Coming to Terms with Reality. Evaluation of the Belgian Debt Relief ...

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International debt relief initiatives and their effects
debt, i.e. the present value of all future debt service payments that would effectively have
been paid by the debtor (in the absence of debt relief), with present value again measured
using the same discount rate. An EV lower than the PV in principle leads to a reduction in
book value of the debt in the balances of the creditor, and to the extent that there is an
active secondary market for that debt, is reflected in market values below par (and market
prices below 100%).
The same goes for valuing and assessing debt (stock) relief. The nominal debt stock relief
will in general not be a good indicator of say, the amount of net additional resources that
are now available in the recipient country government budget (net fiscal space). First of all,
budgetary gains from debt relief only gradually materialise over time, at the pace of the
contractual debt service payments cancelled (the exact timing depending on the specific
repayment terms and schedule). Again, the PV of all future contractual debt service
payments that are forgiven (discounted at some market interest rate, or more appropriately,
the interest rate at which the debtor country can raise these funds on its domestic market) is
arguably a more correct measure since it takes into account the time value of money. And
even a considerable debt relief in PV terms, can only have modest debt service relief
consequences in the short term, when all the debt service payments were due in the more
distant future.
Secondly, the PV of debt relief, and the short term debt service relief involved, again
implicitly assumes that debt would have been fully serviced in the absence of any debt
relief operation, which is also overly optimistic, especially for countries experiencing debt
service problems. If not all debt would have been serviced, the eventual resource effect of
debt reduction is (at least partly) virtual, referring to an ‘accounting clean-up of historical
and future arrears accumulation’ (Cassimon and Vaessen 2007, 14). Only the share of debt
service that would have been actually paid up to the creditor in the absence of debt relief
generates real fiscal space, which is referred to as the economic value of debt (service)
relief.
Third, debt relief operations may lead to a crowding out of other, potentially more effective
aid interventions. All too often it is assumed that debt swaps take place in addition to all
other forms of donor support, especially when swaps concern countries and debt titles
falling outside the HIPC framework. However, full donor additionality cannot
automatically be taken as the default situation; substitution of donor effort can be at play.
As such, one can not automatically assume that debt relief leads to increased net fiscal
space.
Finally, from a donor perspective, even increased net fiscal space in the budget does not
automatically lead to increased development expenditure by the recipient public sector.
One could imagine a situation wherein debt relief savings simply substitute for the
recipient country’s own development expenses; this so-called ‘fungibility’ of funds is
inherent to most donor support, not only to debt relief. Donors try to manage this by the
appropriate use of conditionalities.
Coming to Terms with Reality
2.1.2 A taxonomy of sovereign debt claims
Table 2.1 further distinguishes between the main types of (external) sovereign debt,
according to the type of creditor. Creditors can be either official or private (commercial).
The official creditors are either bilateral creditors (other countries) or multilateral
organisations (IMF, World bank, regional development banks, etc.). Multilateral
organisations provide both concessional, as well as non-concessional loans. Also for
bilateral creditors, two basic types of claims exist. First of all, bilateral creditors typically
provide loans at concessional terms. For bilateral donors/creditors that report to the DAC,
these loans are considered aid, and can be accounted for as Official Development
Assistance (see section 2.4); these are so-called ODA loans. Another major part of the
bilateral claims constitutes of non-concessional claims, which are not accounted for as aid
(and ODA); they are generally referred to as OOF (Other Official Claims). Almost
exclusively, they relate to export credits, insured by (semi-) public Export Credit Agencies,
and, because of payments default to the original creditor, now in the hands of the ECA, and
being acknowledged by the debt country as a sovereign claim 6 .
This taxonomy will also be used from section 2.2 onwards when we discuss the different
debt relief initiatives and interventions.
2.2 Description on international debt relief initiatives
2.2.1 A brief chronological description of the major debt relief initiatives
The history of debt relief goes back a long way, at least to the 1950s, involving a whole
range of bilateral, multilateral and commercial creditors and debt titles of about 85
developing countries. Over time, the nature of these debt relief practices underwent
significant changes. Table 2.1, which serves as the starting point for this section, provides a
schematic overview of international debt relief initiatives and their specific modalities,
organised by type of creditor and identifying three (partly overlapping) phases or
‘generations’: the pre-HIPC era, the HIPC Initiative itself and those initiatives that go
beyond HIPC 7 . In the following subsections, each of these debt relief generations will be
briefly discussed in turn.
6 Usually because of the realisation of external transfer risk, in which the original debtor did provide the
debt service payments in local currency, but the monetary authorities of the country could not assure him
the foreign exchange to make the hard-currency transfer.
7 The HIPC Initiative was chosen as a point of reference because of its pivotal and still central role in
international debt relief practice (see text).
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