What happens when a country is bankrupt? UN trade chief calls for global answer

UN seeks answer to bankruptcy of a country

UNITED NATIONS — The U.N. trade chief said Thursday there is a “missing link” in the international financial system that is becoming more critical as the global economic crisis drags on: What happens when a country is bankrupt and can’t pay its debts?

Supachai Panitchpakdi told a U.N. financial summit he is trying to help 90 poor countries with vulnerable economies, many with debts beyond 100 percent of the value of their overall economy, as measured by the gross domestic product.

Developing countries at the three-day conference, which ends Friday, have been pleading for more money to shore up ailing economies hard-hit by a crisis they didn’t cause.

Prime Minister Stephenson King of St. Lucia, one of 10 world leaders at the summit, urged the international community for a “significantly larger amount of grant funding” in the next two years, saying: “We simply cannot afford the stranglehold of additional debt.”

He said there is no international court to deal with the bankruptcy of a country so every nation would have to rely on its own national rules and regulations.

Panitchpakdi, secretary general of the U.N. Conference on Trade and Development, cited Chapter 11 of the United States Bankruptcy Code, which permits all businesses to reorganize under U.S. bankruptcy laws, as a possible model — a view echoed by Martin Khor, executive director of the South Center, a Geneva-based research organization with 50 developing countries as members.

“We are afraid that many developing countries will be plunged into a new debt crisis which would be very unfortunate,” Khor said, noting that the World Bank recently said 40 countries are facing serious debt problems as a result of the global economic meltdown.

Chrysler and General Motors filed for bankruptcy under U.S. law “so that the motor car can run again,” he said. “If the motor car can run again, so can the low income countries and the indebted countries where billions of people” are facing increasing poverty and hardships.

Both companies got multibillion dollar lifelines from the U.S. government, probably more than the budgets of many developing countries.

Khor said the establishment of an “international debt arbitration system” — which he likened to a kind of international bankruptcy court for developing countries unable to meet their debt payments — was first raised by UNCTAD in the late 1990s and then by the International Monetary Fund, and is long overdue.

For a country whose reserves are running very low, Khor suggested, the court could organize the creditors to come to meet the debtor and scientifically calculate what the debt is worth and how much the creditors should be repaid — “in other words a drawdown on the debt.”

There would be no litigation against the debtor, “and finally new financing should be given to the debtor so that the country can continue again as a viable entity,” he said.

Both Panitchpakdi and Khor said the most immediate need is a temporary moratorium on debt payments by poor countries, similar to the five-year debt moratorium for the countries hardest-hit by the Asian tsunami in 2004, to deal with the fallout from the economic crisis.

But the UNCTAD chief had a slightly different idea of how to address “the missing link we are seeing at the moment in the international financial system — (which) is a system to deal with a so-called sovereign debt insolvency” by a country.

During the debt standstill, Panitchpakdi said, “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.”

He called for a new discussion on the insolvency of countries that would not only include the IMF and World Bank but U.N. agencies to generate “impartiality” as well as organizations like the South Center.

Germany’s development minister, Heidemarie Wieczorek-Zeul, told the summit “we must ensure that developing countries are not pushed into a renewed spiral of debt by development partners.”

She said this should be done by providing more concessional funding and “establishing a sovereign debt workout mechanism.”

Norway’s International Development Secretary Hakon Golbrandsen noted that “a lot has been achieved in terms of debt relief over the last few years.”

“In order to avoid that unsustainable debt again builds up, we would like to underline the responsibility of both lenders and borrowers,” he said.

Golbrandsen called for a U.N. working group to tackle the question of “a new, independent, fair and transparent debt workout mechanism.”