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Sovereign Debt pp 311–324Cite as

Multilateral Debt

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Abstract

Loans contracted with multilateral financial institutions are generally excluded from restructuring processes, consistently with these creditors’ policy of not providing debt relief. The reason underlying this policy is that any relief, whether soft (such as a rescheduling) or hard (such as a reduction), negatively affects the financial capacity of the multilateral lenders, undermining in particular their role as “lender of last resort” in the international financial system. As a result, the debts owed to these institutions enjoy, although to different degrees, preferential treatment in relation to bilateral and private loans. The theoretical justification for this treatment is the “net new lender theory”, by which it is unreasonable to restructure a debt owed to a creditor who is available to provide more resources than those that could be saved through a restructuring plan. This is particularly true for the International Monetary Fund (IMF), which acts as a kind of lender of last resort, providing resources to countries facing temporary liquidity problems, and also as a surrogate for a sovereign bankruptcy court, providing new resources to countries undergoing restructuring processes.

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Notes

  1. 1.

    The rule emerged in connection with the restructuring of Brazil’s debt in 1964: on that occasion, the International Bank for Reconstruction and Development refused to refund Brazilian debt and preferred to make new loans, Bitterman (1973) p. 125. The rule is still maintained, Wood (2007), pp. 778–779.

  2. 2.

    Cf. infra, § 18.5.1.

  3. 3.

    Therefore, if the external debt of a country must be reduced by a certain percentage to be sustainable and the multilateral financial institutions do not consent to reduce their credits, the other creditors are obliged to reduce their credits at a rate superior to the estimated overall percentage, Rieffel (2003), pp. 54–55.

  4. 4.

    The multilateral financial institutions have been, to some extent, successful in persuading sovereign borrowers that any attempt to restructure their own credits would jeopardise access to further financing, Buchheit (1991), p. 13. This privilege would be lost under the HRC Guiding Principles on Foreign Debt and Human Rights (para 54); cf. supra, § 3.7.

  5. 5.

    Under the first head, the preferred status amounts to a sort of security for the policy of the IMF to lend without collateral; under the second head, the preferred status corresponds to the seniority granted to creditors who lend to debtors in a reorganisation process. See Roubini and Setser (2004), pp. 253–254.

  6. 6.

    Carreau (1985), p. 15, attributes a “valeur coutumière” to this treatment.

  7. 7.

    In the dispute on the Venezuelan loans (cf. supra, § 2.2.3), the Permanent Court of Arbitration established in principle the right of preferential treatment in favour of the allied powers that had acted in diplomatic protection through the blockade in respect of the neutral powers that had not, The Venezuelan Preferential Case (1904) IX RIAA 99, 110. This decision was heavily criticised on the ground that to recognise preferred status for Great Britain, Germany, and Italy on the sole basis of an armed intervention was not “conforme a la paix internationale”, Mallarmé (1906), p. 497.

  8. 8.

    See Martha (1990), p. 810. The preferred creditor status of the IMF was challenged by the holders of the Argentine bonds following the default of the South American debtor, Eichengreen (2002), p. 154.

  9. 9.

    See Art 36 of the Vienna Convention on the Law of Treaties (adopted 23 May 1969) (1969) 8 ILM 679. The point is well illustrated in the case of Free Zones of the Upper Savoy and the District of Gex (1932) PCIJ Series A/B No 46, 147–148, where the Permanent Court of International Justice ruled that “[i]t cannot be lightly presumed that stipulations favourable to a third State have been adopted with the object of creating an actual right in its favour. (…) [I]t must be ascertained whether the States which have stipulated in favour of a third State meant to create for that State an actual right which the latter has accepted as such”. See Martha (1990), pp. 814–816.

  10. 10.

    This status is effective as of the entry into force of the Treaty (Recital No 13). This statement has a double meaning: on one hand it deploys its effects among signatories; on the other hand, it can be seen as a recognition of the existence of a preferred status in favour of the IMF, Megliani (2013), p. 96.

  11. 11.

    See Martha (1990), pp. 815–816. Cf. supra, § 9.7.

  12. 12.

    In this regard, the crucial point was to ascertain whether future export and growth prospects were sufficient to maintain payment on external debt current, Claessens et al. (1997), pp. 27–28,

  13. 13.

    Cf. supra, § 8.5.1.4.

  14. 14.

    See Lowenfeld (2008), pp. 655–656.

  15. 15.

    Cf. supra, § 8.5.1.4. The MRDI was proposed by the G-8 of Gleneagles of July 2005 and subsequently endorsed by the institutions involved; see IMF (2005); Guder (2009), pp. 67–74.

  16. 16.

    As regards the IDA and the ADF, “debt relief will be fully financed by donors to ensure that the financing capacity of international financial institutions is not reduced”, A/RES/60/187 of 9 February 2006, point 11. As regards the IMF, a distinction is to be made: all countries with per capita income not superior to US$380 (whether HIPC or not) will receive debt relief from the IMF’s own resources through the MRDI-I Trust, while countries above that threshold will receive debt relief from bilateral contributions administered by the IMF through the MDRI-II Trust, IMF, Factsheet: The Multilateral Debt Relief Initiative, http://www.imf.org/external/np/exr/facts/mdri.htm.

  17. 17.

    IMF, Press Release: IMF Executive Board Cancels Haiti’s Debt and Approves New Three-Year Program to Support Reconstruction and Economic Growth, http://www.imf.org/external/np/sec/pr/2010/pr10299.htm.

  18. 18.

    See Lowenfeld (2008), pp. 663–664.

  19. 19.

    IMF (2009), pp. 757–762.

  20. 20.

    See the Articles of Agreement establishing the IMF (signed 27 December 1945) 2 UNTS 40; an up-to-date version is available at www.imf.org. The declaration of ineligibility is communicated to the Governors of the IMF, as well as to certain other international financial institutions, such as the three regional development banks, IMF (2009), p. 761.

  21. 21.

    IMF (2009), p. 765. The preferred creditor status has been unilaterally affirmed in a communiqué of the Interim Committee dated 26 September 1998, Martha (1990), p. 802.

  22. 22.

    Nevertheless, the frequency of this sanction is not to be overestimated: until 2007, no State has been requested to withdraw from the membership of the Fund for failure to pay its arrears, Lowenfeld (2008), p. 665.

  23. 23.

    The Third Amendment entered into force in November 1992. This decision of the Board of Governors encountered fierce opposition from poor countries, the most likely candidates to incur this measure, Gianviti (1995), pp. 16–17. The new schedule L, “Suspension of Voting Rights”, sets out a number of consequences following from this suspension: exclusion from participation in the adoption of the major amendments of the Articles of Agreement, prohibition of replacing a governor or an executive director, freezing of the voting in the governing bodies of the IMF, and suspension of the governor or the director indicated by the suspended State, even though a right is retained to send a representative to meetings where a matter affecting that member is discussed (see the text in (1992) 31 ILM 1307, with an Introductory Note by Edwards). See Head (1993), pp. 633–635.

  24. 24.

    IMF (2009), p. 754. The legality of this decision of the Executive Board would appear questionable; nonetheless, its justification can be found in Art V(3)(a) of the Articles of Agreement, where the IMF is called to adopt suitable policies to safeguard the temporary use of the general resources. See Gianviti (1995), pp. 14–15.

  25. 25.

    The IMF may still grant a waiver, Gianviti (1989), p. 256; this is normally accorded for minor and technical failures, Edwards Jr (1985), pp. 267–268.

  26. 26.

    See Burdeau (1992), p. 77.

  27. 27.

    IMF (2009), pp. 772–775.

  28. 28.

    This mechanism has facilitated the clearance of arrears and the normalisation of relations with the countries involved; IMF (2001), p. 160.

  29. 29.

    See Cissé (1995), p. 306.

  30. 30.

    See Burdeau (1992), pp. 77–78.

  31. 31.

    Cf. supra, § 10.1.

  32. 32.

    See Nurik (1977) and Shihata (2000a), p. 340.

  33. 33.

    This implies that, under certain circumstances, the IBRD may consent to a restructuring of the bank loans, as long as the restructuring does not extend to the portion of the loan due to it; see Taylor (1985), pp. 439–440.

  34. 34.

    See the text of the Articles of Agreement (signed 27 December 1945) in 2 UNTS 134; the up-to-date version is at www.worldbank.org.

  35. 35.

    General Conditions for Loans, dated March 2012, available at www.world.org.

  36. 36.

    Cf. Art 62 of the Vienna Convention on the Law of Treaties between States and International Organisations and between International Organisations (done 21 March 1986) (1986) 25 ILM 54; Shaw and Fournet (2006).

  37. 37.

    See Asser (1985), pp. 263–264.

  38. 38.

    This power of modification is ascribable to the general powers of the IBRD as a lending institution, Shihata (2000a), pp. 328–329.

  39. 39.

    See Shihata (2000a), pp. 335–336.

  40. 40.

    This policy is well exemplified by the following cases. In 1968, the IBRD President, McNamara, recommended the postponement of some payments related to loans extended to India. Several executive directors contended that India had not submitted any formal request for relief. The general counsel (Broches) shared this latter view, arguing that failing any request by the interested State, Art IV(4)(c) could not find application. In two cases, full restructuring was granted: implicitly in 1975 in favour of Bangladesh and explicitly in 1996 in favour of Bosnia-Herzegovina. See Shihata (2000a), pp. 344–345.

  41. 41.

    See Shihata (2000b), p. 420.

  42. 42.

    See Shihata (2000a), pp. 342–343.

  43. 43.

    See Gamarra et al. (2009), p. 25.

  44. 44.

    Supra, § 10.1.

  45. 45.

    In this connection, it is worth emphasising that the preferred creditor status of the multilateral financial institutions is safeguarded in two ways: debt relief will be provided only after all other creditors have provided more debt relief than multilateral creditors, and no multilateral creditor will be required to write off or write down debt owed to it; Shihata (2000a), pp. 369–370.

  46. 46.

    This Trust Fund is divided into three components: an unrestricted component, a country-specific component, and a multilateral-creditor specific component, Shihata (2000a), p. 371. Donor countries make voluntary contributions on the basis of a Contribution Agreement signed by the donor country and the IDA as administrator of the Trust Fund, Guder (2009), pp. 57–58.

  47. 47.

    If the suspension continues for a period longer than 30 days, the IBRD may terminate the rights to make withdrawals from the Loan Account (sec 7.03, General Conditions).

  48. 48.

    However, it is difficult to apply the suspension when the borrower continues to meet its obligations, Shihata (2000a), pp. 353–354.

  49. 49.

    The wording of the provision does not contain any reference to the ineligibility of use of resources; the official explanation was that in past times, the IMF did not make recourse to this measure. Although this policy has subsequently undergone modification, the amendments of the General Conditions of the IBRD have not acknowledged this variation. See Shihata (2000a), pp. 354–355.

  50. 50.

    OP 7.40—Disputes over Defaults on External Debt, Expropriation, and Breach of Contract (July 2001).

  51. 51.

    A failure by a member country to service its debt to another creditor raises concerns for several reasons: the existence of a controversy on the external debt may indicate a worsening of the economic conditions of the debtor, the unsuitability of its policies or bad administration; an unsettled dispute on external debt may impair the debtor’s capacity of raising capital from other sources; the market standing of the IBRD may be adversely affected by the default; and the ability of the IDA to raise funds may be seriously affected if its donors experience defaults on credits provided to IDA recipients. See Shihata (2000b), p. 452.

  52. 52.

    If the defaulting debtor is not the State but a political entity of it, any restriction on lending is normally confined to the beneficiary [OP 7.40(4)].

  53. 53.

    See Shihata (2000b), p. 452.

  54. 54.

    Dated July 2010, available at www.wolrdbank.org.

  55. 55.

    This exclusion is consistent with the objectives of the IDA, i.e. to provide finance to meet the development requirements of less-developed countries on terms more flexible and less onerous than those of conventional loans (Art I, Articles of Agreement (approved 26 January 1960) 439 UNTS 250, an up-to-date version is available at www.worldbank.org). See Shihata (2000a), p. 352.

  56. 56.

    No formal interpretation of the Articles of Agreement occurred in this regard within the IBRD, Guder (2009), pp. 35–39.

  57. 57.

    See Zafra Espinosa de Los Monteros (1995).

  58. 58.

    See Hudes (1985), p. 565.

  59. 59.

    Dated 20 January 1930, amended in June 2005; see the up-to-date version at www.bis.org.

  60. 60.

    The Statute constituted Protocol No 5 to the Treaty on the European Union and to the Treaty on the Functioning of the European Union.

  61. 61.

    Under the revised Statute (Art 12), the management committee is entrusted with the task of verifying that the EIB activities conform to the best banking practices and of monitoring the financial position of the EIB in relation to assets and liabilities, Marchegiani (2012), p. 75.

  62. 62.

    Dated June 2006, available at www.coebank.org.

  63. 63.

    (1990) 29 ILM 1077, an up-to-date version is available at www.ebrd.org.

  64. 64.

    Dated October 2007, available at www.ebrd.org.

  65. 65.

    Dated 1994, available at www.iabd.org/document.cmf?id=36314542.

  66. 66.

    (Done 28 February 1961) 389 UNTS 69, an up-to-date version is available at www.iadb.org.

  67. 67.

    Dated May 2008, available at www.afdb.org.

  68. 68.

    (Done 4 August 1963) 510 UNTS 48, an up-to-date version is available at www.afdb.org.

  69. 69.

    Dated July 2001, available at www.abd.org.

  70. 70.

    (Done 4 December 1965) 571 UNTS 132, an up-to-date version is available at www.adb.org.

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  1. Catholic University, Milan, Italy

    Mauro Megliani

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Megliani, M. (2015). Multilateral Debt. In: Sovereign Debt. Springer, Cham. https://doi.org/10.1007/978-3-319-08464-0_10

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