KUNIBERT RAFFER Let Countries Go Bankrupt The Case for Fair and Transparent Debt Arbitration BEITRÄGE/ARTICLES E conomists know that protracted maneuvering does not make unpayable debts paid but increa­ses the debt overhang. So-called phantom debts 1 accumulate, which are economically non-existent as they cannot be recovered, but which make things difficult for everyone. History proves that the impossibility of collecting them has to be faced eventually. The choice is between further delays with damaging effects on debtor economies and an orderly, fair, and quick procedure to cancel un­payable debts, bringing debt service in line with the ability to pay. Such procedures, called insolvency, exist and have been routine for centuries. They are only de­nied to sovereign states, based on the subterfuge that corporate or individual insolvency does not address sovereignty, nor governmental powers. Lega­listically, this is right. Economically though credi­ditors can chose to apply the essence of insolvency procedures to sovereign debtors. In 1876 private creditors used Egyptian insolvency law as the yard­stick to solve Egypt’s debt crisis. The administrator appointed to protect creditor interest, Evelyn Ba­ring, did not apply the»lemon squeezer« approach of today’s Bretton Woods Institutions( BWI s). He lowered, for example, taxes and postal charges, financed expenditures on public health and educa­tion, and encouraged improvements in irrigation. Wages and pensions were paid out in full. After sur­prisingly few years he was economically successful for creditors and the debtor alike. 2 A hard nosed 19 th century capitalists managed this crisis much bet­ter and more quickly than international public sector institutions nowadays. Generally, debtors were trea­ted much more generously in the past, before the BWI s became debt managers. Germany’s London Accord, Indonesia’s solution of 1969–70 , or Poland more recently show that meaningful debt relief can be done quickly if creditors do not oppose it. The legalistic sovereignty argument is right as far as it goes. But the proposal of sovereign debt arbitration modeled on the basic principles of US . Chapter 9 insolvency – first made in 1987 3 – offers a way out. The only successful solution, generally accepted in the case of other debtors, can be easily and immediately applied to countries. Sovereign insolvency can be done. The discussion on international insolvency sub­sided around 1990 , starting again in the late 1990 s, largely due to civil society, especially the Jubilee movement. This renewed interest justifies recapi­tulating the arguments in the light of the present debate. The Essence of Insolvency Insolvency is not an act of mercy but of economic reason, generally recognized as the best way to solve hopeless overindebtedness. After the Asian crash of 1997 (domestic) insolvency procedures were to be improved. For creditors insolvency is part and parcel of lending. It makes them look clo­sely at how their money is spent, denying further loans if the first ones are not put to good use. This fundamental disincentive against misallocation of resources within market economies, by which cre­dit risk becomes relevant, is absent in centrally 1 . cf. Kunibert Raffer,»The Necessity of International Chapter 9 Insolvency Procedures«, in: Eurodad(ed.), Taking Stock of Debt, Creditor Policy in the Face of Debtor Poverty, Brussels 1998 , p. 8 . 2 . cf. Edouard Domen,»Comment un noble étranger libéra le khédive de sa dette – un conte oriental«, in: Choisir(septembre) 1999 , pp. 26 ff. 3 . Kunibert Raffer,»International Debts: A Crisis for Whom?«, in: H.W. Singer& Soumitra Sharma(eds.), Economic Development and World Debt, London& Ba­singstoke: Macmillan 1989 , pp. 51 ff. For details see Kuni­bert Raffer,»Applying Chapter 9 Insolvency to Inter­national Debts: An Economically Efficient Solution with a Human Face«, in: World Development 18 ( 2 )( 1990 ), pp. 301 ff. or papers at http: // mailbox.univie.ac.at / ~rafferk 5 IPG 4/2001 Kunibert Raffer, Let Countries Go Bankrupt. The Case for Fair and Transparent Debt Arbitration 367