A recent United Nations financial summit has highlighted a “missing link” in the international financial system according to Supachai Panitchpakdi, the U.N. Secretary General of the United Nations Conference on Trade and Development.
Panitchpakdi is worried about the effect a bankrupt country might have on the global economy, according to Edith M. Lederer, writing for the Associated Press.
According to Panitchpakdi, he is currently working to help 90 poor countries who have vulnerable economies.
Economy Weighing Heavily on Fiscally Vulnerable Countries
In many of these cases, the nations carry debts beyond 100 percent of the value of their overall economies.
Such countries have been pleading for more money to shore up their economies, which have been placed under extreme stress by an economic crisis that originated in much wealthier, developed nations.
Once participant in the summit, Prime Minister Stephenson King of St. Lucia, implored the international community to recognize the direness of his country’s situation and provide “a significantly larger amount of grant funding” in the next several years.
“We simply cannot afford the stranglehold of additional debt,” King says.
No International Bankruptcy Court
The prime minister also pointed out that there is no international court to deal with a country filing bankruptcy and therefore every country would have to rely on its own set of regulations.
Panitchpakdi suggested that the United States Bankruptcy Code, specifically Chapter 11, might serve as a model for allowing countries to reorganize their debts.
Martin Khor, executive director of the South Center, a research organization based in Geneva, Switzerland, agrees that the need for such a system is growing.
“We are afraid that many developing countries will be plunged into a new debt crisis which would be very unfortunate,” Khor says.
He points out that the World Bank recently identified as many as 40 nations with serious debt problems that have arisen following the global economic downturn.
Khor feels that an “international debt arbitration system” is long overdue.
The idea was first raised by UNCTAD in the late 1990s, and later by the International Monetary Fund.
Creditor and Debt Reorganization to Get Countries Back on Track
For nations whose reserves are running dangerously low, Khor suggests a court that could reorganize the creditors to meet with the debtor nation and calculate exactly what their debt is worth and how much creditors should be repaid.
Under such a system, there would be no litigation against a debtor, “and finally new financing should be given to the debtor so that the country can continue again as a viable entity,” Khor said.
Following the Asian tsunami crisis of 2004, the countries hardest-hit by the disaster were given a five-year debt moratorium by the international community, and Panitchpakdi says a similar moratorium may be needed again.
To address what he sees as “the missing link we are seeing at the moment in the international financial system – [which] is a system to deal with so-called sovereign debt insolvency by a country,” the UNCTAD chief believes that during a debt moratorium, “some new financing could be generated so countries could go on living and paying attention to their own economic growth – and at the same time to be looking at the debt restructuring in a way that would have the involvement of the international institutions like the International Monetary Fund.”
Whatever the eventual implementation, it seems likely that bankruptcy, just like everything else, is well on its way to going global.