United Nations A/55/422 General Assembly Distr.: General 26 September 2000 Original: English 00-65930 (E)    161000 ````````` Fifty-fifth session Agenda item 92 (c) Macroeconomic policy questions: external debt crisis and development Recent developments in the debt situation of developing countries Report of the Secretary-General* Contents Paragraphs Page I.    Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1–5 2 II.    International debt problems and strategies  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6–68 3 A.     The Heavily Indebted Poor Countries (HIPC) Initiative  . . . . . . . . . . . . . . . . . . 9–29 3 B.     Non-HIPC debtors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30–34 8 C.     Recent conditions in markets for commercial debt  . . . . . . . . . . . . . . . . . . . . . . 35–38 9 D.     Recent debt restructuring agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39–43 10 E.     Financial crises and debt in emerging markets . . . . . . . . . . . . . . . . . . . . . . . . . . 44–57 11 F. Issues in commercial debt work-outs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58–68 14 III.    International policy conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69–78 16 *  This report was submitted on 26 September 2000 so that the updated information required for a commentary on the latest developments could be included in this comprehensive and substantive analysis of the external debt and debt-servicing problems of the developing countries. 2 A/55/422 I.  Introduction 1. In its resolution 54/202 of 22 December 1999, the General   Assembly,   reaffirming   the   urgent   need   for further implementation of  existing  mechanisms  for  the treatment   of   the   external   debt   and   debt-servicing problems of developing countries in order to help them exit  from  the  rescheduling  process  and  unsustainable debt  burdens,  addressed  the  possibilities  of  enhancing international  cooperation  regarding  a  durable  solution to    these    problems.    The    Assembly    requested    the Secretary-General  to  report  to  its  fifty-fifth  session  on the implementation of that resolution and to include in his report a comprehensive and  substantive analysis  of the  external  debt  and  debt-servicing  problems  of  the developing   countries.   The   present   report   has   been prepared in response to that request. 2. An  analysis  of  key  debt  indicators¹  shows  that external   debt   and   debt-servicing   problems   are   most severe   and   persistent   in   the   heavily   indebted   poor countries   (HIPCs),   the   target   group   of   the   HIPC Initiative.   However,   a   number   of   other   developing countries   and   countries   in   transition   are   also   in   a vulnerable position. Although growth in these countries started  to  recover  after  the  1997-1998  global  financial crisis, debt restructuring problems linger  and  countries remain exposed to adverse developments in commodity prices, interest rates, exchange rates and private capital flows.   A   few   of   them   have   found   it   necessary   to reschedule   their   external   obligations.   Moreover,   the debt-servicing  capacity  of  some  countries  continues  to be affected by war and natural disasters. 3. Various strategies have been adopted to tackle the debt  problems  of  these  countries.  In  this  respect,  the attention  of  the  international  community  has  over  the recent  past  largely  focused  on  the  HIPC  Initiative;  but progress  has  been  much  slower  than  expected  and  the initiative  is  suffering  from  problems  of  underfunding, excessive   conditionality,   restrictions   over   eligibility, inadequate   debt   relief   and   cumbersome   procedures. Steps  have  been  taken  to  speed  up  the  HIPC  process and there is now a commitment to doubling the number of countries for which debt reduction is agreed from 10 in  September  2000  to  20  by  December  2000.  While such  an  acceleration  is  welcome,  the  current  approach is not likely to succeed in removing the  debt  overhang of  the  world’s  poorest  countries.  For  this  purpose  (as discussed  further  in  sect.  III)  one  approach,  while  the existing processes are under way, would be to establish an  independent  panel  of  experts  that  would  assess  or reassess     debt     sustainability,    eligibility     for     debt reduction,   the    amount    of   debt    reduction    needed, conditionality and financing (including the provision of necessary funds for the multilateral financial institutions  affected)  for  all  HIPC  countries  including those that have already benefited and those that are set to  benefit  from  debt  reduction  in  the  coming  months under   the   existing   initiative.   The   latter   two   groups should  benefit  from  additional  debt  relief  if  the  panel determines  that  the  debt  reduction  provided  under  the HIPC   Initiative   is   inadequate.   The   design   of   the modalities  for  such  an  approach  could  be  expected  to draw on experience of domestic insolvency procedures in   major  industrialized  countries  as   well  as  that  of insolvency procedures in private international law. The approach  should  not  be  limited  to  HIPCs  but  should incorporate a broader  spectrum  of  countries  in  need of special    measures   to   overcome    their    official    debt problems.  Simultaneously  there  should  be  agreement on   the   suspension   of   debt-service   payments   by   all HIPCs,     with     no     additional     consequent     interest obligations being incurred, until the panel had made its recommendations  and  agreement  had  been  reached  on the reduction of their debts. This suspension could also be  extended  to  non-HIPC  countries  declared  eligible for  relief  by  the  panel  during  the  period  required  for eventual agreement on debt reduction in their case. 4. Similarly,  despite  the  proliferation  of   meetings and  multiplications  of  groups  and  forums  discussing the  reform  of  the  international  financial  architecture since   the   outbreak   of   the   recent   bouts   of   financial crises in emerging markets, the international community  has  not  been  able  to  address  the  concerns of   developing   countries   concerning   the   contents   of such  reform,  particularly  with  respect  to  orderly  and equitable work-outs for commercial debt and provision of  adequate  international  liquidity  under  appropriate terms  and  conditions  to  countries  facing  serious  debt- servicing difficulties. Rapid progress needs to be made in these areas in order to ensure that  closer  integration of  developing  countries  and  economies  in  transition into  the  global  financial  system  does  not  undermine their stability, growth and development. 5. This report takes up these issues. It will first give a brief review  of the  progress  made in  HIPC  Initiative implementation    and    make    an    assessment    of    its shortcomings.  The  report  will  then  turn  to  non-HIPC debtors, discussing their problems  with respect to both 3 A/55/422 official  and  commercial  debt.  This  is  followed  by  a discussion  of  debt  problems  in  emerging  markets  that have experienced serious financial difficulties in recent years,  and  of  outstanding  issues  in  commercial  debt work-outs. The report will end with some proposals for reform  of  the  international  approach  towards  the  debt problems  of  developing  countries  and  economies  in transition. II.  International debt problems and strategies 6. Total  outstanding  debt  of   developing   countries and   countries   in   transition   showed   little   change   in 1999.  The  total  debt  of  these  countries  at  the  end  of 1999   is   estimated   at   $2,554   billion   after   a   small increase over the end-1998 level (see table). Long-term debt  increased  by  $40  billion,  while  short-term  debt fell slightly and represented 16 per cent of total debt at end-1999.   The   debt   service   ratio   remained   broadly unchanged in 1999 at about 18-19 per cent. The ratio of total  outstanding  debt  to  exports  fell  to  137  per  cent; and   that   of   debt   to   gross   national   product   (GNP) decreased  slightly  to  below  42  per  cent.  Short-term debt corresponded to 53 per cent of the stock of foreign exchange reserves as compared  with 59 per cent at the end of 1998 and with over 70 per cent at end-1997. 7. The  distribution  of  debt  among  different  regions remained the same in 1999 as in  1998.  East  and  South Asia   accounted   for   33   per   cent   of   the   total,   Latin America  for  31  per  cent,  and  Europe  and  Central  Asia for 19 per cent, while sub-Saharan Africa’s share was 9 per cent and that of the Middle East and North Africa 8 per  cent.  Latin  America  has  the  highest  ratio  of  debt service to exports, about 35 per cent, while the highest debt-to-exports ratio, 225 per cent, is recorded by sub- Saharan Africa. 8. Despite  the  slowdown  of  growth  of  the  external indebtedness of the developing countries and countries in  transition,  debt  and  debt-servicing  problems  persist in  a  number  of  these  countries.  The  problems  of  the HIPCs,   which   are   structurally   rooted,   are   far   from being  resolved,  while  other  poor  countries  have  also been  affected  by  the  recent  financial  and  economic crises  in  emerging  markets  and  some  of  them  have encountered  payments  problems  as  a  result.  Many  of the  emerging  markets  that  have  experienced  financial instability and crisis in recent  years  are  suffering  from domestic   as   well   as   external   debt   difficulties   that threaten the sustainability of their recovery. A.  The Heavily Indebted Poor Countries (HIPC) Initiative 1.  Progress in design and implementation and other recent policy developments 9. The   HIPCs   in    general   are    characterized    by extreme  poverty,  poor  social  development  indicators and  human  resources,  poorly  diversified  economies,  a high concentration of export earnings in a few primary commodities, and dependence on official aid as well as high  debt  overhang.  The  last-mentioned  is  reflected  in high levels of debt in relation to national income, high ratios   of   debt   service   to   exports,   large   payments arrears,  and  high  ratios  of  debt  service  to  government revenue. By the end of 1999, little assistance had been delivered   under   the   HIPC   Initiative,   with   only   a negligible  impact  on  the   aggregate  debt   stocks  and indicators  of  the  HIPCs.  According  to  recent  available estimates,²  the  HIPCs’  total  outstanding  external  debt increased  by  some  $4.5  billion  in  1999  to  a  level  of $219  billion,   and   in   this   year   the   ratio   of   debt   to exports amounted to 389 per cent, more than twice that for  developing  countries  as  a  whole  and  considerably above    that    of    sub-Saharan    Africa    (including    the region’s  HIPCs).  There  are  currently  41  countries  on the  list  of  HIPCs.³  Thirty-three  of  them  are  in  sub- Saharan Africa, and 30 are classified as least developed countries. 10. Following  the  Cologne  Summit  in  June  1999,  a number of specific modifications to the HIPC Initiative aiming  to  provide  “deeper,  broader  and  faster”  debt relief   were   endorsed   at   the   International   Monetary Fund   (IMF)   and   World   Bank   Annual   Meetings   in September 1999.⁴ Deeper and broader relief is expected to be achieved through a lowering of debt sustainability targets,⁵   resulting   in   an   increase   in   the   number   of countries  to  become  eligible  for  HIPC  assistance.  The new scheme retains the basic framework of a two-stage process requiring an  established  track  record  of  policy implementation before the delivery of relief. As before, the “decision point” — when a country’s eligibility for HIPC  relief  is  assessed  —  is  normally  reached  after three years of satisfactory performance under IMF- and World Bank-supported adjustment programmes. Another  feature  of  the  new  scheme  is  the  provision  of additional   interim   assistance   for   eligible   countries, External debt of developing countries and countries in transition (Billions of United States dollars) All developing countries Sub-Saharan Africa Middle East and North Africa Latin America and the Caribbean East Asia and the Pacific South Asia Europe and Central Asia 1998 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 1999 Total debt stocks 2 536.0    2 554.0 230.1 231.1 208.1 214.2 786.0 792.7 667.5 659.4 163.8 170.7 480.5 485.9 Long-term debt 2 030.3    2 070.7 180.3 179.1 164.1 169.4 640.5 649.0 517.1 530.6 154.2 159.9 374.2 382.8 Public and publicly guaranteed 1 529.2    1 580.1 171.1 169.4 159.6 161.4 424.2 440.6 337.7 365.0 143.1 147.2 293.5 296.6 Private non- guaranteed 501.1 490.6 9.1 9.7 4.5 8.0 216.3 208.4 179.4 165.6 11.1 12.7 80.8 86.2 Short-term debt 411.9 402.3 42.5 44.7 41.0 41.8 123.5 122.6 119.1 106.1 7.2 8.5 78.6 78.6 Arrears 128.0 .. 63.2 .. 12.1 .. 11.9 .. 17.1 .. 0.8 .. 22.9 .. Interest arrears 36.2 40.7 20.2 20.4 2.4 2.4 3.6 3.6 2.0 2.0 0.3 0.3 7.7 12.0 Principal arrears 91.8 .. 43.0 .. 9.7 .. 8.3 .. 15.1 .. 0.5 .. 15.3 .. Debt service paid 316.1 349.4 14.1 15.2 22.6 21.1 125.3 140.6 84.8 103.5 16.4 15.2 52.9 53.7 Debt indicators (percentage) Debt service/ Exports of goods and services 18.5 18.7 14.7 14.8 14.3 11.0 33.6 34.5 13.3 14.8 18.9 14.5 14.7 14.8 Total debt/ Exports of goods and services 148.0 136.6 238.7 225.1 131.2 111.3 210.5 194.6 104.9 94.4 189.2 162.5 133.7 133.7 Total debt/ GNP 42.2 41.5 72.2 75.8 35.8 44.2 40.9 46.2 40.2 34.8 29.1 28.2 49.0 42.2 Short-term/ reserves 58.9 53.1 139.9 135.5 62.4 60.1 74.7 74.7 40.0 30.9 19.2 21.3 76.3 72.8 Source: World Bank, Global Development Finance 2000 (Washington, D.C., 2000). Note: Two dots (..) mean data unavailable. 5 A/55/422 including relief from  IMF  and  the  World Bank  as  well as  more  concessional  restructuring  of  debts  provided within  the  Paris  Club  framework  under  Cologne  terms (90  per  cent  or  higher  debt  reduction  in  present  value terms  as  compared  with  80  per  cent  under  previously applied  Lyon  terms).  The  second  stage  of  the  process leads  to  the  “completion  point”  and  full  delivery  of HIPC   assistance   from   participating   creditors.   While under  the  initial  framework  another  three-year  period of  satisfactory  policy  implementation  was  in  principle required, there  is  now  the  possibility  of  shortening  the second stage of the HIPC process if the debtor country meets ambitious policy targets early on. Introduction of this “floating completion point” allows Governments to set their own pace of implementation of reforms. 11. A   main   innovation   under   the   enhanced   HIPC framework  is  the  explicit  link  to  poverty  reduction. HIPCs  are  now  required  to  present  Poverty  Reduction Strategy   Papers   (PRSPs)   as   part   of   the   debt-relief process.  A  country  aspiring  to  assistance  under  the initiative  would normally be  expected  to  have in place a  comprehensive  and  participatory  poverty  reduction strategy  before  the  decision  point.  In  practice,  interim strategies have served as a basis for the decision points for  most countries now being processed under the new framework.  Finalization  of  the  PRSPs  and  satisfactory initial  progress  in  implementation  are  expected  from countries  before  delivery  of  relief  at  the  completion point;   early   experience   indicates   that   reaching   this point  may  take  one  or  two  years.  This  link  to  poverty alleviation  and  the  need  to  reach  agreement  on  PRSPs through  processes  involving  participation  of  the  civil society  render  the  HIPC  process  even  more  complex than before. 12. Up  to  the  end  of  July  2000,  nine  countries  had reached   their   decision   points   under   the   enhanced scheme. Bolivia, Mauritania and Uganda were declared eligible    for    additional    relief    in    February    2000, Mozambique   and   the   United   Republic   of   Tanzania followed  in   April  2000,   Senegal  in  June   2000   and Benin,  Burkina  Faso  and  Honduras  in  July  2000.⁶  In all,  these  nine  countries  are  estimated  to  receive  more than  $15  billion  in  nominal  terms  in  additional  debt relief, representing an average reduction in the  present value (PV) of debt stocks of close to 45 per cent on top of  traditional  relief  mechanisms.  The  objective  is  to have  20  HIPCs  reach  their  respective  decision  points under the new framework by the end of 2000.⁷ 13. Uganda became the first HIPC country to achieve the    completion    point    under    the    enhanced    HIPC Initiative  in  early  May  2000.  Bolivia  was  expected  to reach  this  point  during  the  second  half  of  2000,  to  be followed    by    Benin,    Burkina    Faso,    Mozambique, Senegal  and  the  United  Republic  of  Tanzania  in  2001, and  Honduras  and  Mauritania  in  2002.  In  these  first cases under the enhanced framework (six reassessments   taking   into   account   the   revised   debt sustainability    targets    and    three    new    cases),    the countries  have  to  a  large  extent  been  able  to  draw  on pre-existing     national     poverty     action     plans     and strategies  for  the  preparation  of  the  PRSPs  that  are  to be presented to the Bretton Woods institutions. 14. There    was    no    new    Paris    Club    agreement concluded during the period from August 1999 through February  2000,  while  the  modalities  for  implementing the enhanced HIPC framework were being put in place. In March 2000, Mauritania became the first country to benefit   from   Cologne   terms   under   a   Paris    Club agreement,    followed    by    the    United    Republic    of Tanzania  in  April  2000.  Both  these  countries  obtained flow reschedulings, with notably all creditors providing debt  reduction,  that  is  to  say,  outright  cancellation  of payments   due   during   the   consolidation   period.   In addition,    Sao    Tome    and    Principe    in    May    2000 negotiated  its  first-ever  Paris  Club  agreement,  a  flow rescheduling   on   Naples   terms    in    support   of   the country’s  new  Poverty  Reduction  and  Growth  Facility (PRGF)   arrangement   with   IMF.   In   order   to   assist Mozambique  in  dealing  with  the  emergency  situation created by devastating floods, the Paris  Club  in  March 2000   decided   to   defer   all   payments   due   until   the country    will    have    reached    its    completion    point (scheduled  for  mid-2001)  and  arrangements  for  debt cancellation  at  that  time  will  have  been  made.  Similar arrangements  for  a  one-year  deferral  of  debt  service due  by  Mozambique  have  been  made  by  IMF  and  the World Bank. 15. An important development in late 1999 and early 2000   has   been   the   commitment   by   an   increasing number  of  creditor  countries  to  granting  even  deeper debt relief than under the Cologne terms. In this regard, a   breakthrough   made   towards   full   cancellation   of (bilateral) claims was the pledge by the President of the United   States   of   America   in   September   1999,   in connection   with   the   IMF   and   World   Bank   Annual Meetings,  to  forgive  100  per  cent  of  debts  within  the context of the HIPC Initiative. Other creditor countries, 6 A/55/422 notably   all   Group   of   Seven   (G-7)   countries,   have followed  with  similar  declarations.  In  April  2000,  G-7 finance  ministers  and  central  bank  governors  meeting in Washington, D.C., collectively committed themselves to increasing debt reduction to 100 per cent of  non-official  development  assistance  (ODA)  claims treated     within     the     Paris     Club     framework,⁸     a commitment reaffirmed by G-7 leaders at the Okinawa Summit of July 2000.⁹ 16. However,  the  above  should  not  be  interpreted  to mean that HIPCs can henceforth expect rapid or across- the-board     cancellation     of     their     bilateral     debts: cancellation  would  in  principle  be  limited  to  countries going  through  the  initiative,  and  would  be  dependent on   their   progress   in   economic   policy   reform   and poverty   reduction.   Country   coverage,   the   timing   of relief and the coverage of debts, for example, post-cut- off  date  debt,  may  also  vary  from  creditor  to  creditor. Relief also depends on legislative authorization for the release of funds. 17. HIPC-related   debt   issues   continued   to   feature high  in  the  international  agenda  in  the  wake  of  the Okinawa  Summit.  The  Italian  Parliament  in  July  2000 enacted  a  bill  enabling  the  full  cancellation  of  debts (development   and   commercial)   owed   to   Italy   and significantly    expanding    the    number    of    potential beneficiaries beyond the HIPC category. 18. The  G-8  meeting  in  Okinawa,  however,  did  not advance any major new initiative on debt similar to the Cologne   debt   initiative   a   year   earlier.   The   leaders agreed  to  push  forward  the  HIPC  Initiative  and  work together  to  ensure  that  as  many  countries  as  possible reached  their  decision  points,  in  line  with  the  targets set in Cologne. They voiced concern about the number of   HIPCs   currently   affected   by   military   conflicts preventing  poverty  reduction  and  delaying  debt  relief, and  agreed  to  strengthen  efforts  to  help  them  prepare for   and   come   forward   for   such   relief.   They   also promised   to   promote   more   responsible   lending   and borrowing  practices  to  ensure  that  HIPCs  would  not again  be  burdened  by  unsupportable  debt.¹⁰  A  number of other issues were also raised at the summit including the  essential  role  of  ODA  in  the  fight  against  poverty and  the  need  for  an  improved  trade  and  investment environment     and     for     faster     integration     of     the developing  countries,  including  the  poorest,  into  the global economy.¹¹ 2.  Outstanding issues 19. As of July 2000, only a small number of countries were  well  advanced  in  the  HIPC  process,  while  others have  as  yet  to  meet  the  requirements  for  entering  the process; that is to say, they have not embarked on IMF- and  World  Bank-supported  programmes  and  have  not entered  into  Paris  Club  negotiations  for  concessional rescheduling.  The  countries  concerned  are  almost  all least  developed  countries  suffering  from  civil  conflict or  severe  governance  problems,  and  are  among  the most   indebted   HIPCs.  The  Boards   of  IMF   and  the World   Bank   have   supported   extending   the   HIPC “sunset  clause” by  another  two  years to  give  countries an  incentive  to  adopt  the  required  programmes  by  the end of 2002. 20. Overall   progress   is   affected   by   the   laborious resource mobilization for the initiative, which is funded essentially through voluntary contributions. Agreement on  the  use  of  IMF  gold  holdings  to  help  finance  the Fund’s    participation    was    reached    at    the    Annual Meetings    of    the    Bretton    Woods    institutions    in September  1999.  Subsequently,  a  series  of  off-market transactions  were  conducted  and  completed  by  early April  2000,  raising  about  $3  billion  which  has  been invested  to  generate  income  for  the  initiative.  Pledges of  substantial  new  bilateral  contributions  to  IMF  and World  Bank  HIPC  trust  funds  have  also  been  made.¹² Yet full financing of the initiative is not yet assured. 21. Resources  are  required  to  meet  not  only  the  full debt-relief costs of IMF and the World Bank/International    Development    Association    (IDA) over  the  expected  duration  of  the  HIPC  scheme,  but also   those   of   other   multilateral   institutions   holding claims   on   HIPCs,   some   of   which   are   encountering difficulties  in  contributing  their  share  of  HIPC  relief. Concerns   have   been   expressed   by   some   regional development   banks   and   other   financial   institutions about   the   impact   of   the   HIPC   Initiative   on   their financial  integrity  and  long-term  sustainability,  and  on the borrowing  costs  for  non-HIPC  developing  member countries.  Agreements  concerning  the  participation  in the HIPC Initiative of the Inter-American Development Bank  (IDB)  and  other  regional  institutions  in  Latin America   and   the   Caribbean,   and   of   the    African Development  Bank  were  reached  only  a  few  months ago. 22.    If  funding  uncertainties  remain,  there  is  first  the risk   of  delay  in  individual  cases.   For   instance,   the 7 A/55/422 finalization  of  the  new  debt-relief  package  for  Bolivia was   dependent   on   the   participation   of   IDB,   the country’s  largest   creditor,  as   well  as   other  regional financial   institutions.   Similarly,   donor   pledges   that remained   to   be   secured   under   the   IDB   financing framework   agreed   in   June   2000   have   held   up   the release of IMF interim assistance to Honduras. 23. More  generally,  if  resource  shortfalls  persist,  if seeking  assurance  on  the  participation  of  all  creditors before     the     finalization     of     debt-relief     packages continues  to  be  a  lengthy  and  difficult  process,  and  if country   cases   in   consequence   cannot   be   brought forward  to  the  decision  point,  then  the  initiative  risks slowing  down  to  a  halt.  A  shortfall  in  resources  could emerge    as    soon    as    late    2000,    IMF’s    continued participation,  for  example,  not  being  assured  beyond this date.¹³ 24. The  link  between  poverty  alleviation  and  debt relief under the enhanced HIPC framework raises some fundamental  questions.  The  original  objective  of  the HIPC   Initiative   was   to   provide   a   clear   exit   from unsustainable  debt  burdens,  while  under  the  enhanced framework   poverty    reduction    has    been    added    as another  major  objective.  However,  it  remains  an  open question  whether  the  mechanisms  foreseen  under  the new framework can fulfil both these aspirations. There can  be  little  doubt  that  HIPC  assistance  can  have  an important  role  to  play  in  improving  social  spending. However,  there  is  a  danger  that  the  current  approach concentrates   too   much   on   public   social   spending programmes,  diverting  attention  from  the  fundamental task of raising the level and productivity of investment needed   to   achieve   the   economic   growth   that   is   a prerequisite of sustained reductions in poverty.¹⁴ 25. Some  light  can  be  shed  on  the  latter  issue  by recent  estimates  of  the  United  Nations  Conference  on Trade  and  Development  (UNCTAD)  secretariat  for  the external financing requirements of sub-Saharan Africa. According to these estimates, there is a need to double the   existing   level   of   official   financing   in   order   to sustain  a  growth  rate  of  6  per  cent.  This  would  mean raising  the  net  official  capital  inflows  by  about  7  per cent of the combined gross domestic product (GDP) of the countries in the region. On the other hand, principal repayments  and  interest  payments  on  official  debt  by these  countries  amounted  to  just  under  3  per  cent  of their combined GDP in the past five years. This means that  if  countries  in  sub-Saharan  Africa  were  all  to  be brought  under  the  HIPC  framework  and  granted  full and immediate relief on their  official debt, the  amount thus  released  would  be  less  than  half  of  the  external financing requirement for achieving  the rate  of  growth needed.¹⁵  Certainly,  for  HIPC  countries  alone,  in  sub- Saharan  Africa  and  elsewhere,  the  external  financing requirements  in  relation  to  GDP  could  be  expected  to be  greater  since  many  of  them  have  lower  domestic savings  rates  and  private  capital  inflows.  On  the  other hand,  the  average  ratio  of  principal  repayments  and interest  payments  on  official  debt  by  HIPC  countries over   the   past   five   years   is   similar   to   that   of   the countries  of  sub-Saharan  Africa,  just  under  3  per  cent of  their  combined  GDP.  It  can  thus  be  estimated  that full  and  immediate  debt  relief  to  HIPC  countries  on their   entire   official   debt   would   release   resources amounting to no  more than approximately one  third  of their additional resource requirements for achieving the growth  needed  to  make  a  dent  in  poverty.  Thus,  the international  community  could  not  rely  on  the  HIPC Initiative   alone   for   poverty   alleviation   even   if   the initiative were to be fully and rapidly implemented. 26. This also points to the importance of additionality in  the  provision  of  resources  for  debt  relief  over  and above  development  aid.  If  participating  countries  and institutions do not ensure genuine additionality of their contributions, debt reduction will not close the resource gap  and   hence   improve   the   prospects   for   sustained poverty  reduction.  This  is  a  serious  risk  in  view  of indications   that   some   donors   are   already   diverting regular  aid resources  to  their  contribution  to  the  HIPC Initiative. 27. It  cannot  yet  be  judged  precisely  from  the  early cases whether HIPC assistance will actually succeed in lowering    debt    burdens    to    agreed    targets    or    in maintaining debt at sustainable levels. Achievement of debt sustainability is a function not only of the amount of  debt  relief  delivered,   but   also   of   the   growth   of export  earnings  and  government  revenue.  A  standard assumption in Enhanced Structural Adjustment Facility (ESAF)/PRGF    projections,    reflected    in    the    debt sustainability  analysis  (DSA)  papers  prepared  for  the HIPC   Initiative,   is   of   steady   robust   export   growth. However,   the   experience   of   the   first   set   of   HIPC countries  shows  that  this  is  not  always  realistic.  For instance,  export  growth  in  the  order  of  6  to  7  per  cent was  originally  projected  for  Uganda  for  1999/00,  but recent  figures  indicate  that  exports  actually  fell,  by around  one  fifth,  during  this  period.  In  the  case  of Guyana,  which  reached  its  first  completion  point  in 8 A/55/422 1999,  qualifying  under  the  fiscal  criterion,  the  ratio  of the  present  value  of  debt  to  government  revenue  was estimated  at  410  per  cent  as  compared  with  a  target ratio  of  no  more  than  280  per  cent.  If  HIPCs  are  to maintain    debt    sustainability    over    time,    then,    in estimating   the   amount   of   debt   relief   needed,   it   is important  to  formulate  realistic  projections  for  export earnings  and  government  revenues,  and  to  allow  for fluctuations  associated  with  the  vulnerability  of  these economies to external shocks. 28. While     the     enhanced     HIPC/PRSP     initiative recognizes  the  importance  of  “ownership”  by  debtor Governments for its success, its design is not consistent with this objective. The poverty reduction objective has been added by creditors and donors without appropriate consultations  with  the  debtors  concerned.  They  also largely  set  the  PRSP  policy  agenda  and  prescribe  the modalities  to  be  followed,  leaving  little  autonomy  to debtor countries. Creditors set the terms and conditions for debt relief,  which tend to  depend  as  much  on  their willingness to provide resources as on the needs of the debtor  countries.  The  ultimate  judgement  on  whether and when poor countries qualify for such relief is in the hands of the Bretton Woods institutions. The enhanced HIPC  scheme  adds  a  further  layer  of  conditionality, which  risks  overwhelming  the  capacities  of  the  debtor country administrations concerned and  may  effectively dilute   “ownership”   and   autonomous   policy-making. The  rationale  for  proliferation  of  conditionality  and cross-conditionality  is  highly  questionable  in  view  of mounting  evidence,  partly  coming  from  the  Bretton Woods  institutions  themselves,  that  this  instrument  is not effective in improving programme performance.¹⁶ 29. Overall,   HIPC   is   a   cumbersome   and   costly process   requiring   extensive   preparations   from   the debtors  concerned.  A  lengthy  consultation  process  is involved  and  a  large  number  of  documents  have  to  be elaborated  and  submitted  for  consideration  by  various bodies    at    the    successive    stages    of    the    process. Moreover, as  HIPCs  move  forward  within the  process, they  experience  a  drawn-out  negotiation  process  that requires   significant   technical   capacity:   there   are   a series  of  Paris  Club  agreements  to  be  negotiated  and these    are    followed    by    bilateral    agreements    with individual  creditors.  All  of  this  places  great  demands on   HIPCs’   scarce   and   already   strained   manpower resources.¹⁷ B.  Non-HIPC debtors 30. There  are  18  least  developed  countries  that  are not  included  in  the  HIPC  category,  and  some  of  them are    considered    severely    or    moderately    indebted according to the World Bank classification.¹⁸ A number of  special  measures  have  been  devised  for  the  least developed  countries  such  as  the  reliance   mainly  on grants in the provision of financing to them. Most least developed countries are IDA-only countries and thus in principle have access to special relief measures such as concessional  rescheduling  in  the  Paris  Club  and  the IDA   Debt   Reduction   Facility   (DRF).   Most   donor countries have also extended ODA debt cancellation to the   least   developed   countries.   However,   the   least developed     countries’     external     debt     burden     has continued   to   grow   over   time.   The   G-8   summit   in Birmingham in May 1998 called on those countries that had  not  already  done  so  to  forgive  least  developed countries’  aid-related  debts  or  take  comparable  action for   least   developed   countries   undertaking   economic reform. 31. Most of  the  debt-distressed  African  countries  are either  among  the  group  of  HIPCs  or  among  the  group of   least   developed   countries.   However,   there   are notable  exceptions  such  as  Algeria  and  Morocco  in North   Africa   (which   are   classified   as   moderately indebted middle-income countries); Gabon and Nigeria (both severely indebted); and Zimbabwe (a  moderately indebted low-income country). A discussion of African debt  problems  thus  cannot  be  confined  to  the  HIPC Initiative or special measures adopted in favour of least developed countries alone. 32. Debt-relief    options    for    low-income    countries included  in  neither  the  HIPC  nor  the  least  developed country category are restricted. Apart from Nigeria and Zimbabwe,    there     are     six    low-income     countries classified as either severely or moderately indebted that belong  to  neither  the  HIPC  nor  the  least  developed country  category.  Moreover,  there  are,  altogether,  nine severely   indebted   middle-income   countries   some   of which  have  similar  external  debt  problems.  Several  of these   countries   (for   example,   Indonesia,   Ecuador, Jordan and Pakistan) are continuing or have re-entered the   process   of   debt   rescheduling   with   Paris   Club creditors over the  past two  years. Indonesia  negotiated a  new  agreement  with  its  official  creditors  in  April 2000,  and  Ecuador  entered  into  new  talks   with  the Paris  Club  in  May  2000.  Pakistan’s  current  agreement 9 A/55/422 with the Paris Club expires at the end of 2000. Nigeria, with  a  huge  debt  burden,  is  also  expected  to  return  to the   Paris   Club   in   the   context   of   a   programme   of economic  revival  that  received  some  IMF  support  in August 2000. 33. Some  of  the  severely  indebted  low-  and  middle- income  countries  have  in  the  past  been  able  to  obtain reduction of their liabilities to commercial banks under the  Brady  Plan.  However,  similar  mechanisms  do  not exist  for  their  official  debts.  HIPCs  apart,  among  the countries  that  have  over  the  recent  past  rescheduled their  debts  with  the  Paris  Club,  it  is  only  the  Russian Federation for which, in the 1996 and 1999 Paris Club agreements,     stock     treatment     and     comprehensive solutions  to  debt  problems  have  been  foreseen.  Some of the debt-distressed low-income  countries  are  “blend countries” eligible for a blend of International Bank for Reconstruction   and   Development   (IBRD)   and   IDA funds,  as  opposed  to  other  low-income  countries  that are   IDA-only   and   have   limited   access   to   private financing.  In  practice  blend  country  status  has  so  far excluded     such     debtor     countries     from     schemes providing   a    writing-down   of   obligations    such    as concessional   reschedulings   from   the   Paris   Club,   or other   concessional   debt-relief   facilities   reserved   for IDA-only countries, such as those covered by the HIPC Initiative   and  the   DRF.   For  such   countries,   official debt-relief   options   have   to   be   seriously   considered, including  reductions  at  least  on  Toronto  terms  or  even the  extending  of  HIPC  Initiative  benefits.  The  same also  applies  in  principle  to  severely  indebted  IBRD- only  middle-income  countries.  Paris  Club  agreements do   as   a   rule   provide   for   debt   conversion,¹⁹   but experience  of  such  programmes  has  been  mixed:  they are  in  general  too  complex  to  implement  effectively and  they  have  budgetary  implications  for  the  debtor countries concerned.²⁰ 34. Special  debt-relief  measures  are  also  needed  to help  countries  affected  by  war  and  natural  disasters. Deferrals  of  payments  recently  granted  in  the  cases  of seriously  affected  countries  following  hurricane  Mitch in  late  1998  and  the  floods  in  Mozambique  in  early 2000,  as  well  as in the  context  of the  Kosovo  crisis  in 1999,  provide  examples  of  a  mechanism  that  could perhaps be employed in other cases as well. C.  Recent conditions in markets for commercial debt 35. While  HIPCs  and  least  developed  countries  draw mainly on official sources for external financing, larger low-income  countries  as  well  as  most  middle-income countries  have  some  access  to  private  capital  markets. In  particular,  bond  issuance  in  international  financial markets  has  come  to  play  an  increasingly  important role  in  recent   years  as   a   source   of  debt   financing. While  in  1980  international  bonds  accounted  for  less than  5  per  cent  of  total  long-term  commercial  debt  of developing  countries,  this  ratio  reached  40  per  cent  at the   end   of   the   1990s.   Bond   financing   is   gaining importance  particularly  as  a  source  of  external  private financing  for  sovereign  borrowers.  Taking  a  sample that  includes  five  major  borrowers  in  Latin  America, plus   five   major   borrowers   in   Asia,²¹   which   jointly account  for  42  per  cent  of  total  developing-country debt, between 1995 and 1998 debt stocks in the form of bond  issues  increased  by  38  per  cent,  while  the  total public  and  publicly  guaranteed  debt  of  these  countries increased  by  only  14  per  cent.  Private   sector   bond issues  have  also  been  rising  rapidly  in  recent  years, now  accounting  for over  20  per  cent  of  the  total  long- term private debt. 36. Following  the  financial  crisis  in  East  Asia,  both the   magnitude   and   terms   of   debt   financing   have undergone substantial changes.  After falling sharply  in 1998,   the   decline   in   net   private   capital   inflows   to developing  and  transition  economies  in  the  form  of debt  continued  in  1999.  The   exposure  of   Bank   for International Settlements (BIS)-reporting banks to such economies fell by 7 per cent in both 1998 and 1999. In 1999,  more  than  50  per  cent  of  the  total  decline  was due to the change in exposure to East Asia. The severe contraction in 1998 reflected the widespread withdrawal   of   lending   facilities   to   countries   in   the region in the aftermath of its financial crisis, including for a while those linked to the financing of trade flows, while the 1999 contraction was influenced by a reduced need for borrowing due to the accumulation of  foreign exchange reserves resulting from trade surpluses. 37. Net    issues    of    international    debt    instruments (money-market  instruments  and  bonds)  by  developing and  transition  economies  rose  slightly  in  1999.  Once again,  issues  were  heavily  concentrated  among  Latin American   borrowers,   and   among   Governments   and State  agencies.  Much  of  new  bond  issuance  in  1999 10 A/55/422 took   place   in   the   second   quarter:    this   bunching reflected  partly  the  bringing  to  the  markets  of  bonds whose    issuance    had    been    postponed    during    the turbulence in international financial markets at the time of  the  Brazilian  crisis.  During  the  remainder  of  1999, net   issues   continued   at   lower   levels   but   issuance accelerated in the first quarter of 2000. Gross issues by Latin  American  borrowers  continued  at  higher  levels than    net    issues    owing    to    substantial    refinancing throughout  the  year.  Elsewhere,  net  issuance  was  low. New announced bond issues in the first quarter of 2000 reached the level of $25 billion, more than 40 per cent of  that  for  1999  as  a  whole.  However,  such  buoyancy will  be  difficult  to  sustain  as  rates  of  interest  increase for major currencies. 38. The  yield  spreads  in  secondary  markets  on  the bonds of emerging-market borrowers began the year at levels  still  reflecting  the  aftermath  of  the  turbulence that  had  followed  the  summer  of  1998.  For  most  of these  economies, the  rest of the  year  was  marked  by  a fall in such spreads, but this movement tended to peter out  in the  first quarter  of  2000.  While  interest  paid  on new  debt  has  stabilized  following  the  sharp  increases experienced after 1997, recent hikes in interest rates in the  major  industrialized  countries  have  pushed  up  the cost  of  issuing  new  debt  and  have  offset,  at  least  in part, the declines in spreads over the past year. D.  Recent debt restructuring agreements 39. In the second half of 1999 and first half of 2000, Pakistan and Ukraine completed new bond restructuring     arrangements.     In     November     1999, Pakistan offered to exchange outstanding eurobonds for a   new   six-year   instrument   with   a   three-year   grace period;  the  offer  was  accepted  by  a  majority  of  the bond    holders.    Ukraine    in   July    1999   reached    an agreement   to   restructure   a   $163   million   eurobond, repaying 20 per cent of the bond in cash and swapping the  remaining  part  into  a  new  three-year  bond.  Again, in   February   2000,   Ukraine   announced   an   offer   to exchange  a  portion  of  its  outstanding  debt  falling  due in  2000-2001  for  new  bonds  with  a  maturity  of  seven years. The offer was accepted by more than 95 per cent of the holders of the outstanding value of debt. 40. The   Russian   Federation   initiated   negotiations with  its  London  Club  creditors  shortly  after  the  onset of  the  financial  crisis,  with  the  objective  of  a  general restructuring, including debt forgiveness, of debt of the former   Union   of   Soviet   Socialist   Republics.   The negotiations  lasted  18  months  mainly  because  the  two sides   found   it   hard   to   agree   on   the   size   of   debt forgiveness.   Eventually,   in   February   2000,   creditor banks  agreed  to  write  off  36.5  per  cent  of  the  face value   of   a   total   of   $31.8   billion   ex-Soviet   debt, equivalent to $10.6 billion, compared  with 40 per  cent forgiveness  requested  by  the  Russian  Federation.  The rest  of  the   ex-Soviet   debt   will   be   restructured   into 10-year  and  30-year  eurobonds  with  a  7-year  grace period. The terms of the eurobond swap are close to the 35  per  cent  discount  that  was  standard  in  the  Brady deals    in    the    1980s    and   1990s.    Over   the    years, commercial bank creditors had, already, in fact, by and large  put  aside  sufficient  reserves  to  write  off  their positions. Moreover, as an outcome of the negotiations, they have gained the security of holding claims against the  Russian  Federation.  From  the  perspective  of  the Russian Government, the deal eased the pressure on the federal   budget,   and   is   expected   to   facilitate   the country’s  return  to  the  international  capital  markets  in 2001. 41. Following  the  approval  in  February  2000  of  an extended   agreement   with   IMF   in   support   of   the country’s economic and financial programme, Indonesia  in  April  2000  concluded  a  new  agreement with   its   official   creditors   to   reschedule   principal repayments falling due over the period up to the end of March 2002. It obtained slightly more favourable terms (a slightly longer consolidation period, longer maturity for  non-concessional  debts,  a  longer  grace  period  for ODA    debts)    than    in    the    previous    agreement    of September 1998. Non-concessional debt was rescheduled  over  15  years,  including  3  years  of  grace, at market interest rates and with a graduated repayment schedule.  ODA  debts  were  rescheduled  over  20  years including 7 years of grace. The agreement also contains a clause providing  for debt conversion  of  up  to  10  per cent of concerned outstanding credits. 42. An  important  change  in  the  stock  of  developing- country   debt   available   for  trading  in  the   secondary market  is  the  considerable  decline  in  the  share  of  the Brady  bonds.  The  trend  of  retiring  outstanding  Brady bonds through buy-back and exchange operations²² had started in 1996, and after a slowdown during the Asian crisis,  it  picked  up  momentum  in  1999.  Five  middle- income    countries    (Argentina,    Brazil,    Mexico,    the Philippines and  Uruguay) retired  $6.8 billion  of  Brady bonds  through  discounted  exchanges  and  open-market 11 A/55/422 debt     buy-backs.²³     Bond     exchanges     began     with relatively small amounts, but more recently some major transactions   took   place.   In   June   2000,   Argentina exchanged  $3.3  billion  worth  of  Brady  bonds  for  $2.4 billion   in   15-year   eurobonds.   Following   an   earlier modest    exchange,    in    August    Brazil    successfully completed an exchange of $5.22 billion of Brady bonds for  $5.16  billion  of  40-year  callable,  unsecured  global bonds.  This  is  the  largest-ever  emerging-market  bond exchange, and at one of the longest maturities achieved by   an   emerging-market   sovereign.   The   transaction freed  $311  million  in  United  States  Treasury  bonds  as collateral   and  resulted  in   substantial   savings  in   the present value of interest and repayments. 43. From  mid-1999,  Ecuador  started  having  serious difficulties  in  making  interest  payments  on  its  Brady bonds.   As   rolling   over   maturities   would   not   have provided a solution, the country sought a large amount of  debt  reduction  by  offering  an  exchange  for  global bonds   issued   at   market   rates,   but   with   a   20-year maturity   period,   which   was   rejected   by   the   bond holders.   After   a   number   of   failed   attempts,   bond holders   accepted   in   mid-August   Ecuador’s   offer   to exchange  $6.65  billion  in  defaulted  Brady  bonds  for 30-year  global  bonds  at  a  40  per  cent  reduction  in principal. E.  Financial crises and debt in emerging markets 1.  East Asia 44. The crisis in East  Asia has resulted in significant changes   in   the   debt   profile   of   the   countries   most affected,  namely,  Indonesia,  the  Republic  of  Korea, Malaysia, the Philippines and Thailand. This is true not so  much  for  their  overall  external  indebtedness  as  for the  maturity  structure  of  their  debt  and  its  distribution between private and public sectors. More fundamentally,  external  debt-servicing  difficulties  and currency turmoil led to  sharp  increases  in  defaults  and non-performing   loans   (NPLs)   in   the   private   sector, including both financial and non-financial firms.  As in almost every major financial crisis in emerging markets and elsewhere, management and resolution of the crisis in East  Asia have necessitated  massive intervention by the   public   sector   with   attendant   consequences   for public indebtedness and fiscal balances. 45. Commercial   loans   have   traditionally   been   the main  source  of  external  debt-financing  in  the  region, although  Indonesia  has  a  relatively  important  amount of  official  concessional  finance.  A  large  proportion  of external debt of the East Asian  countries  was  owed  by private financial and non-financial firms rather than by the public sector. Many of these firms were driven into serious   financial   difficulties   and   bankruptcy   by   the collapse  of  the  currencies  and  hikes  in  interest  rates, even  though  initially  most  of  them  had  been  solvent. However,  despite  the  sharp  increases  in  bankruptcy  of private debtors, the overall external indebtedness of the countries  concerned  has  barely  changed  over  the  past two years. For instance, the recorded total external debt stock  of  these  countries  fell  by  a  little  over  1  per  cent in   1999   compared   with   the   previous   year,   and   the decline  was  due  to  repayment  of  existing  debt  rather than   writing-off   of   the   unpayable   debt   of   bankrupt private  firms.  This  anomaly  reflects  the  absence  of effective,     speedy     and     equitable     debt     work-out mechanisms  for  dealing  with  international  claims  and obligations among private agents. 46. However,  there  has  been  considerable  variation among  the  individual  countries  regarding  changes  in their     external     indebtedness,     reflecting     disparate movements  in  their  incomes  as  well  as  differences  in the  extent  of  debt  repayment  after  the  outbreak  of  the crisis. Thus, the  Republic  of  Korea’s  classification  has been  raised  by  the  World  Bank  from  a  “moderately indebted”  to  a  “less  indebted”  middle-income  country, while Indonesia has been downgraded to the status of a “severely   indebted”   low-income   country.   The   other three  countries  most  affected  by  the  crisis  (Malaysia, the    Philippines    and    Thailand)    have    remained    as moderately indebted middle-income countries. 47. The  structure of the  East  Asian external debt  has shown   some   improvement   owing   to   a   widespread lengthening of maturities: for the  majority of countries with  large  borrowings  from  banks,  the  proportion  of their  exposure  with  a  residual  maturity  of  at  least  one year  was  about  60  per  cent  at  the  end  of  1997  but  by early 2000 this figure had fallen to 50 per cent or lower for countries other than Republic of Korea and Taiwan Province  of  China.²⁴  International  reserves  have  also been  rebuilt, thus  enhancing  the  ability  to  service  debt and  absorb  external  shocks.  Reductions  in  short-term indebtedness  as  well  as  the  build-up  of  reserves  have been   achieved   at   the   expense   of   massive   cuts   in 12 A/55/422 imports,   deep   recession   and   mounting   social   costs associated with loss of jobs and incomes.²⁵ 48. Gross    public    debt    (domestic    and    external) increased almost fourfold in Indonesia, the Republic of Korea and Thailand over the period 1996-1999 whereas the increase  was  more  moderate  in  Malaysia  (some  44 per   cent).²⁶   These   figures   include   public   borrowing from   multilateral   financial   institutions   and   creditor countries  as  part  of  international  rescue  packages  put together in response to debt-servicing difficulties. They do  not  include  contingency  claims  that  resulted  from debt  restructuring  operations  when  Governments  were obliged   to   provide   guarantees    for    non-guaranteed private external debt, as, for instance,  was the case for the  Republic  of  Korea  in  respect  of  its  restructuring package  of  January  1998.  The  fact  that  the  overall stock  of  external  debt  of  the  crisis-stricken  countries remains unchanged,  means that  a  greater  proportion of such  debt  is  now  accounted  for  by  the  public  sector, even  excluding  contingent  claims.  This  is  consistent with  the  changes  in  the  overall  pattern  of  private  debt flows  to  emerging  markets  after  the  East  Asian  crisis when   non-guaranteed   borrowing   almost   disappeared while  public  and   publicly   guaranteed  debt   shot   up, largely as a result of the socialization of private debt.²⁷ 49. The    increase    in    public    domestic    debt    was particularly sharp in Indonesia; there had been virtually no domestic public debt in that  country  in  1996,  but it rose  sharply  after  the  crisis,  reaching  $53  billion  in 1999. The increase was also sizeable in the Republic of Korea and Thailand where the stock of public debt had risen  from  some  $7  billion  in  1996  to  $15  and  $24 billion respectively in  1999.²⁸ These  increases resulted from  domestic  rescue  packages  as  well  as  mounting fiscal   deficits   that   had   emerged   with   the   onset   of recession and the hike in interest rates.²⁹ A comparison with  the  debt  crisis  of  the  1980s  shows  that  not  only was  the  external  debt  accumulation in  East  Asia  far  in excess of that in Latin America, but it also gave rise to a  much larger amount of internal lending.³⁰ Resolution of   the   domestic   debt    burden    constitutes   a    more important problem for most countries in the region than the   servicing   of   external   debt.   In   this   sense,   the external    financial    crisis    created    a    domestic    debt overhang    in    the    private    sector    whose    resolution requires considerable public intervention. 50. Countries  suffering  from  increased  defaults  and NPLs have adopted different strategies for intervention in  financial  and  corporate  restructuring.³¹  Moreover, restoring  solvency  has  required  financial  engineering on   both   the   asset   and   liability   side   of   the   bank’s balance  sheet. The losses  created  by  revaluing  the  bad loans  on  the  asset  side  had  to  be  covered  by  injecting new capital. The instruments used in rescue operations have   differed   among   countries;   but   in   general,   the recapitalization  cost  is  estimated  to  have  been  large, reaching   $50   billion   in   Indonesia,   $33   billion   in Thailand  and  $26  billion  in  the  Republic  of  Korea.³² The specialized agencies  created  to  take  over  bad  debt have attempted either to collect it from the borrower or to  take  possession  of  the  underlying  assets  in  order  to realize    their    value    through    sales    in    the    market. However,  the  absence  of  modern  bankruptcy  laws  in many    countries    impeded    the    rapid    transfer    of ownership  of  the  underlying  collateral  to  creditors  or the specialized agencies.³³ While the Republic of Korea and  Malaysia  have  progressed  further  than  the  other countries  in  the  resolution  of  bad  domestic  loans,  the process is far from complete, suggesting that economic recovery may be more fragile than it appears. 51. In   assessing   the   sustainability   of   the   current recovery  in  East  Asia,  it  is  also  important  to  note  that so     far     global     conditions     have     generally     been favourable.  In  particular,  the  strength  of  United  States growth  has  been  an  important  factor  in  the  expansion of    exports    from    the    region.    However,    external payments  in  the  region  are  moving  towards  deficits, and   maintaining   imports   may   depend   on   renewed capital  inflows.  Moreover,  a  large  amount  of  external debt  has  been  rolled  over  with  maturity  falling  due over  two  years.  Therefore,  rising  foreign  interest  rates could pose a dilemma: attracting foreign capital  would call  for  higher  domestic  interest  rates  which,  in  turn, could stifle growth and aggravate the difficulties of the banking  system, adding to  the  associated  pressures  for increases in domestic public debt. 2.  The Russian Federation 52. The   Russian   Government,   for   the   purpose   of maintaining international investor confidence, has been distinguishing   between   debts   taken   over   from   the ex-Soviet Union and those incurred subsequently. Total foreign  currency-denominated  Russian  debt  amounted to $148 billion  at the  end of 1999, about  two thirds  of which   had   been   inherited   from   the   former   Soviet Union.³⁴  The  remaining  one  third  of  foreign  debt  has been   contracted   since   the   founding   of   the   Russian Federation   in   1992.   The   ex-Soviet   debt   has   been 13 A/55/422 rescheduled  a  number  of  times,  while  greater  efforts were  made  to  service  the  Russian  Federation  debt  in full  and  on  time  until  the  financial  crisis  of  August 1998  which  was  followed  by  a  restructuring  of  the Government’s short-term external obligations. 53. By  world  standards,  the  Russian  foreign  debt-to- GDP  ratio  appears  relatively   modest,  and  the  debt- service burden manageable. Total debt was less than 60 per cent of GDP before the de facto devaluation of the ruble  in  August  1998.  Although  the  ratio  of  debt  to GDP subsequently underwent a sharp increase, at some 70  per  cent  of  projected  GDP  in  2000,³⁵  it  is  still moderate  compared  with  that  of  many  debt-distressed developing  countries.  However,  given  the  ineffective tax  collection  and  massive  capital  outflows  estimated at    more   than    $20   billion    annually,³⁶    the    central Government  has  found  it  difficult  to  generate  enough revenues  and  foreign  currency  to  meet  debt  service. The  debt-service  burden  was  alleviated  somewhat  in the  latter   half   of   1999   by   the   improvement   of   the economic situation which has been mainly the result of high  oil  prices  and  of  the  devaluation  of  the  ruble  but also  of  improved  tax  collection  and  reduced  capital outflow. The improvement of the payments position  of the Russian  Federation  has continued  in 2000  with  the strengthening  of  oil  prices.  This  is  manifested  in  a sizeable   trade   surplus   and   rising   foreign   exchange reserves.    However,    a    number    of    structural    and institutional shortcomings that led to the 1998 crisis are still present. 3.  Latin America 54. The    economic    situation    in    Latin    America deteriorated  further in 1999  as  the  region  continued  to suffer  from  the  impact  of  the  international  financial crises  for  a  second  consecutive  year,  and  economic downturn  deepened  in  many  countries  in  the  wake  of the   Russian   crisis.   Aggregate   output   of   the   region stagnated for the first time since 1990, after growth had already  fallen  to  less  than   2  per   cent   in   1998.   As pressures    on    currencies    mounted,    there    was    a movement   towards   greater   flexibility   of   exchange rates.   In    general,    the    access    of    Latin    American countries  to  external  financing  has  been  less  affected by  recent  events  than  that  of  East   Asian  countries. While   the   latter   resorted   to   external   surpluses   to finance capital outflows, in Latin  America there  was  a substantial   deficit   on   current   account,   financed   by capital   inflows   through   various   channels,   including FDI,  through  which  sharp  cuts  in  domestic  absorption and  activity  were  thereby  averted.  However,  for  the countries  worst  affected  such  as  Ecuador,  Colombia and    Venezuela,    access     to     international     markets remained   restricted.   Moreover   Argentina’s   currency regime  was  subjected  during  1999  to  pressures  linked, inter  alia,  to  a  severe  recession  and  shifting  external perceptions of creditworthiness. 55. The   difference   in   performance   between   Brazil and Argentina provides a useful contrast for comparing alternative  policy  approaches.  Until  the  beginning  of 1999,   policies   in   both   countries   were   designed   to defend   exchange-rate   regimes   through   high   interest rates and fiscal restraint. High interest rates had caused structural imbalances as the interest cost of outstanding government   debt   more   than   offset   primary   budget surpluses,  and  the  increased  servicing  costs  of  foreign debt  offset  improvements  in  export  performance.  As  a result, both countries experienced a progressive loss of international  investor  confidence  and  severe  pressures on their external payments positions. 56. In  Brazil,  since  most  foreign  investors  and  local banks had been expecting the exchange-rate adjustment, capital outflows after the suspension of the peg  were not  substantial.  Continued privatization  sales to  foreigners,  as  well  as  the  return  of  optimism  due  to increased  competitiveness  and  relaxation  of  policies, produced a recovery of  FDI inflows  and a  swift return to   the   debt   markets.   The   currency   stabilized   and interest  rates  were  steadily  reduced,  providing  a  sharp reduction   in   the   fiscal   deficit   and   improvement   in external  debt  servicing.  The  economy  grew  by  about 1 per  cent  in  1999,  a  much  higher  rate  than  generally forecasted,  and  registered  an  annual  growth  rate  of more  than  3  per  cent  in  the  first  quarter  of  2000.  In contrast  to  the  growth  of  Brazil,  Argentina’s  growth has   been   below   expectations   after   the   successful defence of its dollar peg, suggesting that, under capital flight,  currency  depreciations  are  less  damaging  than hikes  in  interest  rates,  particularly  when  the  exposure to  currency  risk  in  the  private  sector  is  limited.  In addition to experiencing a sharp reduction in exports to Brazil as a result of the currency adjustment, Argentina was  adversely  affected  by  the  high  real  interest  rates needed    to    support    the    exchange    rate.    Since    the Government  depends  heavily  on  external  financing  to meet  fiscal  deficits,  the  increased  burden  of  external debt has been accompanied by an accentuation of fiscal pressures. 14 A/55/422 57. The   most   severe   financial  difficulties   in   Latin America have been encountered by Ecuador which also suffers from both domestic and external debt problems. In October 1999,  it  became the  first  country  to  default on  Brady  bonds  when  the  Government  announced  its decision to reschedule this debt, deferring payments up to   seven   years   with   a   two-year   grace   period   and reducing   the   interest   rate.   The   dollarization   plan announced in January 2000 and an open capital account effectively  eliminate  the  distinction  between  domestic and     external     debt,     aggravating     the     difficulties associated with loss of confidence. In combination with political  uncertainties,  the  decision  to  default  led  to capital  outflows  of  some  $2.5  billion  in  1999,  about 20 per cent of GDP. These outflows had to be financed through    deflation    and    drawing    on    international reserves.  An  initial  drop  in  exports  together  with  a sharp  depreciation   of  the  currency   led   to   a   further deterioration  in  the  asset  quality  of  an  already  weak financial    system,    generating   a    credit    crunch    and deepening  the  contraction  of  domestic  demand.  Since most  external  debt  is  owed  by  the  public  sector,  the resulting  difficulties  are  as  much  on  the  fiscal  side  as related  to  the  balance  of  payments.  In  addition  to  the need  to  generate  adequate  foreign  exchange  to  meet debt  servicing,  there  is  a  domestic  budgetary  transfer problem   of   the   kind   experienced   by   many   Latin American countries during the 1980s, since a budgetary surplus needs to be generated by net resource transfers from the private sector. F.  Issues in commercial debt work-outs 1.  Financial crises, debt standstill and work-outs 58. Recent   financial   and   international   crises   in   a number  of  developing  and  transition  economies  have shown   that   there   are   considerable   shortcomings   in international  arrangements  for  commercial  debt  work- outs. In particular, the absence of effective mechanisms for  involving  private  creditors  in  the  prevention  and resolution  of  crises  has  not  only  meant  that  liquidity crises   all   too   frequently   develop   into   widespread defaults and  bankruptcies, but  also  resulted  in  unequal and unfair distribution of the burden of crisis resolution between  debtors  and  creditors  as  well  as  among  the creditors themselves. 59. After    the    East    Asian    crisis,    it    has    been increasingly suggested that an effective way of dealing with the rapid  exit  of  creditors  and  speculative  attacks on currencies would entail recourse to the principles of orderly  debt  work-outs  along  the  lines  of  the  national bankruptcy     legislation     of     some     major     creditor countries,  particularly  chapter  11  of  the  United  States Bankruptcy  Code.  The  application  of  such  principles could end the anomalous situation whereby debtors are judged  de  facto  bankrupt  without  benefiting  from  the financial protection and relief that  would accompany a de  jure  bankruptcy  in  major  industrialized  countries. These principles are especially relevant to international private  debt  crises  resulting  from  liquidity  problems because    they    are    designed    primarily    to    address financial   restructuring   rather   than   liquidation.   They allow a temporary standstill on debt servicing based on recognition  that  an  asset  grab  race  by  the  creditors  is detrimental to the debtor as well as to the creditors as a group. They provide the debtor with access to working capital   needed   to   carry   out   its   operations,   while granting   seniority   status   to   new   debt.   Finally,   they involve  reorganization  of  assets  and  liabilities  of  the debtor,  including  extension  of  maturities,  and,  where needed, debt-equity conversion and debt write-off. 60. Naturally, the application of bankruptcy principles  to  cross-border  debt  involves  a  number  of complex   issues.   The   most   contentious   issue   is   the standstill   mechanism.   Clearly,   to   have   the   desired effect  on  currency  stability,  debt  standstills  should  be accompanied   by   temporary   exchange   controls   over capital-account   transactions   by   residents   and   non- residents alike. 61. A possible drawback of such a standstill is that it may  undermine  confidence  further,  accelerate  capital flight through informal channels and deepen contagion. However,   the   historical   record   does   not   necessarily support   this   argument.   In   this   respect,   the   recent Malaysian experience with standstill holds some useful lessons.  It  was  temporary  and  selective,  and  highly successful in bringing exchange-rate stability, reducing interest  rates  and  preventing  a  deepening  of  recession. When the controls were lifted in September 1999, there was  only  a  limited  amount  of  capital  outflow,  and  the country  soon  enjoyed  an  upgrading  of  its  credit  rating and  normalized  its  relations  with  international  capital markets.³⁷  Moreover,  other  evidence  does  not  indicate that standstills have a long-term adverse impact on the access to international financial markets of the country imposing them.³⁸ 62. The  international  intervention  in  financial  crises has  indeed  involved  eventual  recourse  to  standstills  as 15 A/55/422 well  as debt  work-outs.  For instance, during  the  Asian crisis,   the   Republic   of   Korea   creditors   eventually agreed  to  a  standstill  and  rollover  of  short-term  loans. However,  for  a  number  of  reasons  such  arrangements did  not  attain  the  objectives  sought  by  orderly  debt work-out  procedures.  First,  they  invariably  came  after the collapse of the currencies and hike in interest rates, thereby   failing   to   prevent   widespread   insolvencies. Thus “many of those who have analysed (the Republic of) Korea’s 1997-1998 crisis contend that (the Republic of)   Korea   could   have   solved   its   liquidity   problems sooner had a standstill  mechanism been in place  at the time  it  requested  IMF  assistance”.³⁹  Second,  official lending    in    such    work-out    exercises    is    typically designed  primarily  to  bail  out  creditors  rather  than  to provide balance-of-payments support to enable countries  to  finance  current  operations.  Third,  in  the restructuring  process,  Governments  are  usually  forced to  assume  private  debt.  Finally,  creditors  often  tend  to secure highly favourable terms on restructured debt. 2.  Bond financing and reorganization 63. In view of the rapid increase in the share of bonds in   external   financing  of   developing   countries,   bond restructuring has gained added importance, particularly for   sovereign   borrowers.   The   notion   that   sovereign bonds    as    well    as    bank    loans    may    need    to    be restructured  has  only  very  recently  been  accepted  by the international community (though not necessarily by all   segments   of   financial   markets):   most   sovereign debtors  that  had  issued  bonds  in  the  1970s  and  1980s remained  current  on  such  obligations  during  the  debt crisis     of     the 1980s, while     rescheduling and restructuring   their   commercial   bank   debt.   As   noted above,  Ecuador,  Pakistan  and  Ukraine  are  three  recent examples of countries involved in bond reorganizations. In the case of the latter  two  countries, this involved only the extension of principal maturities rather  than  relief  since  reorganization  was  undertaken on a mark-to-market basis. 64. As   for   commercial   bank   debt,   there   are   no established   mechanisms   for   restructuring   sovereign bonds.  Moreover, there  are  serious  difficulties  in  bond restructuring compared with rescheduling and restructuring   of   commercial   bank   debt,   particularly syndicated     credits.⁴⁰     First     of     all,     there     is     a communication  problem  between  the  bond  issuer  and holders.  In  general,  bond  holders  are  anonymous  and include   a   variety   of   investors,   both   individual   and institutional.   This   problem   is   further   aggravated   by trading   in   secondary   markets.   This   was   less   of   a problem    for    Pakistan    where    bond    holding    was concentrated   than   for   Ukraine   where   it   was   spread among  numerous  retail  holders.  Moreover,  there  are legal    impediments    to    establishing    communication mechanisms  between  issuers  and  holders  as  well  as  to dealing   with   non-participating   holders,   particularly under the laws of New York State or of England where most   sovereign   bonds   have   been   issued.   Current arrangements also encourage hold-outs since sovereign issuers   are   often   required   to   include   a   waiver   of sovereign immunity as part of the terms and conditions of the bonds. Thus, sovereign debtors do not enjoy the protection accorded to private debtors under insolvency procedures   which   tend   to   overrule   hold-outs   and eliminate free riders. 65. There are a number of proposals for dealing  with these   problems   and   providing   a   basis   for   orderly sovereign    bond    work-outs.    These    include    adding provisions to international bond contracts for automatic triggers  or  changes  in  payment  conditions;  majority action   and   collective   representation   clauses   to   deal with  hold-out  creditors  and  secure  binding  agreements for   all   bond   holders;   and   sharing   clauses   to   deter litigation.  At  present,  an  important  main  concern  of developing-country borrowers is that inclusion of  such clauses  may  reduce  their  access  to  financial  markets and  raise  the  cost  of  bond  financing  by  giving  wrong signals to the market. Overcoming these problems may require  an  international  mandate  for  introduction  of such   clauses   into   all   international   bond   contracts, including     those     issued     by     major     industrialized countries.  While  a  number  of  industrialized  countries have  in  fact  already  started using  such  clauses  in  their bond contracts, this practice is far from universal. 3.  Comparability and burden-sharing between private and official creditors 66. An important issue that has emerged from official interventions   in   emerging   market   crises   and   debt negotiations   is   the   question   of   “comparability”   and “burden-sharing”   between   the   private   and   official creditors.    Official    bail-out    operations    in    recent emerging    market    crises    have    increasingly    been criticized  as  risking  public  money  to  bail  out  private creditors,  and  suggestions  have  been  made  that  public assistance should not be  made available unless debtors obtain    some    relief    from    private    creditors.    More 16 A/55/422 recently,  Paris  Club  creditors  advised  Pakistan  to  seek “comparable  treatment”  from  its  private  bond  holders by  rescheduling  its  eurobond   obligations.   A   similar request was subsequently put forward by the Paris Club to Nigeria. In this case, official creditors appear to have demanded  that  commercial  counterparts  such  as  bond holders be included in a final settlement and accept the terms  of  a  restructuring  prior  to  the  conclusion  of  a Paris Club agreement. 67. An equally important question is whether burden- sharing should be symmetrical when official negotiations are preceded by private creditor agreements.     Some     private     creditors     have     been challenging   the   “fairness”   of   the   current   burden- sharing implicit in commercial and  official  debt  work- outs,  pointing  out  that  official  creditors  as  compared with private creditors do not show matching generosity in     debt     restructuring.     This     issue     of     “reverse comparability”  is  likely  to  arise  in  future  official  debt negotiations.  As  noted  above,  the  Russian  Federation has obtained a large amount of debt reduction  from  its London    Club    creditors,    and    the    expectations    of commercial   creditors   and   the   Russian   Government appear   to   be   that   the   next   round   of   Paris   Club negotiations  should  match  the  debt  reduction  accorded by    private    creditors.    Again,    private    creditors    of Ecuador   have   agreed   to   a   deal   before   its   official creditors,  and  its  Paris  Club  negotiations  are  likely  to involve the question of reverse comparability. 68. The  emphasis  on  burden-sharing  and  comparable treatment    between    private    and    official    creditors constitutes  a  major  advance  over  the  debt  strategies adopted  during  the  1980s  as  well  as  the  more  recent emerging-market  crises  when  official  intervention  in debt  crises  was  designed  primarily  to  keep  sovereign debtors  current  on  debt  servicing  to  private  creditors, and  when  the  seniority  accorded  to  multilateral  debt went  unchallenged.  However,  it  should  be  added  that the    emphasis    on    burden-sharing    among    creditors should not overshadow the more important question of equitable treatment of debtors and creditors. III. International policy conclusions 69. The  analysis  above  shows  that  there  are  serious shortcomings  in  the  international  approach  to  the  debt problems  of  developing  countries  and  economies  in transition. Overcoming these difficulties would call for action  on  three  fronts:  the  HIPC  Initiative,  the  official debt of non-HIPC countries, and commercial debt. 70. The   HIPC   Initiative   has   received   considerable support     in     the     international     community     as     a comprehensive  and  coordinated  approach  based  on  a recognition  of  the  need  to  reach  a  sustainable  debt position  for  the  countries  concerned  in  the  context  of growth   and   development.   However,   so   far   it   has progressed only in incremental steps, and even with the acceleration  up  to  the  end  of  2000  in  the  number  of countries  benefiting  from  agreed  debt  reduction,  the initiative  is  unlikely  to  reach  the  objectives  set.  The problems associated with its design and implementation  suggest  that  even  the  enhanced  HIPC Initiative  does  not  provide  an  adequate  response  to HIPCs’ debt problems. A bolder approach  will have to be  taken  to  remove  the  debt  overhang  of  the  world’s poorest nations. 71. This  new  approach  might  take  the  form  of  an objective    and    comprehensive    assessment    by    an independent panel of  experts  not  unduly influenced  by creditor   interests,   while   the   existing   processes   are under  way.  Such  an  assessment,  which  should  not  be restricted to HIPC countries but should also encompass other  debt-distressed  low-income  and  middle-income countries,  should  naturally  include  debt  sustainability, eligibility   for   debt   reduction,   the   amount   of   debt reduction     needed,     conditionality,     and     modalities regarding  the  provision  of  necessary  funds,  including those for the multilateral financial institutions affected. There  should  also  be  a  commitment  on  the  part  of creditors    to    implementing    fully    and    swiftly    any recommendation of this panel regarding the writing-off of  unpayable  debt.  Moreover,  in  future,  HIPCs  and other countries covered by the panel’s recommendations     should     benefit     from     new     aid resources   in   grant   form   or   on   highly   concessional terms,  in  order  to  avoid  the  renewed  build-up  of  an unsustainable debt burden. 72. There should also be an immediate suspension of the   debt-service   payments   of   all   HIPCs,   with   no consequent     additional     interest     obligations     being incurred until the panel has made its recommendations and  agreement  has  been  reached  on  reduction  of  their debts. This suspension should also be extended to non- HIPC  countries  declared  eligible  for  debt  relief  by  the panel  during  the  period  until  agreements  on  the  debt reduction in their case are reached. 17 A/55/422 73. It     is     notable     that     a     recent     independent commission   of   experts   from   different   schools   of thought  appointed  by  the  United  States  Congress,  the Meltzer  Commission,  has  made  proposals  that  go  well beyond    the    scope    of    the    HIPC    Initiative.⁴¹    The Commission agreed unanimously on the desirability of writing  off  all  multilateral  claims  against  HIPCs  that had  implemented  an  effective  development  strategy.  It also    recommended    that    bilateral    creditors    should similarly write off these countries debts, and that grants rather  than  loan-based  funding  should  be  used  in  the majority of programmes. These specific recommendations    should    not    be    ignored    in    the controversy   over   the   Meltzer   Commission’s   other proposals. 74. The  point  is  not,  of  course,  to  see  full  and  swift debt  relief  as  a  panacea  for  the   deep-seated  policy challenges  facing  these  countries.  It  would,  however, be  one  less  problem  for  their  policy  makers  to  deal with.  Many  of  these countries are  unable to  meet their external  debt-servicing  obligations,  and  for  them  debt relief will simply formally acknowledge a situation that already exists and stop the accumulation of arrears that are unlikely ever to be paid. 75. Reform of the international strategy regarding the official  debt  of  poor  countries  should  also  address  the problems  of  debt-distressed  low-income  countries  that are   not   currently   eligible   for   the   special   treatment accorded   to   the   HIPCs.   Non-HIPC   least   developed countries     and     other     debt-distressed     low-income countries  should  not  be  excluded  from  consideration under   the   HIPC   Initiative.   Indeed,   an   independent assessment   of   debt   sustainability   and   eligibility   is likely  to  bring   many  such  countries  into  the  group needing   rapid   and   sizeable   relief   on   bilateral   and multilateral   debt.   Some   of   the    severely   indebted middle-income    countries    may    also    require    such arrangements, and as a first step it may be desirable to extend   bilateral   ODA   cancellation   and   concessional rescheduling of other official debts to such countries. 76. It  is  also  important  to  recognize  that  countries that are seriously affected by  war  and  natural  disasters and  that  face  serious  problems  of  reconstruction  and recovery require debt relief as well as urgent assistance regardless   of   their   longer-term   prospects   and   debt profiles. Various measures could be envisaged, ranging from   automatic   standstill   and   rollover   for   countries brought  under  the  United  Nations  emergency  rules  to outright cancellation of debts. 77. For   commercial   debt,   establishing   orderly   and equitable work-out procedures with explicit responsibilities   of   creditors   and   debtors   and   well- defined roles for public and private sectors remains the most   important   step   that   should   be   taken.   Serious consideration should be given to a number of different proposals   that   have   recently   been   advanced   in   this context:     firstly,     the     introduction     of     emergency standstills which would be mandated by IMF members, as  proposed  by  the  Canadian  Government;⁴²  secondly, the  introduction  of  arrangements  setting  the  terms  for pre-qualification for unilateral standstill decisions; and thirdly,  empowering  an  independent  panel  to  sanction such decisions ex post facto in a  way  analogous  to  the procedures   of   World   Trade   Organization   safeguard provisions   that   allow   countries   to   take   emergency actions.  Again,  consideration  should  be  given  to  the establishment   of   an   international   mandate   for   the introduction    of    covenants    in    international    bond contracts  enabling  debtors  to  alter  payment  conditions when faced with severe financial difficulties. 78. Given  the  volatility  of  private  capital  flows  and increased  frequency  of  liquidity  problems  in  emerging markets, provision of international liquidity, as  well as temporary   standstills,   should   constitute   an   essential component    of    an    effective    international    financial architecture.  While  the  recently  adopted  practice  of lending into arrears by multilateral financial institutions  is  a  welcome  development,  it  is  important to  ensure  that  such  lending  would  not  simply  bail  out private   creditors,   but   actually   help   the   debtors   to finance their current-account transactions. Furthermore,    conditions    attached    to    such    lending should   not   interfere   with   the   proper   jurisdiction   of sovereign   Governments,   and   should   be   confined   to macroeconomic and financial variables. Notes ¹The debtor countries included in this analysis are the low- and middle-income countries (developing countries and countries in transition) covered by the World Bank Debtor Reporting System (DRS). The main data sources are the World Bank, Global Development Finance 2000 (Washington, D.C., 2000), the joint Bank for International Settlements (BIS)-International Monetary Fund (IMF)-Organisation for Economic Cooperation and Development (OECD)-World Bank statistics on external debt and IMF, World Economic Outlook, May 2000 (Washington, D.C., 2000). ²IMF, World Economic Outlook, May 2000. 18 A/55/422 ³The most recent amendment to the list is the addition of Gambia in 2000. ⁴For a discussion of the Cologne debt initiative, see also A/54/370, paras. 43-57. ⁵Under the new framework, the present value of debt is to be reduced to a maximum of 150 per cent of exports (as compared with a range of 200-250 per cent under the original framework) and 250 per cent of government revenue (previously 280 per cent). The amount of debt relief to be delivered is determined at the decision point, based on actual data. ⁶Of these, Bolivia, Uganda and Mozambique had already reached the completion point under the original framework. ⁷Cf. World Bank and IMF, “The enhanced initiative for heavily indebted poor countries: review of implementation”, 7 September 2000. ⁸Statement of Group of Seven (G-7) finance ministers and central bank governors, Washington, D.C., 16 April 2000. ⁹G-7 statement, Okinawa, 21 July 2000. ¹⁰Group of Eight (G-8) communiqué Okinawa 2000 (A/55/257-S/2000/76, annex), Okinawa, 23 July 2000. ¹¹Cf. also “Poverty reduction and economic development”, report from G-7 finance ministers to the heads of State and Government, Okinawa, 21 July 2000. ¹²As of end-July 2000, the World Bank HIPC Trust Fund had received close to $2.6 billion in contributions and pledges from over 20 countries. ¹³See “Heavily Indebted Poor Countries Initiative and Poverty Reduction Strategy Papers: progress reports”, memorandum from James D. Wolfensohn and Horst Köhler to members of the International Monetary and Financial Committee and members of the Development Committee, 7 September 2000. ¹⁴See further, for example, Tony Killick, “HIPC II and conditionality: business as before or a new beginning”, paper commissioned by the Commonwealth Secretariat for the policy workshop on debt, HIPC and poverty reduction, London, 17 and 18 July 2000. ¹⁵See UNCTAD, Capital Flows and Growth in Africa (Geneva, UNCTAD 2000) (UNCTAD/GDS/MDPB/7). ¹⁶See Killick, loc. cit. ¹⁷Other debtor countries rescheduling with official creditors encounter similar problems. ¹⁸See World Bank, Global Development Finance 2000. “Debt-distressed” in the following refers to both severely and moderately indebted countries. Afghanistan and the Comoros are classified as severely indebted, while Bangladesh, Cambodia, Equatorial Guinea, Haiti and Samoa are classified as moderately indebted. ¹⁹Debt conversion involves the exchange of debt for another liability or the cancellation of debt in return for an expenditure by the debtor. This includes, for example, the swapping of government debt for equity in privatized enterprises, or for the financing of environmental, developmental and educational schemes. ²⁰See, for example, “Finding solutions to the debt problems of developing countries”, report of the Executive Committee on Economic and Social Affairs of the United Nations, December 1999. ²¹Argentina, Brazil, Chile, Mexico and Venezuela in Latin America; Indonesia, Malaysia, the Philippines, the Republic of Korea and Thailand in Asia. ²²In debt buy-backs, the debtor country takes advantage of the discount in the secondary market to buy back the debt, and the operations are financed either out of foreign exchange reserves or through the issue of new bonds. Exchanges of Brady bonds involve their replacement by new issues of the international bonds before their maturity. ²³See, further, World Bank, Global Development Finance 2000, appendix 2. ²⁴See “Supervisory lessons to be drawn from the Asian crisis”, Basel Committee on Banking Supervision Working Paper, No. 2 (Basel, BIS, June 1999), tables 2 and 5; and BIS, “BIS-consolidated international banking statistics for end-December 1999”, Press Releases. ²⁵For an analysis of the crisis and recovery in East Asia see, UNCTAD, Trade and Development Report, 2000 (United Nations publication, Sales No. E.00.II.D.19), chap. IV. ²⁶See World Bank, East Asia: Recovery and Beyond (Washington, D.C., May 2000), table 5.1. ²⁷See UNCTAD, Trade and Development Report, 1999 (United Nations publication, Sales No. E.99.II.D.1), chart 5.4. ²⁸See World Bank, East Asia: Recovery and Beyond ... ²⁹Ibid., table 5.1 and figure 5.2. ³⁰See UNCTAD, Trade and Development Report, 1998 (United Nations publication, Sales No. E.98.II.D.6), Part one, chap. III, sect. D, p. 71, and table 31. ³¹For different strategies, see UNCTAD, Trade and Development Report, 2000 ..., box 4.2. ³²World Bank, East Asia: Recovery and Beyond ... ³³For a discussion of how these agencies operated, see UNCTAD, Trade and Development Report, 2000 ..., box 4.2. 19 A/55/422 ³⁴IMF, World Economic Outlook, May 2000. ³⁵Ibid. ³⁶IMF, “Capital flight from Russia”, Policy Discussion Paper, June 2000. ³⁷For the rationale, nature and effects of these controls see UNCTAD, Trade and Development Report, 2000 ..., box 4.1. ³⁸As the Deputy Governor of the Bank of England, David Clementi, put it in a recent speech: “... would standstills risk cutting off capital flows to the emerging markets — if you like, killing the goose that lays the golden egg? History offers some clues here. For example, there appears to be no evidence from 1930s experience of defaulting countries having fared worse than non- defaulting countries in terms of subsequent output growth. And looking across a broader sweep of history, some empirical evidence has failed to find any discernibly negative long-term effect of a country’s prior debt-servicing record on the terms or volume of its borrowing.” See BIS Review, 70/2000. ³⁹Ministry of Finance and Economy, Republic of Korea, Group of 20 (G-20) report, Korea’s Crisis Resolution and its Policy Implications, p. 13, December 1999. ⁴⁰On the problems involved in bond restructuring, also see further “Sovereign debtors and their bondholders”, United Nations Institute for Training and Research (UNITAR) training programmes on foreign economic relations, Document No. 1; and A. de la Cruz, “The new international financial architecture. Has 1999 (Ecuador and others) changed anything?”, paper presented to the Debt Management and Financial Analysis System (DMFAS) Conference on Debt Management, April 2000. ⁴¹Report of the International Financial Institution Advisory Commission (Meltzer Commission), March 2000, executive summary and chap. 2. ⁴²Canada, Department of Finance, “Canada’s six-point plan to restore confidence and sustain growth”, September 1998.