 2010, you see all these indicators, external debt to exports, total debt-to-GDP, then two debt-service indicators, you see them sort of coming down after the HIPC MDRI Debt Relief Initiative, they hit bottom around 2010, and since then they creep back up. It’s this creeping back up that creeps us out. But if you look at where we are now, we are still, for the most part, way below where we were pre-HIPC, and that is most obviously true if you focus on this blue shaded line. This blue shaded area is the interquartile range, the range from the 25th to the 75th percentile of all LICs. The dotted orange line in the chart is the countries that are currently high risk, that are rated at high risk by the methodology. For those, you can see that we are, in some of these indicators, not that far off from where these same countries were at the time of the HIPC initiative. That's a warning sign, but we are still very far off from where the countries were that actually went through HIPC, and that's the blue line. Those countries had way higher distress levels than the current countries that we call high risk now. We're not trying to give an overly sanguine view, it's just that, yes, it's gotten a lot worse, yes, it is bad, it's nowhere near where we were at the time of HIPC. Let me quickly get to my second point. This is the good news, but there is bad news as well, and that is that of course, as time passes, over-optimism in the system itself tend to build up. That's because the system has been created at a time when certain risks weren't there yet. The two big ones were the ones that were named by David, so this is domestic debt buildup, which is for the most part not in here, it is in the total debt-to-GDP ratio, but it's not in the other three. And then it is, of course, climate risk. Maybe we are fighting the last battle. Maybe the system that we have now would have done a great job at detecting the HIPC distress. But we're not concerned with the HIPC distress. We're not in the 1990s, we are in the present, and maybe we're failing to detect those risks. This is definitely a worry. But then a big even bigger worry for me as a sort of former IMF technician or researcher, is the whole system just has low predictive power. It fails to call crises when they appear, and it very often sounds false alarms. One has to make the predictive power of the system better, and this is what really justifies a reform, I think. The LIC DSF reform is overdue, in my opinion. It should be done. The obvious things to do in this reform is to move away from this threshold approach that you see on the screen because aggregating binary signals throws away a lot of way of information. What you want to do is if you want to communicate high risk, medium risk, low risk, you should do it by generating probabilities of this distress and then you can cut those probabilities in three segments, but on the way there keep the full information. This is what we did in the reform of the market-access countries DSF at the fund. You want to do a better job at capturing uncertainty in the evolution of debt so that's not there, this is all essentially deterministic in the current DSF, and you definitely want to worry more about domestic debt and generally more about rollover risks and liquidity. Now, my last point, I'm going to make a big plea to capture the fiscal cost of climate adaptation. David mentioned climate-related debt risks. There are three types, basically. There's the natural catastrophes and growth slowdown, so the direct impact of climate change, climate risk, there's the effect on borrowing costs. Now these are all bad, but they are fairly easy to measure because you can simulate what a catastrophe would do and you can, to some extent, observe what happens to spreads in the face of climate risk. The really hard one is the fiscal costs of required adaptation investment, and that can be enormous in many low-income countries. The reason why it's so important to capture that is not only is it very important for the judgment of whether debt is sustainable, but it's going to be really important in debt-restructuring negotiations because if a country is insolvent and its actions with respect to climate adaptation can have a significant impact on that future solvency, that obviously justifies making the creditors pay for those adaptation investments on condition, however, that they are actually carried out. Basically, in climate-vulnerable countries that can reduce their risks through adaptation investments, you want to have the same approach to debt restructuring that we have through standard macro-conditionality, except that the conditionality should be on adaptation investment. The reason why this is so important is because it's very difficult to actually find out what the required adaptation is. You can very easily see a country sweeping in all kinds of stuff into I need this, I need that for my adaptation that the credits are not to buy. The information problem in sort of identifying, certifying, providing the technical assistance, but also providing the credibility to a country's adaptation plan is going to completely determine whether creditors are willing to pay for that. And this is the point I'm making this here at the end, the institution to do that is the World Bank. The World Bank should be the adaptation conditionality institution in debt restructurings involving climate-vulnerable countries. We're going to get a lot more of those in the future. The depth of debt relief for those countries that we all want will depend on whether this job is done credibly. Thank you. 

[David R. Malpass]

Thank you. Pablo, reactions? 

[Pablo Saavedra]

Yes, thank you and thanks Jeromin. This is a very good presentation and very good points. Some quick reactions and then adding some topics. I fully agree on the over-optimism of projections. This is something that we, in the context of the review that is coming up of the DSA, we need to look again as it was done in 2017. This has an impact, obviously, and it's not just growth, it's also fiscal balances and all the impacts that we see on the rest of the framework. As part of that review, I also agree that we need to look more closely at all the features in terms of climate, particularly climate adaptation and the cost of that. I think we have some features in the DSF, but clearly more is needed. It's a different situation that we are facing at this point. I do agree that we are not in the situation of HIPC at this point, even as we experience the fastest growth in debt over the last ten years compared to any other period in the last 50 years. I would like to add two important points for debt sustainability. The first one David tabled in his opening remarks and is the issue of debt transparency and reporting. All of these ratios we looked at in DSAs, starting from debt in GDP, debt service to revenues, debt service to exports, depend that you have a good numerator. If you don't have the right numerator, none of the analysis can give you a good picture of what's happening. Think about the many examples we experienced over the last years. Mozambique comes to mind, they were issuing bonds left and right. Everybody thought that they were sustainable and the news came that they didn't report two big loans and all of a sudden, of course they are not sustainable, markets shoved out from them and crisis. Having the right information, it's critical, otherwise, no matter how good the tool is, you cannot assess properly the situation. I would say that there's a lot of awareness that has been raised over the last years by the bank, by the fund, by other institutions, by researchers like Carmen and others on this topic. In the middle of all these very challenging situations on debt transparency, I would give kudos to our team in DEC, the IDS team, because over the last five years more than $630 billion that were not recorded have been recorded and have been incorporated, added to the statistics. That's progress. Sure, much more needs to be done in the future and we are all aware of that and we all need to work on it, but some progress has been done. That's the first one and I think there's a big agenda ahead. The second one is domestic debt. Domestic debt is an area where we monitor the least. There's all sorts of things happening on domestic debt, less convenient terms for countries. There are all sorts of issues of definition, residency, currency, that are different across countries. When you have bad macroeconomic policies in a country, you start to face some issues that we are seeing now in terms of domestic debt. We all supported the development of the domestic debt markets, the bank, the IMF, others. It's a good thing. But when it happens in the presence of bad macroeconomic policies, you have what we are experiencing in some countries, which is a very dangerous build up beyond any situation we experienced in the past of the nexus between the financial sector and sovereign debt. We have countries where the financial sector holdings of assets of sovereign debt are 40%, 50%, up to almost 60% of their assets. When you have, again, bad macroeconomic policies and you have a debt restructuring that is impending, then you face with massive tradeoffs. You have to say, okay, you want to be fair across debtors in the external and domestic, and I'm sure the next session will discuss that. At the same time as a policymaker in a country, by doing the restructuring domestically, you may put a huge pressure on your financial sector and that in turn may generate other problems in your financial sector and that in turn may have a massive recapitalization cost and massive fiscal cost of recapitalization, which in turn worsens, again, your debt sustainability. That's another area where I think we need to have a harder look in the context of the DSA as well. We have a harder look in terms of how we develop domestic markets because that's an area where I think there has been a lot of enthusiasm and less monitoring and less hard nose approach to how things are going. Let me stop here, David, and pass it on. 

[David R. Malpass]

Thank you. And Carmen, you pioneered work in all of these areas. Thank you for the amount of it that you did at World Bank, but in all of your work at Harvard and elsewhere on precisely these issues. Your thoughts on this and on where this is going in this wave of debt. 

[Carmen M. Reinhart]

Very good. Well, first of all, I'm delighted to be back here and I'm going to divide my brief remarks into three parts. The first one is really about taking my hats off to you, David. The second part, that'll be short. But it'll be there. The second part is squarely on some of the issues that have already been talked about in the context of the DSA and some of the analysis that has been discussed here. The third part will be forward looking of what I think are some of the big issues that we're facing. Let me start with you, David. I think in looking at the history of debt crises and financial crises, the chronic problem is the error of… it's a liquidity problem, it's not a solvency problem. I think you were early to detect that the tide had turned, that we had a very good era in low-income countries from roughly 2003 to 2013, and then by 2015, with a crash in commodity prices, that era had come to an end even well before COVID-19 and you were one of the few people out there saying this. That was close to my heart. The second one is on the issue of transparency, and this also goes to all of us that… we're talking about debt sustainability is when we really don't have a good handle on the level of debt, because the issue of transparency is, it sounds really hypothetical and abstract, but the fact is, Pablo also mentioned this, let's start with the numerator. I think we've always over the course of many decades now, the evolution of hidden debts and what type of hidden debts you see has changed. But the hidden debt problem has been with us in many forms and continues to be with us. I've written a lot, as you all may know, on the problem of the largest creditor, China, and how severely under recorded debt levels owed to China have been, and that a part of the hidden debt problem owed to the nature of the contracts, which also had confidentiality clauses and so on, but the bottom line is we started from severely underestimated the degree of external indebtedness. That's number one. Number two, we have all the old problems of hidden debt, which is, and I'm going to allude to a couple of examples, we don't have publicly available figures on net reserves. We have publicly available figures on gross reserves, but net reserves are a black box, at least in the public domain. Why is that another source of hidden debt? Well, let's go back to the Asian crisis. We thought that Korea, we thought that Thailand had much higher levels of reserves when in effect, those reserves had been committed in the forward market. Turkey's level of net reserves are currently estimated to be a negative territory, a rising number of countries recently, very recent vintage, and my coauthor Sebastian Horn, who works here at the Bank, Christoph Trebesch and Brad Parks and I have written about PBOC swap lines that have average maturity of three and a half years. This is long-term external debt. You look at the gross reserves and they look like they could sustain debt payments. But I am not deviating from the discussion of a DSA, but I am saying we have a lot of work to do to get the debt stock right. Another area where in the DSA we could do better is the eternal problem of contingent liabilities. I know in the context of DSA, we say, well, look, if you take the average cost of a banking crisis because the government assumes part of the private debt, we have scenarios that deal with that, but we still have to do better because contingent liabilities go beyond the cost of a banking crisis. I mentioned the Asian crisis earlier and one of the first things Korea did at the time of the Asian crisis was come in and guarantee the debt of the [unintelligible]. First of all, let me say I think DSA analysis should be kept simple and should be kept clean, but part of getting them clean is getting really good numerator, and part of that goes to the issue also, what are these contingent liabilities? Very often in a lot of my work, including my work on debt intolerance, we weren't just working with public and publicly-guaranteed debt, but total external debt for the reasons that often what are private debts before a crisis become public debts thereafter. Now I'm going to take issue with what Jeromin has shown us here because it wouldn't be complete. Jeromin and I love to argue, we've been arguing for decades. We mostly agree like 99% of the time, but let me tell you what's wrong with that chart. Can anybody guess what's wrong with that chart? 

[Audience member] 

[Inaudible] 

[Carmen M. Reinhart]

Okay, I'll take that too. But my problem is it begins in 1990. 1990 is the decade after the crisis begun. Of course it looks worse than now. If you took it back to 1980, it would look a lot like it looks now because Paul Volcker started tightening on October of ‘79. Now, for a lot of those countries, the low-income countries, Paul Volcker tightening didn't mean much, but the collapse in commodity prices that ensued was felt immediately. We tend to date the debt crisis by the metrics of middle-income economies when Mexico defaulted in August of ‘82, but by August of ‘82, a number of low-income countries, commodity producers, had already defaulted. The debt crisis for many low-income countries begins in 1980 and goes well beyond the closure of the Brady Plan into the HIPC. What I am saying is, if we look at the stages of a debt crisis, if we look at the stages, I'm not saying there is absolutely a wrong picture by what you've shown here, but that if you took it a decade back, you would see in the early 80s lot of what we're seeing now because what happened was the cumulative decline in output and the cumulative depreciation in the currencies kept blowing up the debt ratios, which is by the time you get to 1990, they are where they are. Yes, I agree, we do not look like 1990s, but we look a lot like the early 80s, which is bad news. I'm not noted for my optimism, but I am also noted for rambling, so please stop me. I just want to say a couple of remarks about going forward and a couple of things that really concern me. One of the things that currently concerns me is that I alluded to the crisis of the 80s as a crisis in middle-income countries as well. Those middle-income countries really made a dent, hurt the global financial system. They hurt core money center US Banks. Now the crisis is emerging in a lot of smaller countries that don't have a global impact. The problem is those are the kinds of crises that can last forever, precisely because they're not systemic. It's the old story of if you owe the bank a little money, you have a problem, if you owe the bank a lot of money, they have a problem. The impetus for solving a crisis that doesn't create systemic, visible problems that you have to react to immediately is a lingering one that I think we're facing. I'll conclude by saying the second problem that I think we're facing, and we'll be facing it very soon, is that during COVID-19 we had a surge in borrowing. A lot of the borrowing also was multilateral borrowing, a lot of borrowing from the IMF, and those chickens are going to come home to roost very soon. Repayments, and a big issue for those of you that study the debt crisis of the 1980s, a big issue during the height of that crisis was south to north flows were negative. There were net repayments of debt as the early IMF programs started to be repaid. Some of you may remember the old jokes that the World Bank should just walk over across the street, whatever they gave countries to repay IMF debt. We have a big challenge ahead on the surge and a big challenge ahead in that the geopolitical situation couldn't be worse for the US and China coming to terms and expediting a solution. I'm not uplifting. 

[David R. Malpass]

That's okay. We're here today to discuss problems and solutions, so it doesn't have to be uplifting at the outset. Maybe we can get to that in the second panel, we'll put that on them. I want to drill down on a couple of issues that came up that are important. One is the small country issue and fragility. Let's say that there is a way to get to restructurings for the really important countries that have a systemic impact. That certainly was a major factor in the 1980s, the problem was so big that the banking system was at stake, so then a solution eventually was found. What if we have a crisis now that can hit a lot of small countries and not impact the total system? That's an impetus for having a more rapid restructuring process that gives countries some exit. Then the second is domestic debt. The point was made of the composition of debt is quite different. It's China debt, which is important, it's also commercial bond debt, which is very different from previous crises. But then also the interaction of domestic debt. I wonder if I can ask all three of you, in the DSA process, the debt sustainability analysis process, that's the underpinning right now of the analytical framework. Doesn't it have to recognize that domestic debt is completely different from in the past and has to be fully taken into account within debt sustainability? Jeromin, on that point and also how do we get to restructurings for small countries, your thoughts? 

[Jeromin Zettelmeyer]

Right, so I agree it needs to be recognized much more. It is not entirely ignored in the current system because the current system does look at total debt, so it would be in there. But this is only one of five indicators and all the other, the other four are purely about external debt. This essentially comes from a philosophy where if you're restructuring domestic debt, you're hurting yourself and similarly if you are over indebted to domestic residents, there may be ways of addressing that that do not take the route of default. In that sense, domestic debt is taken less seriously, traditionally. But there are very good reasons to think that this is wrong. 

[David R. Malpass]

Countries have been using domestic debt to delay confronting the external debt problems. Your point is good, that there were a lot of external debt problems that didn't manifest even though there were the stresses of COVID-19. I would point out interest rates went back down to zero and so that kind of extended the problem. But very importantly, the countries just drew on their domestic debt systems, crowding out the private sector as a way of delaying the restructuring process. We're looking at, let's say Ghana fell into that, where they borrowed heavily from domestic sources, delayed the restructuring and now are in very difficult situation. 

[Jeromin Zettelmeyer]

I agree, we need to pick up those risks. It's certainly true that we can use it for procrastination, and it's also true that it is underemphasized in the system, and the reason for that is that we think of this as a sort of left pocket, right pocket exercise because it's between the government and the taxpayers. But that is far less true than it was in the past because this is to a significant extent market debt now. This could be passing from residents to non-residents, and you can definitely have liquidity crises involving domestically issued market debt. The most famous of that was the 1997 GKO crisis in Russia. That triggered the Russian debt crisis, those were domestic instruments so it has to be taken [inaudible]. 

[Crosstalk] 

[David R. Malpass]

But they were dollar-denominated domestic, right? 

[Jeromin Zettelmeyer]

They were dollar but, please correct me if I'm wrong, they would not fall into the definition of external debt. They would not be picked up in that… 

[David R. Malpass]

I see. I want to get away from the definitions and more toward the burden of the debt. What we're seeing now is the domestic debt crowds out the private sector. You may be able to delay it for a while, but you weaken yourself as you're doing that. I think if we get stuck in the definition of who's the holder of debt, or whether it's dollar denominated or local currency denominated, it still is ending up burdening the growth of the country into the future. 

[Jeromin Zettelmeyer]

It does, but it all comes down to the point that Carmen was making. Do you think it's a liquidity problem or do you think it's a solvency problem? Within the euro area, there has been a big debate on whether you should put tight restrictions on domestic banks holding sovereign debt of their own sovereigns. The fiscally conservative viewer says, a bit like you, absolutely there should be very tight restrictions. If you talk to the Italians about this, they will say you're taking away our main lender of last resort against the irrationality of the market. You can look at it both ways. Basically, there's a liquidity problem. This is simply a form of financing which may be welcome, but definitely it has this potential for procrastinating on true solvency problems, and maybe that's the case more often than not. 

[David R. Malpass]

Pablo smiling. 

[Pablo Saavedra]

Yes. I think one… just to illustrate the point of domestic debt, in low-income countries, in the last ten years, domestic debt went from around 9% of GDP to 20% of GDP more recently. If you look at the middle-income countries, it's north of 45% of GDP. It has grown rapidly. Now, the problem that I see is that there's not enough monitoring and not enough assessment of that part in the DSA. It's considered in the total, but not enough. The conditions of that debt are always less clear and less transparent as well. Domestic debt relies a lot on rollovers, so the short term, until they are not rollover, or until you put in danger your financial sector through this big nexus between sovereign debt and the financial sectors that we were talking about. There's a situation in Europe and Jeromin mentioned some countries, there's a big build up in countries that don't have a European Central Bank in Africa, in South Asia, that are going through these situations, again, with 50% of the assets of the financial sectors in sovereign debt. 

[David R. Malpass]

I'm sorry, so you're saying they don't have a lender of last resort the way advanced economies do? 

[Pablo Saavedra]

Yes, and definitely not a European Central Bank of last resort. Basically they are confronted. The issue is some level of financial sector taking sovereign debt is okay, it's fine, pension systems do that, et cetera. There's a threshold at some point where it gets unhealthy and it gets to a situation where, especially when it's mixed with bad macroeconomic policies, when basically you have a potential bump there, when there's a restructuring situation, which is what we are facing. I'm not going to name countries, but five come to mind where they have close to 50% of the financial sector has sovereign debt, an SOE, that maybe there is not PPG, but it's PPG really at the end, it's going to be guaranteed. A very dangerous situation. We have to have a different lens also for domestic debt and we have to have a deeper analysis of what's happening there. Maybe I'll take another point from Carmen. I'm also not known for optimism. Even though that we are not on the aggregates at the level of pre-HIPC, the buildup, it's really fast what we are seeing. The last ten years, again, have been the fastest growth in dept compared to the last 50 years. We should be concerned about that. We should be concerned in the context of having lower growth potential, in the context of having higher inflation, in the context of not having very clear source of growth ahead that can get us out of the problem. We also have to come back to two things at the country level, at the basics, fiscal policy, adequate fiscal policy, better mobilization of revenues, more efficient expenditures, better planning on the fiscal side. Also, from our perspective as multilaterals, I think we have to go back a little bit to 2010 and see how the buildup of this debt occurred. We had the NCDP before an equivalent of the IMF, evaluate how that played out. Is something else needed at this point to continue to avoid this debt buildup? 

[David R. Malpass]

Carmen, thoughts? 

[Carmen M. Reinhart]

David, I'm in complete agreement with you that the domestic debt issue going forward will have to be more. It's in the current DSA, it's in there, but not as an equal partner. That's how I would characterize it and it has to be brought up. I do think, however, I disagree with you, the devil is in the details because I think currency matters, ownership matters, legal place of issue matters a great deal right now, inflation is accelerated dramatically in many countries. And of course there's a big question, in many places, especially those that have sort of remnants of financial repression, this is big time liquidation of government debt that is in domestic currency. I think another issue, it's a tax. By the way, inflation is a tax, it's a very regressive tax, so we really want to take the issue of domestic debt at hand. We have to know the details. At times I have felt at a loss on how in the modern era define what is a domestic credit event and what is an external credit event. Because in the old days you had domestic debt was domestic law, domestically held, domestic currency. Now you have blurs. You have domestic law, domestic currency, but foreign held. There's an issue of if you're doing a restructuring on the external debt and you want to talk about intercreditor equity, how can you not bring in the domestic debt? I do think domestic debt brings on board a lot of challenges. I do think that the other challenge, which is well known, I've stressed it for a long time, you've stressed it, everyone I think in this panel has stressed it, which is we have a very large and growing share of non-Paris Club creditors that have been also doing bilateral. The number of debt restructurings between China and its borrowers has skyrocketed in the last especially seven years or so. That's also new, but China is not the only one. We have Saudi Arabia, UAE and so on. I think, broadly speaking, a new game in town is the domestic debt dimension. Another new game in town is non-Paris Club creditors. I'm more comfortable with bondholders. After all, I did coauthor Sovereign Bonds since Waterloo because we've had sovereign bonds for a long, long time and we know how those restructurings worked out. 

[David R. Malpass]

The one issue on that is, is there a process to restructure quickly? It's possible to be in favor of bond markets as a provider of capital into risky situations, but then that also means that there should be some predictability in the restructuring when it goes under, because that's the benefit of having bondholders. They can absorb the losses, but only if there's some system that identifies the necessary restructuring. 

[Jeromin Zettelmeyer]

As an empirical matter, I think it's true. If you look at the last 10, 15 years or so, the typical bond restructuring lasts less than a year, which you may still think is too much. That includes some very complicated ones, like for example, Argentina in 2020. I think then you get these outliers and they mostly have to do with domestic collapses, Venezuela collapsing, Lebanon collapsing. Those things don't get done. Or more recently with the interaction between non-Paris Club and bondholders because the non-Paris Club creditors [unintelligible] China, are even more difficult in the presence of bondholders than they would be on their own because… 

[David R. Malpass]

We might hope today for a relatively rapid restructuring in Ghana or Ethiopia where there are Euro bonds that are at issue, and so that would make your point a bit. 

[Jeromin Zettelmeyer]

Sri Lanka could be a very significant problem because every group is going to look at the other group as it has happened in Zambia too, not where they're also bondholders, and then there is this issue of who goes first. 

[David R. Malpass]

What’s our time, do we have…? Okay, so one of our purposes today was to have long enough for people to discuss them. I go to kind of a goal. A goal, as we know, is we want good outcomes for people in developing countries and that means very much more investment. That goes to the investment in adaptation, in resilience, and in job creation, everything. That goes to the nature of there's extra savings or available savings in advanced economies. By its nature, we would like to see a system where capital flows from advanced economies into developing economies and that builds on the idea of convergence. Ideally you'd have higher return on investment in developing countries and they would attract new capital and there would be some accelerated growth in the developing countries. Then you can imagine different mixes of how much of that new capital stays dollar denominated versus goes into local currency denomination. We do have examples over the 30 years, 40 years of countries that built an effective enough domestic debt market that they could absorb foreign capital in domestic debt, which I guess goes to Carmen's point that that gives some kind of latitude to the country if it gets into trouble because having the debt denominated locally and settled locally means that there's some kind of counter-cyclicity to when they get into trouble. That would mean a goal of having countries be able to absorb a lot of capital in domestic debt kinds of instruments, and yet it's very hard to see how we get from here to there. The euro bonds are by and large still dollar denominated. Anyway, so maybe I'll go to Pablo first on that. Do we want to get to a system where a lot of the debt is domestic currency debt because that gives you resilience? 

[Pablo Saavedra]

Again, depends, I guess. I mean there are countries where that have shown, I mean you can argue from different angles, but have shown resilience by having very large domestic debt markets like Brazil. They have a very large… and I can point at many different vulnerabilities of Brazil, including gross financing needs and how that has been rising steadily over the last years to very large numbers now. But that was a positive point from the point of view of debt. 

[David R. Malpass]

Did it achieve net-positive inflows in terms of gross investment into Brazil by having that resilient domestic debt market? 

[Pablo Saavedra]

I don't know the correlation of causation of this, but yet they have the positive inflows. But at the same time you can see how Ghana doubled their domestic debt, but in the context of very damaging macroeconomic policies for many years come to a point where actually it's a hindrance… 

[David R. Malpass]

But that wasn't capital market debt in the domestic market, that was bank debt, which is different. We're trying to get to the point where there's domestic debt capital markets in developing countries. India is an example. I'm sorry, I didn't say that right, India is trying to make the transition from bank debt to capital market debt that's rupee denominated. 

[Pablo Saavedra]

And pension funds, no typically pension funds have been used to develop domestic capital markets. Actually in Ghana you have a lot of debt of the domestic debt in pension funds. But then, again, when there's bad macroeconomic policies, now you have to go to the pension funds and deal with the unions and say we need to restructure the debt and you have to take a loss, and you have all the workers in the street. I guess the ingredient that damages everything is bad macroeconomic policies in the country. Then you throw out of the window all the benefits of developing a domestic debt. I think it also matters how you develop this domestic debt, and we can have another seminar fully on [inaudible]. 

[Crosstalk] 

[David R. Malpass]

You'd almost say, let's not talk so much about which instruments and which ownership and look at it as an attractive macro balance brings in investment one way or the other. 

[Pablo Saavedra]

I think there has to be a balance on the sources. It has to be good macroeconomic policies to enable a good development of the domestic debt market and so on. 

[David R. Malpass]

Carmen, same question. Do the instruments matter? And isn't it just macro stability that matters? 

[Carmen M. Reinhart]

I've mentioned the Asian crisis before because I think also that was pivotal for this idea that pivoting to domestic debt is important. Korea, Thailand, Malaysia are three excellent examples of countries, if you look at the debt composition, domestic versus external, that it underwent through a dramatic change. Brazil is also, as Pablo mentioned... 

[David R. Malpass]

They had dollar debt before, they had a crisis, and now they have domestic debt. 

[Carmen M. Reinhart]

It was a clear signal that having domestic currency debt was to be preferred. Having said that, there is domestic debt and there is domestic debt. You can really mismanage that as well. That's where things like maturity structure are extremely important. Rollover risk is rollover risk, whether the debt is domestic or external. If you look back to the Argentine crisis of recent vintage, this was central bank domestic debt that had very short maturity. You had this rollover problem that triggered periodic currency crisis. The virtue of going from external to domestic and how much improvement that offers depends on how you manage it. That is extremely important. It's also extremely important of what else you do to the ownership dimension. Are there ways of deepening pension funds and basically creating an audience, if you will? I hate to call it a captive audience, but in some cases it is. But creating an audience to hold the domestic debt, which may not come easily. 

[David R. Malpass]

I think more in terms of the conflict of interest between that because you've got different parts of, in effect, a government, that was a material issue in the Detroit bankruptcy, where the public workers’ pensions had been invested in the debt of Detroit. You ended up with a surprisingly bad debt picture because of that. Wouldn't it be a better direction? I'm skeptical of whether domestic pension funds should be used to build out the capital market because they get captured within the system. Jeromin, any…? 

[Jeromin Zettelmeyer]

I share that, but on the other hand, developing the domestic capital markets is really important, Basically, I’m completely on board with my colleagues who say, you cannot simply look just at currency of denomination domestic debt and conclude the country is safer because you don't know the context in which this was created. But the way I would look at it is that if you are a policymaker who's trying to improve things, so you're trying to improve your macro fundamentals to do all the right things, then certainly building a domestic capital market and issuing much more internationally-issued debt in domestic currency is part of that agenda. That is unambiguously a good thing in the context of all these other things happening too and makes you more resilient to shocks and does all the things that you suspected it would. 

[David R. Malpass]

For my limited understanding, so that means London-based debt but in local currency, the London-law debt in local currency? 

[Jeromin Zettelmeyer]

Yes. I would say the big breakthrough in policy credibility in many Latin American countries, for example, came in the 2000s between 2000 and 2007 roughly when monetary policy regimes became much more credible and this institutional credibility removed one of the main reasons why these countries could not issue in domestic currency before unless it was in the context of financial repression. That is that you don't trust a currency that can be inflated away. Once you reach sort of a mature central banks that have some credibility, you can then do that at reasonable cost. That was a sign that these countries had grown up and it benefited them enormously. It benefited them even in the COVID-19 crisis because many emerging markets were able to undertake quantitative easing type operations with the central banks that previously were just the realm of advanced countries. All of these things are, I think, a good thing, but then there's always the possibility that you don't want to just go for domestic debt as your main target. It has to be part of a broader strategy.

[David R. Malpass]

That’s good. 

[Paul Blake]

Okay, we'll open up the floor to a Q & A if anyone has questions. David, in the middle. Just wait for the microphone so folks online can hear us. 

[Audience member]

Thank you for a great discussion. Abebe Selassie, the director of the African Department, recently raised an important issue, the issue of funding squeeze. That is that the African continent, but also a lot of the other LICs are facing with China wanting to issue less fresh money for new projects other than the rescue lending in a few countries. There's also bondholders seem to have less appetite to fund riskier markets. We've also seen donors maxing out their firepower in the COVID-19 crisis. I wanted to hear your reflections on how that plays out with the liquidity versus solvency question, and maybe if you could also reflect on our crisis response in the last two years, the DSSI, IMF, World Bank emergency lendings and all that, how that helped or it didn't help, the years ahead and we're going to face. Thank you. 

[David R. Malpass]

Yeah, that's a huge question. What are we going to do? 

[Paul Blake]

We can take a couple of questions and continue the discussion, as you wish. 

[David R. Malpass]

Let's take one more because that one could occupy the rest of the day. One more. 

[Paul Blake]

Any other questions in the room? 

[Audience member]

If you look at the ratio of debt-to-GDP and you compare it over time and you say, for example, in the past, low-income countries the debt was held mainly by the bilaterals and the multilaterals. Now they are much more patient than if the debt were held by markets. If you now sort of fast forward and look at the thing and say that most of it is now held by private creditors, would you compare the ratios like apples and apples? Or is it now you're talking apples and oranges entirely? Because you have much more impatient markets than you do have patient official creditors. 

[David R. Malpass]

Okay, we should do that and then wrap. This will take time for the panel. 

[Paul Blake]

We still have about 10 or 15 minutes. 

[David R. Malpass]

Okay, good. Is there one more question? There's one from… 

[Paul Blake]

I see Art here. 

[Art]

I wanted to come back to one topic that Jeromin brought up briefly but then got dropped mostly from the discussion, which is the role of climate in the DSF and in DSF reforms. I wanted to press you a little bit on that Jeromin, because if I understood correctly, you said that countries with high adaptation needs should be deserving of more debt relief. I'm not sure that's the right argument to make for the following reason, that is that arguments for debt relief tend to work better if they appeal to creditor self-interest than whether they appeal to their altruism. The case you're making is for altruism, that's sort of what the loss and damage argument is about, that's how I understand it. The self-interested argument is let's think about countries that are systemically important for emissions, for global emissions, for example. Their creditors would have an incentive to pave to internalize that externality. But then the problem becomes, are there enough systemically important emitters that also have debt problems? Is the overlap between those two groups of countries sufficiently large that this is an idea that has legs? It’d be great to get your thoughts on that. 

[David R. Malpass]

And the others. Okay, great. These are all super challenging. The first one, the funding squeeze, is very much upon us. We have this big concern that some of the poorer countries are decapitalizing as they don't get new money and they still have old debt, and so that gets them into a liquidity. It maybe started as sustainability, but then it becomes liquidity, and that's where we are today with debt overhangs that should have been treated as sustainability problems that now have become liquidity problems. There's not a solution to that exactly. That's kind of the crisis upon us. That's my thought on that. I'll turn to, there was a question on debt-to-GDP, are they comparable because of the different way the holders…? And then climate. Carmen, do you want to start us off on any of those? 

[Carmen M. Reinhart]

Yeah, I do want to tackle the first two very briefly. The liquidity squeeze is precisely also what I was alluding to with referring to the height of the 1980s debt crisis where net flows from the south to the north where you had the repayment dominating any kind of new money. I am very much cognizant that we are heading in that direction. In the work that I've alluded to earlier with Sebastian Horn and Christoph Trebesch and Brad Parks, we document that net new flows from China turn negative for the first time after large inflows in 2019. Historically, interest rate increases in financial centers and tightening global liquidity conditions and greater risk aversion, don't forget we're also having a banking, not systemic yet, but we are having banking problems… All these things tighten credit. You have a sudden stop from the east and a sudden stop from the west. Cumulatively, negative net flows could pivot you from liquidity to solvency problems because you're not even getting a little to evergreen. I think that's a real risk and I added the dimension that a lot of the IMF money borrowed during the height of COVID-19 will start needing to be repaid. I take completely your point that they're not really apples and apples but they're apples and oranges, but composition of debt is never constant throughout. I think one important dimension of the pivoting to more countries accessing capital markets, more frontier economies, is that the number of countries that are rated by credit rating agencies expanded. Now you have, as interest rates rise, more countries being downgraded as a result of having entered. Because remember, credit ratings don't focus on official to official, they focus on private creditors to official creditors. I think the point I am making is that as a result of the changing composition, you may see greater multiplier effects of interest rate increases. But I take with a grain of salt the point that if you look at any time series [unintelligible] of the debt has varied dramatically over the course of long time series from bonds to loans, from loans back to bonds. Let me stop there. 

[David R. Malpass]

Jeromin, I'll broaden the question a little bit. You've kind of proposed what you called the World Bank could play the role of adaptation conditionality institution during a restructuring, and I'll say even it could be sustainability conditionality institution. 

[Jeromin Zettelmeyer]

Exactly. 

[David R. Malpass]

As the World Bank participates in a restructuring, we're kind of always looking for the macro sustainability of the restructuring, part of which is adaptation or resilience into the future. But the problem that we're constantly in is the one of the country needs the liquidity now, and so do you really want to condition a solution on anything? On education or on poverty alleviation or on adaptation or mitigation, as Art is saying, how do you really justify that? 

[Jeromin Zettelmeyer]

Okay, so I wanted to get exactly the opposite point across that you understood, Art, so I did not understand it very well. In some countries, many, not a huge number of countries, think Caribbean islands, think the islands that will normally try to issue catastrophe bonds, those things. Climate risks have a first order impact on solvency, and on top of that, these climate risks, or rather the economic impact of those climate risks, can be directly influenced through adaptation conditionality. I picked adaptation precisely because there is a commercial interest of a creditor in getting certain investments and policies done that make it less likely that when the next hurricane strikes, that country is going to default. However, those measures are costly. My argument is they should be reflected in a DSA, but once they are reflected in this DSA, you can actually sell them to a creditor precisely because it is in the commercial interest. 

[David R. Malpass]

And the creditor will think they won't be then subsequently… that they'll be able to get through one restructuring and not a series? 

[Jeromin Zettelmeyer]

Exactly. I'm not talking about liquidity. The liquidity support as always has to happen as soon as possible, as soon as there's a credible process for debt restructuring. One is not necessarily going to wait for all the bells and whistles, but that's the standard problem that we always have with restructuring. At the end there is a staff-level agreement on an IMF supported program, and what I'm saying is that in countries where solvency, debt sustainability does not just depend on having proper central banking and having fiscal restraint, all those things that the IMF controls, but where there is a first-order relationship between insolvency and adaptation investment, the bank needs to be there and basically make sure that it happens. And if it happens, then it can go to the creditors or the country can go to the creditors and say now please, because this is ultimately good for you, help us finance it. But you see, that the critical point there is that you need a neutral party that actually identifies the correct adaptation investment because otherwise this is a huge source of moral hazard for the country. It is much harder than just telling a country, oh, you need to reduce deficits and inflation. The IMF is good at doing that, but almost anyone can do that. But to actually figure out the nitty gritty of what adaptation is required really needs a lot of expertise and credibility. And that's a big gap, I think, which you guys ought to fill. 

[David R. Malpass]

We are trying somewhat, maybe Pablo can elaborate, but on the idea of laddering Cat DDOs, Catastrophe Deferred Drawdown Option. In three countries, or a few have actually thought in terms of a ladder that protects from or provides resilience into a variety of future scenarios. Then the investors presumably are going to look at that and say, aha, that lowers their risk of future restructuring. There is a little bit that mechanism, but it could be expanded. Pablo, thoughts on any of the three? 

[Pablo Saavedra]

Yeah, let me start perhaps with some of the questions that were asked, particularly on the first one on the funding squeeze and what effect of that happens in countries. I'm thinking about a synthetic country where maybe it has an issue of a liquidity problem, but it's borderline, but now market access is limited or closed, and because there's lower growth, they also have less fiscal space, and because they have high debt, they have less fiscal space. What happens when there's this situation? The situation of that country may turn a liquidity situation into a solvency issue. Many countries that we are looking at, without saying names, they relied a lot on SOEs to export, to create economic activity. They don't have the money, the fiscal resources to provide them with subsidies. That in turn is lowering the output and the exports of those SOEs. So now they may get into solvency issues all of a sudden. I think many countries are inching towards a borderline situation with what's happening in the markets these days. There was a question on the DSSI. The DSSI was a good thing, but it was a rather small thing as well. If you look at the numbers, somewhere between 12, 13 billion, depending who is counting, on the relief that was provided, and dimensions matter if you compare that 11, 12 billion to what one country needs in debt relief, let's take Zambia, 8.3 billion in debt relief in line with the DSA. It's just one country compared to all the relief that had to be provided to many countries. We're entering a very difficult time in terms of funding for developing countries. The Bank, the Fund, they have increased their efforts and the funding. That's also increasing our share in the debt of countries. Obviously, we have to look in NPV terms because we have significant grants in many countries and that's very critical on how we measure the proportions of debt that we have. In many countries that are in debt distress, we provide just grants from the IDA point of view. But I think coming out of this situation is going to be also very critical in terms of the sources of funding and the conditions of that funding. Now, on the questions of ensuring or protecting adaptation costs, I think it's important also to have a discussion on how we want to do this. I think the new DSA that comes after a review forthcoming may have more features to look at these issues and so on. I think we have to consider all the environment and all the tools that are available to countries to do this. One tool cannot do everything. We have insurance products, we have Cat DDOs to provide immediate liquidity with reforms that were done in the past, but the instrument is ready when it's needed. There are other regional instruments. I think there are different risks that need to be covered with different instruments, and I think we need to also have that discussion in the context of the many different ideas that are coming up on this. 

[Crosstalk] 

[Jeromin Zettelmeyer]

Quick response to the comments in the [unintelligible]. Basically, there are two things you can miss when you just do these debt-level comparisons over time. I think the more important one is that you miss changes in the concessionality of debt. If debt had become less concessional over this period, then it would be misleading to look at these levels and getting some comfort from the fact that levels are now lower. This we did check. [Unintelligible] paper actually has comparison of a concessionality. Unfortunately, we cannot do real NPV debt, which is what you would want to do because we don't have the terms, but you can do these sanity checks. I don't think that's the problem. You're completely right that bonds have become much more important, and that's why I think that the next LIC DSF should worry more about rollover risk. They said in this group it's about 11% according to the international Debt statistics. It's not a huge effect. 

[Carmen M. Reinhart]

Which is why I brought up the issue of credit ratings because it could also change the interest sensitivity of the overall act. 

[Jeromin Zettelmeyer]

Yes. It has to be. 

[Paul Blake]

Thank you to everyone for the questions and thanks to our panel for joining us for this first session. We'll take a five-minute break and then we'll come back for a second panel led by Indermit Gill. 

[Music during intermission] 

[BREAKING THE IMPASSE IN GLOBAL DEBT RESTRUCTURING WE WILL RETURN MOMENTARILY] 

[Indermit Gill]

Thank you, everybody. Thank you for coming. Is this on? Is this hot? Yes, thank you. So we actually have a great session planned. Those of you who those of the people who left are going to miss a far better session than the last one. We have a session that will actually look at the problem of debt restructuring from three angles. The first one… She does the work of both Pablo and Ed Mountfield, which, if you know the three of them, I think makes it about equal. Then the third is Lee Buchheit, who says he's a retired lawyer, but he's not retired or he's really bad at retiring because he's working all the time, but he's worked for 40 years and he's worked on more than 20 debt restructurings. The thing about Lee, he's a very rare guy, by the way, because he's both a good lawyer and a good person. It's almost a null intersection. He has generally represented the debtor countries in those debt restructuring things. That's what we're going to do, and I think that what we'll do is that we'll start with Laura and she's going to show a few slides, then Ceyla who will also show a few slides and then we'll go back and forth a little bit and then we'll turn it over to you. I really encourage you to ask questions because this is your chance to sort of get a really good perspective from three top experts. Over to you, Laura. 

[Laura Alfaro]

Thanks to the organizers for the honor of being in this great conference. Let me start with a little bit of background and I think summary of many of the things that were discussed. This is the world that we are financial transactions, by definition they're complicated because there's a commitment to pay later, and by definition then they have asymmetric information problems, non-enforcement risk, coordination problems. Add to this then when we do it at the international level, we have additional risks. One is the one that was mentioned, the problem of different currencies, but the main problem or if you want issue related to international financial transactions is the role of sovereigns. The involvement of government as an explicit or implicit party, as was mentioned in international transactions, there is no international court that can bring governments to the table, and thus we're going to have problems of willingness and capacity to pay. The reaction to this has been if you want poor substitutes and inefficient solutions, direct or indirect costs of defaulting from if you want to lend their countries, and from investors point of view trying to find ways of structuring the debt that gets around some of these weak institution problems. For example, if I don't think they're going to pay, if I don't have seniority, I tend to go very short-term debt. Add to that that sovereigns by definition means more complex players, quasi- sovereign, bilateral state-owned enterprises and also many forms of multilaterals. This is the problem at hand and this is what we're trying to solve. There has been market solutions and if you want international financial solutions. The one that has taken the most, if you want, action or perhaps as discussed, a lot are contractual modifications and in particular, modifications that allow to restructure more easily to bring creditor coordination. There was some skepticism, I'm old enough to actually remember that some people were not so keen on them. They have pretty much become widespread in incorporation. Of course there is different heterogeneity in terms of your debt structure. There's a more positive view on the effects by the IMF. I think Jeromin actually was an author on this paper. If you read the recent World Bank Development Report, which is also a great document in terms of this topic, I read it a little bit more natural in part because these in general have been good times. We really have not seen them. If you go to some of the private sector views, they actually have said that there has been an overblown of how much this has been a problem by some outliers. The outliers tend to be the famous one, usually Argentina, but most likely it used to be the case that most parties came along. Indeed, outliers as Argentina and the new problem is that even Argentina finds a way to change them. In this topic, Argentina keeps finding ways to innovate, but also we have a big player that now doesn't include this type of process. The second, if you want, financial innovations that are trying to increase [inaudible] sharing, one has been GDP-linked bonds, the other one, for example, climate-risk bonds. Here, again, the issue is that there's a reluctance to buy equity-type assets because of the credibility and weak institutions. GDP-linked bonds, again, there have been cases where there has been some playing with the GDP accounts, which is, again, the moral hazard related to this problem. Climate perhaps has the more verifiable, but I do worry a little bit that as the climate situation becomes worse, this insurance-type instruments may actually mean that some countries may be priced out of it. But again, at least it's a little bit more verifiable. There has been some other type of clauses that are trying to deal with seniority and one in particular has been these collateral clauses that are trying to emulate what is done at the private sector at the sovereign level. Again, the World Bank also tells us that there might be some issues in terms of widespread restructuring because of this type of clauses. We have the international financial institutions type of solution. The ex-ante are these grand schemes, and Jeromin has written a paper, it's been a while, but I think it documents some of the attempts to create these grand schemes to try to improve, if you want, the original seed, which is the sovereign problem and change some of the international and national rules. The other one is more ex-post type interventions, one is just lending to crisis. This of course has always had the concern of moral hazard. If we know that the country is going to be bailed out and money is fungible, again, we just wait and we get paid. Then there is the other one that is just the multilateral debt relief initiatives. Sadly I'm now old enough to have seen many and so I have done in my lifetime through the Baker, which was not great, Brady I think helped some countries but not others, and this is Brady, the treasurer, not Tom Brady if you're from Boston. Then some countries that were not helped, then we went to HIPC and then HIPC on steroids, and again, eventually we did see some reduction in the debt. However, the World Bank themselves in one evaluation did say that this tends to be insufficient because as was explained in the previous session, there are many things that matter for debt sustainability. In fact, Peter Henry has a very nice paper where he shows that the countries that receive a lot of the HIPC perform exactly the same as the ones that didn't, just because there was a boom time, period. Then we're seeing this increase and this increase does precede COVID-19. Some of this increase was in good times, which is part of the problem. We don't force countries to save in good times. I'm saved by a movie that I just seen, Air, that is all about the 80s because my graph does start in the 80s, so I'm saved with Carmen. If you have not seen that movie, go see it, it’s actually a great movie. A couple more titles inspired by the 80s, Death Strikes Back, New Clits On the Block. Now we see China and bilaterals. This is of course from the great work that has been done by Sebastian, Carmen, and Christoph. I will take some little time a shout out to Carmen because as a woman economist, it has always been inspiring and humbling to see someone that not only has a keen eye for key questions, but also the intellectual capacity and determination to find answers that help us improve the way we understand many problems. China and the role of China in debt, I think has been one of the many that she has just nailed it, as they say. They have documented the problem of the nondisclosure, that lack of transparency. There's also here great work by Anna Gelper documenting some of the contracts. I come from one of those small, un-systemic countries. In my country, it's actually illegal to do these contractual clauses and the internal debt has to go to congress, but I did see a lot of the pressure to create what was supposed to be equity contracts, turn them into more non-contingent contracts. In some work that we have done, we do a quantitative exercise playing than traditional debt against this nondisclosed debt, we do find that it reduces the traditional players’ sustainability and it leads to more defaults. But one needs to be careful because it does increase the welfare of the lenders, in part because these two type of debts are not perfect substitutes. There are moments in which you can play them against each other, and if you default on one, you go to the other one. Collateralized debt means that you will hold less traditional debt and you will hold more of this non-transparent collateralized debt. However, what increased overall welfare is to increase transparency. However, it does come at the cost of the Non-Paris Club's debt. Thus, the lack of incentives perhaps for them to come and disclose all the debt, it will affect how much of this debt is being held. Final thoughts. Even though there are still no clear rules, we have them and so one would think that improvement needs to tackle all of these problems. We tend to have a little bit more of partial rules and schemes. I do fear that usually we're fighting the last war and so there has been a lot of going against the bondholders and the private sector and it is possible that the outcome of that is just gave us new players and new complex rules. Again, some of these collateral clauses we have not been tested. It could be that just the existence is deterring some bad actions, but I do worry, and by the way, China is not the first one to do this. I remember when the Tesla Bono bailed out was backed on oil and Mexico paid, but I always worry about what if we had gone off equilibrium path? Are they really going to come and take the barrels and what does that do in terms of geopolitics? Because of that geopolitical implications and the fact that at the core we are among sovereigns, I am not continued to with apparently the Latin lack of pessimism, so keen on this viable, big grand schemes, and let me end there. 

[Indermit Gill]

Thank you very much, Laura. I was going to ask you to respond to a question, but I'm going to give you some time to think about it and we'll turn to a thing. But just to give you a preview of the question because the thing that you're saying is that we are still fighting the last war in a sense. If you had to design a machinery that would be the alternative to the Paris Club, which is a big part of the machinery that we have right now, what would it look like? You think about it while we turn to Ceyla and then we'll come back to you after Lee. 

[Ceyla Pazarbasioglu]

Thank you, Indermit, very good to see you and very good to see everyone. Also, of course, we worked quite a bit with David when I was here at the Bank and lots of good work. The DSSI was born here and I think it served countries well, so looking forward to the discussion and of course with Carmen, it was great to work together and it's a great panel. All around great and very good for the discussion. I don't know if the presentation is… 

[Indermit Gill]

One second, but you can start. 

[Ceyla Pazarbasioglu]

Okay. 

[Indermit Gill]

There you go. 

[Ceyla Pazarbasioglu]

There we go. Okay, first I do want to talk a little bit about, I think this probably came up, I came towards the end of the first session, but where we are in terms of debt distress and I'm going to look more on the low-income countries because for emerging-market countries the problems are very different. I'll start with low income and then go to EMs. This is the paper that Jeromin I think talked about. It was Chuku, Jeromin and other great colleagues who put together, about three weeks ago we published it, a working paper on where are we now? Are we close to a systemic debt crisis in low-income countries? As with everything, there is good and bad news. In terms of if you look at where we are in terms of solvency indicators, we're not yet there. Of course there's a range, as you can see in this chart, but on average we are not there in terms of debt-to-GDP, debt service-to-GDP, it looks like compared to early the 80s, 80s, early 90s, we're not there. In terms of arrears, and this is a big change from pre-HIPC times, much lower, less than 1%, 2% of GDP compared to 20% of arrears, in terms of export, sorry. But now the question about transparency comes in. Are these the right information and data in terms of arrears? Are countries through regulatory forbearance hiding some of these issues that I think we have to always bear in back of our minds? Because the pandemic did lead to a lot of regulatory forbearance by many countries, not just LICs, but of course emerging market countries as well. This is important because this goes back to also what Laura was talking about, and I'm sure we will hear a lot from Lee's words of wisdom. The creditor landscape has changed quite dramatically. Even if you look at 1990s versus now, you have multilaterals, about 50%, used to be 45%, a larger share of private sector, about 19% and much higher in some other countries. Domestic debt is also much higher in many of the countries that we are working with, the low-income countries. Bilaterals are less. This has gone mainly to private sector and multilaterals, but in terms of the composition of the bilaterals, reflecting also what happened at HIPC and the MDRI, you see that Non-Paris Club creditors are a much bigger share of the debt of many low-income countries. That has implications because we have been working with Paris Club for decades. It took a while to get there, but it was organized. We knew how to deal with the Paris Club creditors and so on. Now we needed to come with a new framework and that's why the G20 came up with Common Framework. This is to basically bring all official creditors around the same table. We have had some successes, we had Chad and Zambia is still ongoing, some success with Chad, Ghana is ongoing. But to be honest, it's been very, very slow. The reason it's been very slow is because some of the new creditors, like China, like Saudi Arabia, Turkey and India, are not used to many of the issues that Paris Club creditors have been dealing with. And just to remind everyone, even with Paris Club, it took five to six years to get the procedures in place so that we could be much faster in terms of timelines and process. What is needed to make the Common Framework work? Because, as someone said, it's not common, it's unCommon Framework because countries don't want to come and make themselves available to the Common Framework, given all the delays that we have been seeing. What do we need? We need timelines and processes so that countries can have more predictability. We need to make sure that the new creditor countries have domestic processes in place to be able to move quickly. This includes, of course, domestic coordination mechanisms, because in many countries you have different players, you have development banks, you have the EXIM, you have others. Really as Paris Club members did, you need to have better domestic processes in the newcomers. When countries request the Common Framework and the formation of the official creditor committee, that time is very long, six months to a year. That really needs to be reduced because the real discussions only start once the official creditor committees are formed. Of course, early engagement and information sharing between debtors and creditors. Those are all very important in terms of predictability of the Common Framework, making sure that there's a suspension of debt service for the countries for the duration of the negotiation because countries come to that point in a very difficult situation, they need this moratorium in terms of debt service to be able to not go into a much deeper crisis. Official creditors and private creditors, that mechanism is also not very clear. I talked a lot about the Common Framework when we also have the newcomers in the non-Common Framework cases. Common Framework is mainly for the DSSI or IDA countries, and either mimicking the Common Framework or extending the Common Framework is going to be very important. I'm going to talk about the Global Sovereign Debt Roundtable because this is very important to try to address some of the issues that came up in Common Framework and non-Common framework cases. This is co-chaired by David, Kristalina and the India G20 presidency, so the Finance Minister of India, and the idea is to basically provide a common understanding and address some of the main issues or bottlenecks, impediments that lead to delayed restructurings in different country cases. We kept the GSDR, we have a lot of countries that want to join, we have CSOs that want to join, so everyone wants to join, but we wanted to make sure this is not a UN-type large roundtable where you won't have any decisions that would come up, but rather a small, balanced roundtable. We have four advanced economies, all Paris Club creditors, we have four emerging market creditors, which are non-Paris Club, four private sector participants, they're all listed here, so I'm not going to go through everyone, and then six borrowing countries. This has led to, during the Spring Meetings, we had the full meeting of the GSDR and it was a very good discussion because I think the participants, especially those that weren't there, like the non-Paris Club creditors, felt like they had a platform to voice their concerns and reach some sort of consensus. What were the key outcomes? Information sharing. A lot of criticism on our DSAs, why don't we share them and so on and so forth. A lot of misunderstanding of what the DSAs are for and what can be shared. We are providing guidance to our teams coming up with ways of sharing that information much earlier because most of the non-Paris Club creditors need that information to be able to finalize their domestic coordination mechanism. For China to be able to form the creditor committee, they need to go to the State Council, and for that they need to go and explain what are the implications for them. Information sharing, which used to be once the creditor committee was formed, is actually now very important in forming the creditor committee and we have an important role to play there. Role of multilateral development banks is really critical and was one of the key outcomes of the meeting where there was finally a consensus reached that these institutions play a very important role. They are lender of last resort in many cases and also they provide financing, project financing, other financing, when there is no other financing to come from anywhere. It's important to make sure that they can provide net positive flows to countries at concessional rates. Pablo was talking about this earlier, so that was a very important outcome. On technical issues like cut-off dates, the perimeter of debt, comparability of treatment, processes, and procedures. Here, consensus is reached that this is urgent and needs to be done, but this is work that needs to be ongoing, so we will have work streams that will look into it. I'm not going to go through some of these issues, but just to mention that there is also really good work on the private sector creditor side and for most of the emerging markets, the collective action clauses are really critical and we've seen that in Argentina. I'm sure Lee will probably talk about this, but these are important and over 90% of bonds issued since June 2020 do include these clauses. Now the question is with syndicated loans, which do not have such clauses to try to incorporate majority voting provisions, which are similar to collective action clauses. But this is voluntary and it's not going to solve our stock problems because most loans don't have these clauses yet. And then of course, if we have time, we can also discuss other initiatives like the CRDCs and so on. I'll stop here, Indermit, in the interest of time and can go into detail as needed. 

[Indermit Gill]

Thanks, Ceyla. I had two or three reactions and one question. My reaction was that you said that look, China, India, Saudi Arabia, and others are the ones that don't quite understand how the Paris Club works, how debt restructuring and all work. But if you look at the DSSI, the main problem was not that these countries didn't participate in the Debt Service Suspension Initiative, it was the private sector people who didn't. That weakness was actually then passed on to the G20 Common Framework. Is that the bigger problem that you actually have? Private sector creditors have been generally unwilling to participate, or is it the fact that we are sort of looking at the Chinas and the Indias and the Saudi Arabias and sort of focusing on them because we are focused too much on the official side? I guess the question there is if you look at Ghana's debt and you sort of see that more than 60% or close to 65% of it is owed to the private sector, aren't we sort of getting the sequencing all wrong? But let me leave you to think about that question and then turn to Lee, who's going to put a spark in this discussion. A bigger spark than the two ladies did.

[Lee C. Buchheit]

Thank you. Friends, it's wonderful to be with you this morning. The title of this session is Breaking the Impasse, and so I intend to try to offer you some thoughts for how actually to move the process along in a practical sense. Let me say this by way of preamble. What we are dealing with today is a species under the broader genus, consequences of prolonged excessively loose monetary policy. We are coming off something that we have never seen in our lifetimes, I'm not sure in anyone's lifetimes, which is more than a decade of ultra-loose monetary policy, near zero interest rates with massive lashings of quantitative easing. That distorts everything in the financial markets. Let's be honest about it. Private sector lenders are driven to a relentless, remorseless search for yield. That will cause them to anesthetize their normal risk aversion. That will produce lending, both corporate and sovereign that I think any sober historian of the sovereign debt markets would have thought was crazy and wildly mispriced. We have had more than a decade of that. Since 2008, something like 12 to 15 of the so-called frontier markets have been able to come to the bond markets to borrow. They have borrowed on bullet maturities. It is fatuous to believe that the politicians in those countries are squirreling the money away to pay those bonds when they mature, they borrowed in the sure and certain hope that when those bond matures they'll be able to go back into the market and borrow, hopefully at low interest rates and be able to continue the process of refinancing their debt pretty much in perpetuity. The assumption of the last ten years for those countries that have borrowed in that sense is that we would face a future of perpetual benignity, not just in the financial markets, in the geopolitical world, even in the natural world with climate change. And of course, that was foolish. Now these countries, as these bonds mature, will find either that they cannot reaccess the market, Moody's came out with a report last week saying 25% of these countries have lost market access, or if they access them, it will be at interest rates that they find intolerable. I said this is a species under the genus of prolonged ultra-loose monetary policy, it is not the only species. We're seeing it, and we will see it in the next few years in a variety of other areas. Let me deal with three particular problems. How will sovereign debt workouts in the next 20 years differ from those of the last 20 years? The first one is the subject that has preoccupied everyone in this city for the last year or so, and it is intercreditor coordination. We now live in a world in which bilateral creditors are not equivalent to the Paris Club. We now have three separate major groups of creditors, commercial creditors, banks, or bondholders, depending on where you look in the historical timeline, Paris Club, and non-Paris Club, such as China, as my colleagues have pointed out. 

[Indermit Gill]

I would just change the order of that. I would actually put commercial non-Paris Club and then Paris Club. 

[Lee C. Buchheit]

Okay, I think intermittent in terms of size of flows, that's exactly right. The Paris Club collectively has been dwarfed by the non-Paris Club creditors. Each of these groups shares one thing in common, they are deeply suspicious of every other group. None of them wishes to provide debt relief, only to find that their debt relief is disproportionate to that provided by the others. This leads you down the road of comparable treatment. Now look, let's be honest, every one of these creditor groups secretly hopes that they will be able to talk themselves or leverage themselves into a preferential recovery in the eventual debt workout. It is only when they are disabused of that hope that they will embrace fervently the idea of comparable treatment. Everyone has to do it together. But this has produced a classic first mover problem. Zambia, for example. None of these creditor groups wishes to commit itself to provide debt relief until they can be sure that a commensurate relief will be provided by everybody else. As a result, the process has simply been stymied. This is intolerable for the debtor countries. Take a country like Sri Lanka. It is in the middle of a deep humanitarian crisis. These delays are not costless for those people. Moreover, the politicians in these countries will have enacted the IMF's prior actions in order to qualify themselves for an IMF program. Those prior actions are politically unpalatable domestically. They are sold on the theory that this is temporary pain that will lead to more durable well-being. But when the whole process is bogged down in this way, it leaves the politicians in the debtor country with their posteriors hanging out. They cannot justify what they have done by way of prior actions, by saying that this was the necessary preparation for longer debt relief. How to deal with it? I can see of no way other than some form of most favored creditor contractual commitment. No one is going to believe propaganda. No one will believe that the other creditor groups will in fact provide commensurate debt relief if someone goes ahead. Therefore you need some mechanism, and the only mechanism can possibly be contractual, by which you bind the debtor. The debtor voluntarily binds itself and says, if we strike a deal with you, our bondholders, for example, and subsequently we give a sweeter deal to Paris Club or non-Paris Club bilaterals, we will reopen our deal with you and provide an NPV adjustment. You know and I know that such a reopening would be both politically and financially unfeasible. Therefore this is essentially the debtor tying its hands. But in order to break the first mover problem, I don't see any option other than the debtors providing that second comment. We will look back with nostalgia on the days when dealing with commercial creditors meant dealing with a homogeneous group of commercial banks in the 80s or early 90s, or with bondholders. Modern sovereigns entering a debt workout are going to find a much more diverse creditor group within commercial creditors. Put apart what we've been talking about with the bilateral non-Paris Club creditors, you will have arbitration award holders. Within the last month, friends, Argentina has lost a lawsuit in London about its GDP warrants. It has lost a lawsuit in New York about how it handled the nationalization of YPF. If they are upheld on appeals, both of those lawsuits will produce multibillion-dollar claims against Argentina. It is silly to try to attempt a restructuring of the traditional debt. When I say debt, you folks think money borrowed. These are not traditional debt claims, but they are claims against the state, and we are going to have to find a debt restructuring mechanism that somehow brings these in. We cannot leave them out with equanimity. And you ask, how can that be done? There are only three possible ways. One would be contractual, what Ceyla mentioned, the idea of perhaps expanding collective action clauses not just across debt instruments like syndicated loans, but across different types of claimants, tort claimants, nationalization claimants, unpaid suppliers, et cetera. I think the chances of that are near nil. Second option would be some legislative, a refried SDRM. I think that would be extraordinarily difficult. The third option would be some form of judicial doctrine by which English and New York courts view the situation of a distressed sovereign debtor very much the way we have viewed mass tort claims where there are multiple victims, each one of whom has a claim against the tortfeasor. There's no doubt about the legitimacy of the claim, but if any significant portion of them recovered the full amount of their claim, that proportionally disadvantages everybody else because there'll be a finite body of assets that the tortfeasor will have. We've solved that problem in mass torts through a combination of class action mechanisms, judicially developed procedures, through bankruptcy regimes in which there will be a rateable distribution of assets. In any event, I think that's probably the only way that this problem is going to be dealt with. A final comment, and I know I'm going over, there is an aspect of this business viewed as Spinoza might say, sub specie aeternitatis, in the light of eternity. Look back over 40 years and we have seen periods of excessive sovereign borrowing where they bulk up when the market will allow them to do so to unsustainable levels, followed by disagreeable purgings in the form of debt restructuring. Now shriven of their legacy debt stocks, the politicians can return to the overborrowing and we do it again. It is a kind of financial bulimia and it characterizes this business. What we lack is any way of constraining countries from returning to non-concessional borrowings. Yes, you can jawbone the country in an Article IV, but when the mission leaves, so much for that. But this, friends, is where debt management confronts this idea of sovereignty. Even multilateral creditors, much less commercial creditors, who can tell a sovereign that it cannot borrow in the future on non-concessional terms? Commercial creditors will do this all the time. They'll say to a corporate borrower, you're subject to the following 20 pages of debt restrictions, but it is extraordinarily difficult when you're dealing with sovereigns. And yet, if we do not solve this problem, the bulimia will continue. I'll stop. 

[Indermit Gill]

Thank you, Lee. I told you to light a spark under us, not to burn the whole structure down. Anyway, I have a question for you, and actually, I thought that I would leave you to think about it a little bit. Why is it that back when the private sector creditors were a smaller share of the total debt, we would hear a lot about the London Club, but now that the private sector creditors are a much larger share of the tour, we don't hear about them at all? We only hear about Paris. But let me go back to Laura. I asked you a question about, say that you had to sort of design this from scratch, what would it look like and in which city would the club be? 

[Laura Alfaro]

San José, Costa Rica. Let me just take a detour. There's always this rule, you never talk after a British, especially if you have an accent, because it doesn't matter what you say, you're not going to sound that smart. Let me amend that, you never talk after a well-versed lawyer. But I have to say that there's some part of what you said that I agreed and it's troubling. But the part and I'm going to say is I was in government, in the global financial crisis and there was an international call to spend, and I remember saying to myself, oh, my God, God help us, because if there's one thing we can do it is to spend, the problem we cannot do is the other one, which is not to spend. There has been a movement the last decades of politics without regard to the capacity of countries to do that. I have also witnessed a movement against fiscal rules and debt rules, because the government always needs to be the central guard resort, forgetting again that not all the kids are the same. Some may be a little bit more restrained and some just spend. When called to spend, they do spend, and when they had to stop, nothing happens. But I have to say the international institutions also were not very strong in telling them, stop. If anything, they move forward. Now, back to your question, and then I'll go and I don't know, go to some church, because I just agreed with a lawyer. But the question, it is a little bit unfair how we would design it, because it is not, per se, a question of countries and locations. I have to say, if you're going to choose one, Paris is a good one, nice place, but it's just the reality of how the world evolved after the end of World War II. The way it evolved is, yes, they all got there in Bretton Woods, and I don't know if you've been there, I actually took a picture because Costa Rica is actually in the center, the photo, but it was a world where the countries that were fighting, some of them decided to disengage from the economics. It allowed the West to sort of have the rules, and the Soviet Union was apart. They were fighting geopolitics, but not as much in territory. That has changed. Now we have big players that want to say, because they also have a lot of economic power. That means by definition, we're going to have to change it. Does it need to be in Paris? Do we need to move it to lovely San José, Costa Rica? I think that is perhaps not the center, although sometimes those movements have power. Washington is here because of a tradeoff between the north and the south, we’ll pardon the debt and we'll get the capital. Maybe that like that needs to happen. But the world is different and that's what we need to accept. Just to be a little bit more controversial, I actually think that the need of fair, fast and all the same might be just impossible. By the way, fair and all the same is not the same. Sometimes fair is not everyone the same. I have a view that this need to punish the private sector, fine, money is fungible and the money would go there, I don't think that is really the main problem we're facing, although you can mention cases where it is. I do think the main problem we're facing is the Geopolitics, and that is beyond my PhD, but that doesn't prevent me to talk about it. Usually when we have seen that sovereigns help the little countries, and I represent the little countries, is because it's in their best interest. There is a moment that if I don't lend to them, they're not going to grow, and it actually either is hurting me or my commercial bank. There has to be a recognition by some of these sovereigns that that has happened. Maybe that's not what has happened. Maybe they have not seen the debt overhang, although I think in the case of Ecuador, maybe a little bit of that happened. A lot of the debt was due soon and they realized that if they didn't restructure, maybe they wouldn't get paid. But it has to be some internalizing of the cost, and sadly, we may not be there. That is, if they care about the economics, if they care about the Geopolitics, it is a more complex problem and perhaps someone should give up a capital to give them that. 

[Indermit Gill]

See, I thought you would say something different. I thought you would say that, look, given the fact that… and this has nothing to do with Geopolitics, it just has to do with the economics of the debt, where you would say that, look, given the fact that earlier it was mainly official debt with the private sector representing a small tail, it should have been a mechanism that was led, that was an official mechanism, in a sense. But now, given the fact that most of the debt increasingly is being held by market actors, that you would have to have a mechanism that was a market-based mechanism. 

[Laura Alfaro]

I just don’t think the problem right now is the private or the market. That's my view. There used to be a simple solution, if the problem was market dealing with sovereigns, let's go back to the old world. Let's just say, again, let's put sovereign immunity. You cannot sue. I don't think it's going to solve the problem. 

[Indermit Gill]

What's the problem in Ghana? Do you think the problem in Ghana is official? Do you think the problem in Ghana is China? 

[Ceyla Pazarbasioglu]

Domestic debt. It’s domestic debt. 

[Indermit Gill]

Held privately, mostly. 

[Ceyla Pazarbasioglu]

Held by the financial sector of the country. The link between [inaudible]. 

[Crosstalk] 

[Laura Alfaro]

But then it becomes a different beast. That one probably should be separate, which as I said, this view of fast fare and all the same may be the reason that is getting the problem. Give Ghana a different treatment. Because if it's all domestic, it has internal… 

[Indermit Gill]

It's not going to be all domestic, it also has an external debt. I think… 

[Laura Alfaro]

But we're going back to my point. Just choose your battles. Which one do you think is the worst problem? I think if we're going to treat everyone the same always, we're going to have the problem we have now. We're not advancing. 

[Indermit Gill]

Okay, Ceyla. I think you agree with Laura, no? 

[Ceyla Pazarbasioglu]

Well, I remember what we did in Turkey in 2001. We had the domestic debt problem. We had to voluntary debt exchange. It wasn't voluntary, but we were able to do it because you bring your banks around the table and you say either we both think or you have to do this and you can do it. The question is, how do you preserve financial stability? Because once you do that, then you have to come in and recapitalize the banks and you have to have the mechanism to be able to do that and so on and so forth. I think private sector, if I look back at many of the countries that we have been dealing with, has not been the major problem. Lee will correct me, I'm sure, but it has not been the major problem unless it's Glencore with types which have collateral and some sort of escrow account where the money goes directly there. There's nothing you can do. But I think if you look at the restructuring so far, it has been possible to bring in the private sector because in the case of some of the countries that borrow from us, we have lending into arrears policy and so on and so forth. You have to... 

[Indermit Gill]

It's because the procedure is all stuck at the first level where we haven't sort of agreed among the official creditors. We haven't really got to the private sector problem. Of course the private sector is not a problem yet. It's just this big problem waiting. 

[Ceyla Pazarbasioglu]

But you can impose on the private sector. Once the official sector agrees, unless they have the Glencore-type collateral, then you can say you can lend and it's okay, as long as it's good faith negotiations, you can have arrears to the private sector. You have a huge stick. It hasn't been, and you mentioned the DSSI. The DSSI was, don't forget, the DSSI, I remember, and sorry, Lee, I usually don't disagree with you, but you talked about, I agree, ultra-loose monetary policy. Fine. We had COVID-19, we seem to forget about the pandemic, but I remember sitting in March wondering, are we going to get out of this alive? Are we going to have any markets left after this? Everything was frozen, for two weeks everything was frozen. But then the private sector did come back. The DSSI, which was dealing with the liquidity problem because we thought there would be no access, was less of an issue, but more of a debt service problem. Many of the countries that had that issue and couldn't borrow, most of their exposures were to the official sector. I would like to think it was good, it worked well, and it was a good transition to the Common Framework which is dealing with solvency problems, not liquidity problems. I think I have less concerns about dealing with the traditional private sector, when it comes to much more diverse private sector, I agree fully with Lee that we need to rethink many of the issues that we discussed. Lastly, I think we always forget about when we talk about debt. We say, oh, private sector didn't correctly price risks and so on and so forth. But it's also the borrowing countries. The debtor countries that do go out and borrow and they usually, we have good debt which goes into growth-enhancing projects and so on so forth. I think more work needs to be done there, how to make sure that goes to good purpose because most of these countries need debt, they don't have enough domestic savings. But a lot of debt is bad and it goes to projects that are not necessarily growth enhancing. Of course, we have ugly debt, which is corruption. We need to also work very hard on how to have more transparency, how to have mechanisms which either the surveillance work, but that's not a big stick, but also other mechanisms, whether it's credit rating agencies or other mechanisms which provide some sort of discipline as to what debt is used for. 

[Indermit Gill]

Thank you, Ceyla. Lee, I do want to tell you that there is one person in the world who does tell the governments of low-income countries that they cannot borrow from the markets if they are borrowing from us and so on. That is David Malpass. He has something called the SDFP. He can tell you how successful that's been. But you have to tell us about why is it that we actually don't hear anything from the London Club or we would we only hear about things about the Paris Club and so on. 

[Lee C. Buchheit]

The answer to that lies in history. In the 1980s and early 1990s when commercial creditors were almost exclusively commercial banks, those commercial banks, for their own balance sheet purposes, booked those loans at 100 cents on the dollar. When you negotiated with them, therefore, if you said I want you to write off one dollar… one dollar for you the debtor and one dollar for them the creditor, and so those negotiations were like this. That is not true. When we have moved, as we have in this century into the world of commercial creditors as bondholders, bondholders, the larger institutional bondholders, will almost universally mark their positions to market, which is to say that when the country gets into trouble and the secondary market price of the bonds come down, that will deflate what they're showing on their books as the value of their investment. This gives bondholders an incentive that the commercial banks never had, not only to get a debt restructuring done, but to get it done quickly. If history says anything, it says that when sovereign debt restructurings get bogged down, the recovery value of bond investors is ground to a fine powder. Look at Venezuela. As Jeromin said this morning, that is bogged down, not because the bondholders are refusing to come to the table, they're eager to come to the table, that's a geopolitical issue. Lebanon, very similar issue. When you talk to a bondholder, here's the alchemy of a sovereign debt restructuring with a bondholder, you can go to a bondholder and you can say, I owe you nominally $100. If you write off $25 of that, in the context of renegotiating my debt with bilateral creditors and adopting an IMF program and reforming my economy, the market value of your residual $75 claim could be well above where you are marking your $100 claim today. That is the alchemy. You can say to a bondholder, give me debt relief, because by doing so you help yourself and not just me. That is why I think you don't hear as much. Your comment is quite right. The Common Framework, and I won't expound on this, set up this idea that the bilateral creditors would decide on the amount of debt relief and then the commercial creditors were to stand up and salute and say, where do I sign? We have not tested that intermittent, whether they will go gentle into the good night of saying, yes, a joint bilateral creditors committee has pronounced on the level of debt relief, we just don't know that. But the innovation of collective action clauses, which is exactly 20 years old, did much to draw the venom of commercial creditors who had legal rights and were prepared to enforce them. That's the superficial answer, that a commercial creditor legally is armed and dangerous. Bilateral, even multilateral creditors, theoretically may have legal rights, but they don't exercise them. We know that and therefore you don't hear about that aspect. 

[Ceyla Pazarbasioglu]

But landing into arrears helps, right? With the private credit. 

[Indermit Gill]

I know we are rapidly running out of time and David is paying for the mic. I'm sure he has questions. David, Carmen, you go first and then after that I turn it over to Paul to sort of take questions from the floor. We have about ten minutes for questions. 

[David R. Malpass]

This has been a great panel and so I want to pick up on Cayla’s point. I'll phrase it this way, can the IFIs use tools such as lending into arrears, which Ceyla called the big stick, and/or conditionality to actually get to the other side? That means to fiscal prudence, to a debt restructuring outcome that's sustainable. We have the example going on in the US right now of the debt limit law which ends in default, where you're trading off between doing anything and default. Isn't it the case for the countries that are really under pressure, that there's not very much pressure that can be put on them or the creditors because they're facing very bad outcomes? That goes to, is there a big stick? Maybe for Ceyla and then the others. Could the IFIs do more to force debt restructurings that really work towards sustainability? 

[Indermit Gill]

Ceyla, you want to take that first? And then Laura. 

[Ceyla Pazarbasioglu]

Yes, I think the answer is yes, but it is difficult in the sense that we have the lending into arrears, especially private sector arrears, which helps as long as you get the official creditors agree to it and as long as you don't have any collateralized or other type of debt, that makes the LIA basically toothless. That works, and it also even the lending into official arrears policy works, which we have used in the case of Suriname and so on, as long as you don't have a major holdout creditor. But the problem is we do have some of the official creditors which are large, so using lending into official arrears doesn't necessarily work in that context. 

[David R. Malpass]

Point of question on that. Why can't lending into arrears also have impact on collateralized? Because that's becoming an increasing issue. Are there any tools that will get at the problem of the collateralization of some of the flows? 

[Ceyla Pazarbasioglu]

I'm sure Lee has a better answer on that one, but if the money… take the case of Chad, if the oil revenues go to an escrow account, which is Glencore's escrow account, I'm not sure how it would be feasible for Chad to get their hands on that. It's a legal question, I assume. 

[David R. Malpass]

Sorry, I didn't mean to dominate. Then that creates a trend toward collateralization. In other words, if I'm a potential lender, I take that point and say, aha, I have a big directional point, I'm going to try to collateralize all of my debt to sovereigns and that way I'm protected from whatever tools are out there. Maybe do the others have? And I'll stop. 

[Indermit Gill]

Laura and then Lee. 

[Lee C. Buchheit]

The answer, David, is that only one person can solve that and that is David Malpass. The World Bank has for many, many years had the most virulent form of negative pledge clause known in the market and it purports to prevent a sovereign borrower from encumbering any of its public assets to secure any other creditors without equally and ratably securing the World Bank. The World Bank has not enforced that provision very often. It has once in a while. By the way, that provision is often replicated in the regional multilateral development banks IDB and Asian Development Bank and so forth. There is no currently commercial market version of a negative pledge clause that will do that. If you want to stop countries from pledging their assets to secure other creditors, that would be the way to do it, but you're going to have to be more subtle because, for example, in a Glencore situation, this is not structured as a debt, it is structured as a prepayment of oil facilities and therefore not a debt, and therefore the argument would go it does not run a file of World Bank or other MDB negative pledge. You've got to be a little more subtle. But I'm afraid that would require a sea change in how this organization and your colleagues look at your enforcement of negative pledge. But it is a terribly significant issue because, David, you're absolutely right. Set the precedent that getting collateral immunizes you from future restructurings, and boy, howdy, people will want collateral. 

[Indermit Gill]

Good insight. Thank you. 

[Laura Alfaro]

I think it will be yes for the little countries and no for the important ones. In a world where sovereigns are writing contracts that have nondisclosure clauses, the World Bank can do whatever they want, but they're doing already things that we don't know what they're doing. We also know from the evidence of sanctions that it's very hard to get everyone to do what you want, even when you have a moral cause. Empirical evidence is if someone wants to behave and they're parties that want to misbehave, it's just going to be very hard. Having said that, I do think that it should be made a little bit more clear that this is a problem. As I said, I think the precedent that was created with the [unintelligible] for me was very scary because he was the US using oil as a collateral. You have your nuclear clauses, if you want, you don't even use them right now for the big countries. No one's going to send Argentina to arrears, because if you send Argentina to arrears, it's going to look for another party to borrow. God knows those loans probably were not the best DSI done in the world, but in the world of geopolitics, if you use the nuclear options, they just go somewhere else. That is the world that we're living. As I said, yes to little Costa Rica and not to Argentina. 

[Indermit Gill]

Paul, you want to take more questions from the floor? 

[Paul Blake]

In a moment, but first we'll go to Carmen. 

[Indermit Gill]

Carmen. 

[Carmen M. Reinhart]

Lee mentioned something, but this question is for all three of you. If I understood you, Lee, the comment, I'm going to rephrase it, but it's the seeds of the next crisis are sown during the boom, because that's when it takes two to tango. Governments over borrow, lenders are all willing, tripping over themselves to lend. There's a lot of procyclicality. I was intrigued, you raised the issue, let's say that there's somewhere down the road, let's not call it a HIPC, let's say it's something else. What kind of conditionality could one use that it's intertemporally binding? Because let's not forget also that the governments, it’s not necessarily that the governments that are borrowing are also naive and think that the good times are going to last forever, but they certainly know they're not going to be in office forever. If it blows up, it blows up in somebody else's term. 

[Indermit Gill]

Yes. 

[Carmen M. Reinhart]

How do you tackle that? I'm not optimistic on the InterTech, but limiting or going against the resurgence of the boom bust. 

[Indermit Gill]

Wait a second. We'll take a few more questions, and I know that you guys are raring to go at this one. Please ask your question first to Andrea, she's from Reuters. 

[Andrea Shalal]

Hi. Thank you so much for this, it's great. I just wanted to ask you two kind of real-world questions as we're having this very academic debate about debt, and that is the current situation, whether we’re going to call it a banking crisis or not, but the sort of tender moment as far as banking goes and the concerned that there could be more. What is the implications for that as we see credit tightening? What are the implications for these debt problems? Then the other thing is the borrowing problem that countries have and the lack of fiscal discipline in an environment where we see massive backlash against governments in general. Before the pandemic, there was a trend toward more social unrest. What should governments be doing if not spending to keep their populations under control and without massive social unrest? Thanks. 

[Indermit Gill]

Yes, there are a few more questions, we take it, and then I'll go to the panelists to pick and choose whichever question they want to answer. 

[Paul Blake]

The gentleman just over here. 

[Jeff Hall]

Hi everybody. I'm Jeff hall with Open Society Foundations. We've been watching with interest this effort in New York and Albany around the legislation that would bind the private sector to the deal that the official sector got, and I'm just wondering if we could tempt Lee and Ceyla into a debate over the merits of that legislation. 

[Paul Blake]

Eric from Bloomberg. 

[Eric Martin]

Thank you, Eric Martin with Bloomberg. I just wanted to ask you about the events of earlier this month with the Global Sovereign Debt Roundtable and whether you see this as a venue that can lead to actually achieving the kinds of changes that are needed to restore debt sustainability, and on what time frame? We’ve heard different perspectives about how much China changed its posture in the roundtable versus just kind of restating its previous posture about MDB participation, and whether this is something that can move forward and advance on a timetable that will be soon enough to save some of these countries that are facing the most distress and the most pain for their people. Thank you. 

[Indermit Gill]

Okay, we have more questions. One more question. 

[Paul Blake]

One question from the lady on this side here. 

[Indermit Gill]

Yes, please. Yes, ma'am. Please. 

[Susan Maslin]

Hi. My name is Susan Maslin. Lee, it's a pleasure to hear you speak. I'm actually the lawyer who handles the negative pledge clause for the World Bank. I'd love to speak to you afterwards, but I wanted to raise to you, you mentioned that the negative pledge clause could be more preventative, and of course we know now you can structure around the clause and avoid it. But how would the bank go about striking the right balance between enabling the deals that need to be done? Particularly by the private sector, to encourage development, which often require security or collateral, versus the bank also perhaps having to take security or take collateral itself in order to protect under the negative pledge clause, which we would ourselves be criticized for because we try to encourage unsecured borrowing by our borrowers. I'd like to hear just some comments on that from you. Thank you. 

[Indermit Gill]

She's trying to get free advice from you without paying. I think those are the questions. 

[Laura Alfaro]

So you’re not helping poor countries for free? 

[Indermit Gill]

We will run about ten minutes late, guys, please stay with us because there's a really good thing at the end. Everybody gets a car in the end. 

[Laura Alfaro]

An EV. 

[Indermit Gill]

Go ahead. 

[Laura Alfaro]

No, I think that it was more directed to that. 

[Indermit Gill]

Yes, please, Lee, if you want to go first, and whenever you want to come in. 

[Lee C. Buchheit]

Very quickly I'll do Carmen's, in the negative pledge. What I've proposed, Carmen, as a measure to be sure, not a dramatic measure, would be to say that if a country is undertaking non-concessional borrowings, perhaps above a certain limit, they would be required to prepay, dollar for dollar, their multilateral borrowings. The theory being that the multilaterals would be lending at a lower interest rate, so there would be an economic disincentive. It won't stop it, but it will burden it and perhaps inhibit it once in a while. The negative pledge issue, absolutely there are circumstances where you're going to want the country to be able to borrow, and maybe creating a security interest is necessary to do that, and so you would take it to your board and ask for a waiver, but keep control of it and waive it. I was involved in 1998 with Russia, you remember that terrible collapse in Russia. Six months we negotiated with your colleagues because Russia, at that time, most of the lending was going to go toward the development of the oil industry. That was project finance lending, and that required giving to the financing parties security interests in essentially everything that's in the project. In the end, your board created an exception for project financing of that kind in order to let it go ahead. But I think the short answer to your question would be, when people need waivers and when it is justifiable, then you give them. 

[Indermit Gill]

Ceyla? 

[Ceyla Pazarbasioglu]

Yeah, great question, Carmen. I think several parts to it. One, fiscal rules doesn't work in every country, but it has worked. If you look at emerging markets, even some of the HIPC countries, they're in a much better place now because they are more disciplined, they have more debt transparency, fiscal rules in place. But I think there's a bigger issue. You're talking about concessional finance versus non-concessional finance. If you look at ODA, it has become tiny. There is also this whole issue of what Andrea was saying. Countries have very limited fiscal space, they have social unrest, social tensions, they have huge financing needs because of, one, limited fiscal space and what I said, but also adaptation, climate adaptation, dealing with all these shocks and so on so forth. Concessional financing is to be seen with a microscope. I'm not talking about MDBs, I'm talking about donor finance and other finance. I find it almost hypocritical that there is all this call for need for X billion for this, X billion for that, and then if you look at what are the donors doing, it's actually very small. That does then push countries to more non-concessional financing. Something has to give. Either they will have social unrest or not able to meet their development needs or their immediate needs, or they borrow. I do think there's also a need by the international community to step back and say, okay, we talk about all these needs, and then we try to either ask the bank or MDBs to optimize or IMF to do new instruments or innovations with SDR channeling, rather than really addressing the whole issue. I think there is an issue in that context. On the GSDR, I always think it's important to manage expectations. I don't think we should assume that the GSDR can solve and will solve everything. I do think it's an important platform to raise issues, and we have already seen some good moves. We see it very clearly in the discussions, and I would like to see it in action in the case of Ghana, Zambia and so on. Time should show, but I do think it has helped. Lastly, I think what we hear a lot from creditors, and this links back to the earlier discussion on the sustainability analysis and so on, given all the shocks and uncertainties, it's very difficult to have a debt sustainability analysis, to have the parameters and for creditors to agree on what debt treatment needs to be made. In addition to what you talked about, Lee, which is making sure creditors are bound, the borrowers are bound by treating creditors equally, I do think there is a need to think more carefully about how to share upside. I don't think it should be, oh, let's not do anything, let's wait for two years to see what happens, because that's not going to help anyone, but to agree on a debt restructuring, but also think of a way of, okay, two, three years down the road, if the conditions are much better, how can that upside be shared across different creditors in a systematic and rule-based way? I think that would be also very important in terms of research, be it contingent claims or some sort of pricing that upside in a way for private sector and official creditors to be able to agree quicker. 

[Indermit Gill]

Thank you, Ceyla, over to Laura, and then after that, I'll try to sum up. 

[Laura Alfaro]

I agree, again, there's a very old paper that grants versus loans, and many of the cases that we're talking about should be grants, it shouldn't be loans. I do believe in fiscal rules and debt rules. They may not always work, but they do send a right signal, in my view. Also in my view, it has been from the north, the undermining of some of these because of the issues that have been going in Europe. I think there has to be an understanding, not all kids are equal. That's why I only have one, because they all need different treatments. The other one related to that is, I think this movement of the multilaterals to try to be popular, I understand the reason, but I don't think that's the role. Sometimes you do need a parent to say no. That's actually in the best interest of the kids. That's the same with governments. If you spend a lot, you don't help a lot of your people when you're bankrupt and in distress for ten years. Perhaps going back to the role of sometimes we're not as popular and sometimes you just stick to the simple things in life. Let me finish with a story. When I was in the market and I tried to get a job in the World Bank, I was given this case. This is a very corrupt country that has many poor people and a lot of needs, but if you give the money, you cannot guarantee that it's not going to be stolen and end up in some other place. Would you give the loan? I'm like, you just told me that it's going to get stolen, so I said no, needless to say, I didn't get the job. 

[Indermit Gill]

Let that be a lesson for you. Yes. Okay. I'll try to answer Andrea's question about what is it that we are doing under the current circumstances. One of the things is I don't think that we have to tell these countries a lot because they look at the example of countries that did go into debt distress, did go into default, and what's happening to them. If you look at what's happening to Zambia, what's happening to Sri Lanka and others, it is terrible. If you sort of think about the opportunity cost of not being able to invest in education, health and so on, or try to sort of do that in a risky way, I think that we are trying to advise them to not take those risks right now because what happens to countries when they do take those risks and those risks tend to sort of not go right? They tend to go backwards in a hurry. You have to sort of choose between not going forward or going backwards in a big hurry. If you look at, for example, if you look at Zambia, the poverty rates are up, per capita income is down, et cetera, et cetera. The same thing happened in Sri Lanka. both of the countries have been downgraded from, I guess in one case, from lower middle to low, the other one from upper middle, upper middle to lower middle and so on. This will happen to a lot of countries unless they start to watch out for things. Now, just so you all know, we actually have been working, I've been working a lot with some people and we actually have two papers. One is called Why and How to Reform the Low-Income Country Debt Sustainability Framework, and the other one is called How to Break the Debt Crisis, How to Break the Impasse in Debt. The only reason why I didn't share this with you before the conference was because all the answers are here and then you wouldn’t have come. We will actually share this with you. The thing that I do want to sort of say to you is that based on the paper on how to break the impasse, this is a short paper that Mark Thomas, who is our country director in Mexico now, but who actually worked a lot on HIPC and so on, [unintelligible] and I. Basically what we were trying to sort of do was what may be possible in the light of the experience with previous systematic developing country debt relief? We had sort of four or five conclusions. The first conclusion was that rapidly rising debt ratios and commercial borrowing with great rollover interest and currency risk implies that emerging markets and developing economies will need some form of systematic debt relief during the next few years, one. The second is that the experience of the HIPC program as well as the DSSI was marked by the non-participation of commercial creditors in voluntary debt relief. This implies that any new mechanism will have to start by assuring full participation of commercial debt holders. The third is equal treatment participation of official creditors could then be made a condition of any final workout on a country-by-country basis, commercial debt relief can be engendered by an official sector approach that targets private sector restructuring upfront, drawing on the successful precedent of the Brady Initiative. Fourth, the value of concessional development, lending and grants needs to be fully factored in when calculating equal treatment across creditors. And finally, there was a lot of concern here about making sure that you actually put the right conditionality on the countries that are actually getting this debt relief. The talk was about something like the PRSP Initiative, the Poverty Reduction Strategy Papers that basically implied a huge machinery, David. It was a massive machinery and we tried to sort of make sure that our country signed on to those things and so on. We were not recommending recreating some kind of a machinery like that for some other global public good like climate mitigation or climate adaptation. We would not recommend that. That I hope is a good summary of the kind of things that we discussed today. Now what I'll try to do is that I'm going to introduce David because the whole reason for this conference, the whole reason for why we do a lot of the work here is David Malpass. I'm going to briefly introduce, and I'll take a little while, David, I know because you don't like to talk about yourself, so somebody else has to talk about you, so I'm going to talk about you. he first one is, just so you all know,  he started here in 2019, I think, right? Starting in December 2019, there was already a lot of work being done on debt. We had a big report called Global Waves of Debt. And then after that, you actually had, each year, we actually had a major debt report. We had a report in November of 2021, which is called the Debt Transparency Report. Then we had, in December 2022, we had the International Debt Report, and then we had a World Development Report in June 2022 that actually looked at how to deal with developing country debt. Then if you look at the things that David has been doing in terms of advocacy for debt relief, in April 2020, there was a call to support IDA countries and launch the G20 Debt Service Suspension Initiative. This was extended for nine months in October 2020. In November 2020, he started to pressure the G20 to try to come up with a debt restructuring framework. They obliged by creating the G20 Common Framework. Since then, I think David has been making sustained efforts to ensure that countries like Chad, Ethiopia, Zambia, and Ghana get quick relief, quick and fair and adequate relief. David, by the way, thinks he has not succeeded for three or four reasons. The first one was he was very unhappy that the DSSI did not include private creditors. The second was, and that he thought was bad in itself, since that meant that IDA governments continued to service a large chunk of external and domestic debt, but it was also because it was a bad precedent for the G20 Common Framework, and we are paying the cost of that even today. But I'll get to the point about whether or not David succeeded or failed towards the end. The other thing he did was he made us do, and by us I mean Ceyla when she was the FEVP, then me when I was the FEVP, and now Pablo, that he's the FEVP, we've been working all the time just because… It seemed to be very difficult for us to understand why, we completely understand why now. There was a big program on debt transparency, as I told you, there is also involved DEC, and Carmen was absolutely leading that initiative. The second was, there's a big program on debt sustainability to look back again at the DSF framework about how we can actually make that better. Then finally there was a big program also on debt restructuring. The idea here was to get ready, in a sense, to get ready for a debt crisis, which we know is actually upon us. If you define a debt crisis as countries going into default, that's one way to define it, if you define a debt crisis as a stage when debt starts to weigh on their growth and the development prospects and so on, we are well into that crisis already. Then the other thing that David tried to do was to actually increase our operational efforts. There was a new IDA Sustainable Development Finance Policy. There were these joint papers with the IMF for the Development Committee in April 2021. There was one on the Common Framework, how to make it work and make it work better. Then there was another one in April 2022 called Making Debt Work for Development. There were countless other things that he did in terms of op-eds and so on, lots and lots of the things. What were the effects of all of this stuff? First one was we felt there was a lot more attention to debt issues by the G7, the G20 and our board. The second was a much more productive interaction between the IMF and the World Bank. This was because the World Bank started to do some of the work that we should have done anyway. It was not fair to the fund that they were actually bearing the burden of a lot of this work. I think it was good for the fund that we started to do the work, it was good for us because it was important for our clients, but mostly it was good for the countries themselves. What happened was when I left the World Bank in 2016, we did not have this kind of a focus on debt. Of course we did work on debt and so on, but not this kind of an institutional focus. When I come back over here, I find much more attention to debt issues by our regional directors, our country economists, our country teams and so on. The thing that I would sort of tell David is that he has been very, very successful. Not as successful as he would like, but then now I'm going to tell you something that he told me at the beginning when he and I first met. The first thing of course he told me was that I should care a lot about debt, but don't care at all about the credit. I still remember this. Sometimes I would find that something that we discussed with the fund, for example, came up in a blog, and the blog was by Kristalina and Ceyla. I'd tell David I wish that the blog had been cosigned by him and Kristalina. He’d ask if I was okay with the content of the blog, so I'd say yes. So he said, then what's the problem? I don't have a problem with it. Why do you have a problem with it? As long as the message was right, it didn't matter who got the credit. The second thing he said was, revise your effort-to-outcome expectations when you work on something important. When you tackle big problems, expect a lot of effort to lead to just a little progress. As long as there's a little progress, it's okay. You have to revise that. Don't try to aim for a very high outcome-to-effort ratio, it'll be low. As long as it's positive, it's okay. The third thing he said was, you got to write things down. That's why I've written all this down and I'll publish this, David. You have to write things down before you say them out loud. Unless you write it down, he said it doesn't matter. When you have to speak at a creditor committee meeting, follow, first write down what you're going to say and then, of course, get it approved by him, just so you know. Then after you say it, you share that statement. You share it as a written statement, you share it as a press release and so on, but you actually do share it. You must write down things, otherwise there's no record of it. I agree with him completely. The last thing that he did, I don't think he intended to do this, but I think that if you work for a good boss, people will work harder before they come for a meeting with… no, people will work harder after they leave a meeting with you than they did before they come for that meeting. That's one of the things I found was that people should be much more motivated after they meet you than they were before they came to you. That's one of the things that I found after my meetings with David, rather than the ones preparing for them. This is the mark of a really good boss in the sense that you leave every meeting much more motivated than you came in. I've said all these nice things about you, David. They're all well-meant because as you know, I stutter a lot when I lie, and I did not stutter at all when I was talking about you. But with that, I'm going to ask David to come and say a few words. I have only worked two years with David, so I learned a lot, probably too much about debt. I don't know if I wanted to learn this much about debt, but I did not learn enough about life. But fortunately, you are not going to be my boss after a little bit, but you're going to be my friend forever. 

[Applause] 

[David R. Malpass]

Thank you, Indermit, that was way too much, but thank you. We have made progress on debt, so I recognize that I wish there had been more. I had a few comments that I wrote before you said all that stuff, so I want to focus on that, but I will point what we've tried to do on transparency, and I'm going to come back to that for debt, is true across the bank. We've tried to write down what we're trying to do and then write down what we did and then say it in meetings and have some kind of accountability and transparency through the written products. But the panel was really great. I hope you will all write down the points that you've made. I heard Lee say perpetual benignity, and then he said in light of eternity, so we know how important this conference is. People were assuming perpetual benignity in terms of low interest rates and in terms of their borrowing and ability to roll over, and that can't be right. Now we're facing a big challenge of rollovers. I wanted to list some of the things the World Bank has done, is doing, some more from Indermit’s list. The expansion of the IDS and Carmen and the big DEC team did a great job on that and it's really important. We've strongly advocated improvements in the implementation of the Common Framework. One thing is to find that framework and balance and then push forward with it and make it better. We've also worked hard on preparedness, and that's why I mentioned on the panel the idea of the Cat DDOs, but it's also in health preparedness. As we think about it, we've got to find a way to get countries to do things today that will save them money into the future, and that we do have tools to do that, but we need to push them harder because otherwise there's always the temptation by the government to spend whatever money it has and not be prepared for the future. Finding that balance is really important. Then I wanted to mention, importantly, the Private Sector Enabling Initiative that we've launched and that's going to be a very important, I hope, mainstay of the bank going forward is recognizing that it's not just IFC's job, but the Bank's job to enable private sectors and private capital inflows into developing countries. It needs to be a bigger initiative. Thank you, Indermit, for mentioning all the reports that have been done throughout this process, that's been really important. My point was the bank's been doing lots of work and really pushing hard on all of this. I want to pick up some of the points from the panels. There was that global call to spend, remember that during COVID-19, which pushed many countries, encouraged the governments, and so now we're trying to create a prudent fiscal policy. I guess Pablo was making that point that to get to debt sustainability, there has to be some prudence within the country's fiscal policy. I think that's essential. But the current reality, I'm afraid, is that there are too little reforms in the countries and then too little IFI funding for too little reforms. We're left with an impasse in this situation. There were also the panel and the notations, the importance of transparency, the nondisclosure clause, escrow, and collateralized debt were all mentioned, which I welcomed. …the notable point about a black box on net reserve. A key core part of the DSAs now are the lack of transparency on the country's net reserves, which has affected quite a few countries over the last ten years. Laura said if you go toward or as you go toward transparency, some potential borrowers will be discouraged by that, so you'll be left with less non-Paris Club debt. Finding a balance that we want countries to develop, we want more investment, ultimately you want them to be more credit worthy and take on more debt. But as the transparency goes up, there'll be less of the non-Paris Club debt. There was also the point made that the DSA should be simple and clear. As the DSA reform effort is done, how do we get to a usable DSA? I got two final points. One is on the imbalance of debtor and creditor. Several points on that. One is there's this inherent conflict that someone said was intertemporal. That means the government can borrow money now and the current government won't have to pay it back. That's a really big problem, that leads us toward this big push on transparency. That's important. There was mention of the importance of statutory measures being changed, and Lee mentioned the judicial doctrine regarding that has helped with mass torts and with bankruptcy, but is not available, and Laura mentioned that. Then there's this change, in the old days loans were carried at book, but now we have them at mark to market. That should enable debt restructuring processes, but we do have this problem that the panel discussed of sequencing from public to private. If we stick with the idea that the public sector goes first and then the private sector, we don't get the full benefit that comes from the mark to market. The private sector creditors should be ready to restructure, and in fact they told the Global Roundtable on Debt that they were required to restructure early in a process because fiscal prudence was to restructure early if it's presented to you. But if we start with the public sector as the restructuring driver, you won't get to the benefit that we now have from the mark to market for many of the creditors, both Eurobond and bank creditors are in more of a mark to market situation. Then we had the talk of, the World Bank should just handle the problem, said Lee. but the lawyers spoke up and pointed out some of the problems and I'll name more. We do have a negative pledge clause, it's only as we interpret it in IBRD loans. We used that in Angola with the hope of forcing a reduction in the escrow accounts that were there, but instead we ended up with the World Bank itself having an escrow account in Angola alongside China. It ended up not solving the problem that was initially tried to be solved. We have the problem also that Laura pointed out of smaller countries. There would be an unfairness in the application in that big countries would probably not be enforced on their negative pledge clause, whereas small countries could be enforced. This goes to this idea of within the IFIs, are they the parent that will really try to push toward debt transparency and debt sustainability and debt restructuring? At this point that's not within the IFI playbook to be the pusher for resolution of these problems because as Laura pointed out in her interview question, the right answer was go ahead and make the loan. That creates a real challenge when the countries are faced as they are now, with the consequence of what Lee was talking about, of the very low for long period of reach for yield. After such a period, who's supposed to be the enforcer of it? Then I wanted to mention the SDFP because you did the Sustainable Development Finance policy, so that's an IDA policy, and many of the things you said I don't get credit for. There was a huge effort around the World Bank to make these things work and SDFP is one. It existed on the books, it was supposed to help countries not get non-concessional debt. Lee has proposed the dollar-for-dollar trade off, that's really aggressive. What we are doing within the SDFP is performance policy. The performance policy anchors PPA. On an annual basis, there's a discussion with the country that they should have transparency and should not have non-concessional borrowing when they're taking IDA borrowing, especially if they're grants. That has been marginally successful, maybe more than marginally successful. We're really pushing hard into that. It's for the IDA countries or maybe PRGT countries in IMF terminology, and so we can use that more in order to help countries get to a spot where they are attractive to new investment. Then final point I wanted to go to big picture, the point made, she's gone, but the question of what should be done, and so I just want to do a couple. One is the advanced economies, I think, need to really feel responsibility for their spending because it is in some ways part of a global financial system. If there's a huge amount of capital that's absorbed into the advanced economies as we see now, and perpetually into their rollovers of massive debt, there can't be enough to go around into development. I'd say one answer to that pointed question of what should be done, we have to recognize the responsibility on the big governments to do better in terms of their spending. Then a second thing is the concessional resources that were mentioned by the panel. The IMF is needing concessional resources for PRGT and for the Resilience and Sustainability Trust. That underpins how big the IMF programs are, and the World Bank needs and uses concessionality across the trust fund family and also in IDA. Those are so important. There was discussion or I have a little note on lending into arrears versus collateralized. One of the imponderables that was left by the panel is this grave difficulty that we have that all of the signs are to lend frequently, early and often with more and more collateral, regardless of what the conditions are. That's really not a good dynamic, so that's where I feel like we haven't changed the dialogue. But thank you, panel, for a great discussion and thanks everybody. Really important topic. 

[Applause]