ISLAMABAD: The ‘Trade and Development Report 2015’ suggests that the global economy needs a fair and efficient sovereign debt workout mechanism ‘sooner rather than later’.

“Such a mechanism aims not only at facilitating an equitable restructuring of debt that can no longer be serviced according to the original contract, but also helps to prevent financial meltdown in countries facing difficulties servicing their external obligations, according to the United Nations Conference on Trade and Development (UNCTAD) which released its annual publication.

The report says an internationally agreed fair and efficient sovereign debt workout mechanism is of paramount importance to mitigate the damage from financial shocks, restore debt sustainability and reduce the threat of contagion. While bankruptcy laws are an integral part of any healthy market economy at the national level, no counterpart exists at the international level to address sovereign debt crises, it notes.

The report states that the current system of sovereign debt resolution is fragmented and ad hoc.

“This has created a situation in which national governments are left to their own devices to face a multitude of private creditors, some of whom seek to exploit the current vacuum of international rules and action to speculate on sovereign debt, using litigation to extract exorbitant profits.”

By doing so, these non-cooperative actors make sovereign debt restructurings more difficult than they already are, harm other creditors’ interests and undermine the prospects for economic recovery in debtor economies.

The urgency of UNCTAD’s call is justified by the highly fragile state of the global economy: emerging economies — the main contributors to global growth since 2011 — are now facing difficulties, while developed economies are still failing to produce more than lackluster growth performances eight years after the global financial crisis.

This state of fragility is unsurprising in a global economy that continues to exhibit an unhealthy dependence on debt. “During the years of the “great moderation” (1985–2005), global debt levels rose from around $21 trillion in 1984 to $87tr by 2000, and to a staggering $142tr by the end of 2007.

Published in Dawn, October 10th , 2015

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