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Low and Middle-income Countries: Debt Restructuring

Volume 836: debated on Tuesday 12 March 2024


Asked by

To ask the Secretary of State for Foreign, Commonwealth and Development Affairs what consideration he has given to introducing measures to compel private creditors to take part in debt restructuring for low- and middle-income countries facing debt crises.

My Lords, in begging leave to ask the Question standing in my name on the Order Paper, I declare my interests as set out in the register.

My Lords, I have raised this issue directly with the Chancellor of the Exchequer. I completely understand the concern to ensure that private sector debt is fully part of debt restructuring for low and middle-income countries. There is a range of arguments that we should consider on this issue and we need to be mindful of the impact that legislation could have, including on the cost of and access to finance for partner countries.

My Lords, I thank the Foreign Secretary for that Answer. He will be aware that lobbyists for private creditors made the same arguments ahead of the Debt Relief (Developing Countries) Act 2010, but when the Liberal Democrat-Conservative coalition reviewed the working of the Act in 2011, it found it to be a successful measure with no evidence of unintended or adverse effects. Given that the majority of relevant bonds are governed by English law, will the UK take a lead to ensure that private creditors take part in sovereign debt restructuring on the same terms? Will the Foreign Secretary work with the New York state authorities, which are also considering this issue?

Obviously, I remember fondly when we were working together in passing the Act to which the noble Lord refers. When that Act was passed there was a real problem with vulture funds acting as hold-outs in debt reconstructions. While there are still arguments for the approach he is taking, we have to ask: will it affect the cost of capital for poorer countries to borrow, will it affect the availability of capital and, crucially, now that we have the collective action clauses and the majority voting provisions, is it still necessary to have this sort of legislation? The IMF reviewed this in 2020 and concluded that things were working well, so there is a concern in my mind that the approach he is talking about is perhaps relevant to what was happening in the past rather than relevant to what is happening now. I think we should keep an open mind on it.

My Lords, with more than $1 trillion owed in debt by 150 countries to China through belt and road, making it the biggest debt collector in the world, what assessment has the Foreign Secretary made of the implications on dependency, including the extension of China’s military presence in the world? In this 75th anniversary year of the Commonwealth, is he not particularly concerned about the way in which the CCP has been marching into that void, not least as a result of the cuts we have made to our overseas aid and development programme?

It is very important that we provide alternatives to finance so that Commonwealth and other countries have a choice. I am very proud of the work I did to set up the Caribbean infrastructure fund, for instance, and we are looking again at whether we can refresh and renew that. We are also trying to get the multilateral development banks to expand their balance sheets and lend more to poorer countries. These are ways in which we can offer countries alternatives to Chinese finance in the way that he suggests.

My Lords, should we not look at the recent example of Sri Lanka, which decided that it had to seek the help of the IMF? The IMF responded speedily, but the problem was the private creditors and the time that took. Is there not a case for perhaps the IMF to produce some dimension whereby there is a structure that all private creditors can use, or be advised to use, so that a speedy decision is made for the benefit of the poor people who are suffering?

If bonds are the form of lending, there are collective action clauses that can prevent private sector hold-outs. With loans, you have these majority voting provisions so that a group of private investors cannot hold up the resolution of those debts. That is the right way forward. On Sri Lanka, we welcome the official creditor group deal that was reached on 29 November 2023; the bondholder committee is currently in negotiations with the Government of Sri Lanka. We do not comment on ongoing restructuring programmes, but we hope that a deal will be arranged soon.

My Lords, the 2010 Act was an excellent example of cross-party co-operation because it was passed by the Labour Government and implemented by the coalition. The United Kingdom and New York have a unique power to take leadership of this issue, which is important to a substantial part of the world, because 90% of the private lender contracts that are causing the problem are written under either English or New York law. Does the Foreign Secretary acknowledge and approve the efforts of New York to bring in legislation to make sure that private creditor terms are equivalent to those of other creditors, which they are not? If so, what steps are we taking, if any, to co-ordinate with New York to ensure that similar legislation can be enacted here?

I thank the noble Lord for his question. It is true that what was teed up by Gordon Brown was nodded into the net by the coalition Government, and rightly so. We do not think that the law in Albany, New York state, is actually likely to get through; it has been sitting around for a long time. It is good in its intentions because it is trying to sort out the issue. But the IMF advice and the Treasury advice is that if we legislate in this way, particularly unilaterally, it would affect the cost and availability of finance to other countries, and it may mean that more of these financial deals are written elsewhere in a less advantageous way than is currently the case.

My Lords, as a country we carry a weighty moral debt to many low and middle-income countries, given our history. This moral debt is borne by business as well as government, and indeed by charities and faith institutions. Will the Government revisit the International Development Committee’s report on debt relief and the evidence supplied by the Jubilee Debt Campaign and Make Poverty History, to consider again how all sectors may work together to ensure a joined-up approach to supporting these countries?

The right reverend Prelate is absolutely right that we need to have good arrangements for this. That is why the common framework was put in place. The old arrangements under the Paris Club were fine when most of the debt was being written by France, Germany, Britain and America. The common framework tries to reflect that a lot of the money is now coming from Middle Eastern countries and from China and to make sure that all these countries can be involved in the resolution of these situations. It has been moving too slowly, but I still think it is the right approach to include this wider group of lenders in these resolutions.

My Lords, I accept what the Minister is saying about legislative routes to bring private creditors into debt negotiations—it is extremely complex—but does he accept that what was included in the international development White Paper is insufficient to deal with the problem of debt? Will he commit to look at what further measures we can undertake to find a solution, including a new definition of debt sustainability, so that we can better understand what could be achieved?

I absolutely agree with the noble Lord. We must keep this under review and keep looking at it, asking ourselves what more we can do. As we do so, we should be guided in part by the IMF, which has a definition of debt sustainability. Even on its definition, things look very bleak when you look at the number of countries in debt distress or at risk of going into debt distress. But more necessary than a new definition is making the collective action clauses and the majority voting provisions work.

My noble friend the Minister mentioned the Commonwealth. He will be aware of its public debt management programme, which supports member countries to effectively manage their debt portfolios. What conversations have my noble friend or colleagues in government had with Commonwealth colleagues about public management of the debts of Commonwealth members and non-members?

I thank the noble Lord for his question. There is an ongoing conversation with the Commonwealth. This is one of the many good advice services that it gives. This year, the year of CHOGM, we are also spending a particular amount of time talking with Commonwealth countries about how they can access finance, not loans in this case but green finance. A lot of finance has been made available, but many of the smaller countries find it hard to access, and we should help with that.

My Lords, poorer countries have increasingly become dependent on growing amounts of private finance and, for some of them, time is getting critical. We need to address the issue and announce reform but have emergency considerations for countries that cannot wait until we resolve it. Does the Prime Minister—I mean the Secretary of State—agree that this needs to be done and that we cannot afford to let these countries default or allow the private sector to get away when the taxpayer is taking the risk?

I agree with the noble Lord that we do not want what we had in the past, which was vulture funds holding out for a better resolution than other holders of debt were getting. If we have new bonds with collective action clauses and new loans with majority voting provisions, that is much less likely to happen. There are also the other innovations that Britain has brought, such as the climate-resilient debt clauses, so that if there is a sudden problem caused by climate change or other shocks, you stop the repayment. I argue that Britain has a long tradition, on a cross-party basis, of helping with debt sustainability and resolution, and we need to keep that record up.