New Vatican-backed push for debt cancellation gains steam

Today, the world’s governments are more indebted than ever before — and the international financial system, from multilateral institutions to creditor groups to rating agencies, is only reinforcing that reality. That’s according to a new report commissioned by Pope Francis, the late leader of the Catholic Church. The report calls for a “structural transformation” in the international financial system, and says the world has a “moral obligation” to launch a second Heavily Indebted Poor Countries, or HIPC, Initiative, the first iteration of which was launched in 1996. In the nearly three decades since, that program — along with a complementary Multilateral Debt Relief Initiative, or MDRI — has brought 37 countries out of $100 billion in debt, according to the World Bank. “Twenty-five years later, the world confronts another debt crisis, and to solve it requires deeper and longer-lasting reforms of the global financial architecture,” reads the report, which was released last Friday. “A new initiative would have to go beyond political agreements among creditor governments and involve private creditors, who now play a significantly larger role in the debt portfolios of low- and lower-middle-income countries (LLMICs) than they did in the 1990s.” The report was led by two progressive economists — Joseph Stiglitz, a Nobel laureate and former World Bank chief economist, and Martín Guzmán, Argentina’s former economy minister. It comes halfway through the church’s Holy Year, or jubilee year, which is meant to focus on forgiveness and reconciliation across the world. Jubilee years have been celebrated since 1300 A.D., first every 100 years, then every 50 years, and finally every 25 years since 1470. For decades, debt relief has been a core focus of those jubilee years, with Pope John Paul II urging for the cancellation of debt from the world’s poorest nations in 2000. He framed debt relief as a moral imperative, and ever since, the Vatican — through entities such as the Pontifical Academy of Social Sciences and other papal initiatives — has continued to weigh in on international finance ethics, often advocating for fairer global financial systems and debt relief. After taking over the papacy in 2013, Pope Francis did the same. He called for debt cancellation amidst the COVID-19 pandemic, and commissioned over 30 experts to dig into the topic this year. The picture their findings painted was jarring: Today, 54 low- and middle-income countries spend 10% of their tax revenues — or more — on interest payments alone. “The issue here is not just that countries are defaulting on their debt, but that countries are defaulting on their development,” said Mahmoud Mohieldin, the United Nations special envoy on financing the 2030 Agenda for sustainable development — who is one of those experts, and a contributor to the report — in a press briefing last week. The debt crisis Some 3.3 billion people — almost half of humanity — live in countries that spend more on servicing their debts than they do on education or health. In Africa, that situation is even more severe: the continent is the only region where public debt has been growing faster than gross domestic product since 2013. Today, low- and middle-income countries owe $11.4 trillion in debt, equivalent to 99% of their export earnings, according to the U.N. Trade and Development group, or UNCTAD. The report says the blame lies with both creditors and borrowers — but says the issue has also been exacerbated by unexpected circumstances, including the need for a surge in public spending due to the COVID-19 pandemic and inflation brought on by the war in Ukraine. To fight inflation in their own economies, high-income countries raised interest rates sharply — making it much more expensive for low- and middle-income countries to pay back their existing loans, the report states. As a result, international financial institutions — a term which covers the World Bank and the International Monetary Fund, among others — stepped in, helping countries pay their private creditors instead of funding their original mandates: promoting development, reducing poverty, and stabilizing economies, the report states. The job of these institutions should be to offer support when economic conditions become worse, the report states — which is when money tends to flow out of low- and middle-income countries to safe havens such as Europe and the United States. But according to the report’s authors, they did not fulfill that role. “Rather than providing countercyclical development finance, they underwrote capital flight,” it continues. “In doing so, they shifted the cost of private-sector bailouts onto citizens in the developing world — many of whom now face not only higher debt stocks, but also rising interest payments on official loans.” That’s all been compounded by the fact that over the last several decades, the lending world has gotten more complex. The report highlights the emergence of new, nontraditional governmental creditors, highlighting debt raised on private bond markets and from nations outside of the Paris Club — a group of creditor countries that in 1956, committed to providing a sustainable way for borrower nations to tackle their debt. “This fragmentation has increased inter-creditor disputes for the distribution of debt relief and prolonged restructurings,” the report states. “There is a need for mechanisms that ensure fair burden-sharing among creditors, such as would be provided by an international bankruptcy court.” It also criticizes the rise of blended finance and public-private partnerships that have “largely failed to deliver transformational investment.” The report describes the latter as “opaque” and “difficult to restructure,” stating that the bulk of such solutions have been confined to “low-risk, low-impact projects” in middle-income countries. “The logic behind these mechanisms too often revolves around de-risking existing market structures, rather than using public finance to shape markets toward transformative objectives — such as employment creation, technology transfer, climate resilience, and social inclusion,” it continues. “Without a fundamental shift in governance, much of the current private finance agenda, including that centered around blended finance, risks becoming a quiet engine of future debt distress.” The way forward The report recommends a multitude of approaches, actions, and principles to resolve the world’s debt crisis — including expanding and extending debt suspension initiatives, encouraging more responsible borrowing that is less influenced by countries’ political cycles, and reforming the lending rate and surcharge policies of the IMF. There’s also the inclusion of a “no bailout” clause, which would block the IMF from offering loans to governments struggling to pay off their private sector lenders. “Using public money to shield private creditors from losses is not only an unjustifiable use of public funds; it also distorts incentives for both the creditors and the governments to negotiate sustainable debt deals,” the report states. The report also refers to a revival of the HIPC initiative. In 1996, HIPC was launched by the IMF and the World Bank to help reduce the unsustainable debt burdens of the world’s poorest countries. In exchange for undertaking economic reforms and poverty-reduction strategies, eligible countries received debt relief from bilateral, multilateral, and commercial creditors, ultimately freeing up fiscal space for essential public services. But despite that, HIPC hasn’t prevented a new debt crisis from emerging. Because of that, the report pushes for an HIPC II — while noting the debt crisis of today far surpasses that faced in the mid-90s. To do that, the report’s authors state that the international community should offer bridging loans and other financial support to help countries implement economic programs for both immediate recovery and long-term development. And for this to work, they add, it would require full cooperation from private creditors — including agreeing to lower interest rates that reflect the reduced risk after a sustainable debt restructuring — as well as comparable debt relief from official bilateral lenders. “In this Jubilee year we ask the world to extend a hand to the people of countries in distress,” the report states. “We must offer them the opportunity to rebuild their hope. It is time for a HIPC II.” The authors also push for new initiatives, endorsing a proposal from the government of Spain to create a so-called Jubilee Fund. That fund would be housed at an international financial institution, the report states, and be backed by Special Drawing Rights, a type of global reserve asset that can work as a form of financing. “In today’s world, the victims are not lying on a roadside,” said Rev. Charles Chilufya, who heads the Justice and Ecology Office of the Jesuit Conference of Africa and Madagascar, at a press briefing last week. “They are entire nations, wounded by unjust debt, robbed of their futures, stripped of their dignity, and left bleeding by the side of the global financial road.”