New UK debt distress plan will not solve crisis, campaigners warn

A new scheme launched by the U.K. government to help lower-income countries that are struggling to pay their debts has been criticized by campaign groups as a major disappointment that will fail to bring private lenders to the table. Under the scheme announced Monday, banks will receive government support if they introduce clauses enabling debt restructuring to go ahead where a deal is backed by a majority of lenders behind a syndicated loan. This arrangement is already built into 90% of new bonds. Anneliese Dodds, the U.K. development minister, argued that such “collective action clauses” had pushed forward debt negotiations with Ghana and Zambia, telling the audience at a London event: “This is a great example of what market-friendly innovation can achieve.” However, there were no details about the type of support that would be offered to incentivize the clauses. The announcement appeared to be an attempt to head off a campaign for the U.K. to change its laws to achieve debt relief. Campaigners said that, due to London’s position as a financial hub, U.K. law oversees 90% of debts owed by lower-income countries to banks, hedge funds, and asset managers. Questioned by Devex, Dodds did not dispute that the idea is an alternative to legislation that would force private lenders to join debt restructuring agreements, saying: “I’m interested in what works.” However, both Christian Aid and the Debt Justice campaign warned that voluntary measures fall far short of what is required, at a time when 3.3 billion people live in countries spending more on debt servicing than on health and education services. They pointed out that many years of trying had failed to persuade syndicated lenders to agree to any majority voting provision in loans — and that, even if achieved, this would apply only to future debts, rather than easing the current crisis. “The government should pass legislation to compel private creditors to cancel existing debts, not just talk of preventing future debt crises,” Jennifer Larbie, Christian Aid’s head of U.K. advocacy and campaigns, told Devex — rejecting the idea that “voluntary measures will force real change.” Heidi Chow, executive director of Debt Justice, described the measure as “like fighting a forest fire by offering a water pistol in 10 years’ time. The UK needs to demand much deeper debt cancellation for lower-income countries.” Debt Justice also rejected Dodds’ claim that collective action clauses have helped Ghana and Zambia — pointing out that neither debt restructuring negotiations have concluded, as private creditors hold out for better terms. However, a recent report by ODI Global argued that it is wrong to blame “a lack of engagement by private creditors” for the debt crisis and disputed that U.K. legislation would “do much to make most debt restructurings quicker.” It said the problem of so-called vulture funds shunning debt restructuring efforts has “largely been addressed by the introduction of collective action clauses (CACs) in bond contracts”. Dodds’ speech confirmed that the Labour government is taking forward the previous Conservative administration’s development blueprint by seeking to put the City of London at the heart of “a new development approach.” “We need the City to be at the forefront of expertise and solutions, to make sure that countries facing unsustainable debt burdens can restructure it effectively,” Dodds told the London Stock Exchange. Arguing that collective action clauses had prevented “one or two bondholders” from holding up negotiations with Ghana and Zambia, she said: “My challenge to the commercial banks now is to introduce the equivalent clauses for syndicated lending.” “No lender has implemented them — yet. So today, I am announcing that the UK government will offer support for the first ten transactions that put ‘majority voting provisions’ into existing or new lending to low-or-middle-income countries,” Dodds said.