Grenada wants to negotiate a debt reduction with all its creditors – private, multilateral and government. Could its radical suggestion work?
Decisions on the small island of Grenada in the eastern Caribbean could influence the way debt problems are dealt with across the world. Having partially defaulted on its huge debt payments in March, Grenada is now proposing that all creditors negotiate a debt reduction. This simple idea is unheard of during debt crises that have shaken the world for the past 30 years.
Grenada had a brief moment of fame in 1983, when a revolution started to build a more equal society. Land reform, social programmes and a good level of revolutionary pathos were the trademarks of that era – until the New Jewel movement began to dismantle itself. The US government under President Ronald Reagan used the opportunity of an internal coup in the Grenadian ruling party and government for a bloody cleansing operation in its backyard.
Ever since, successive Grenadian governments have integrated the island into world markets. The EU gave Grenada privileged access to banana and spice exports, but US pressure through the World Trade Organisation led the EU to cut trade preferences and open markets to banana producers in Central and South America. Small-scale producers in the eastern Caribbean were decimated.
The Grenadian economy was devastated again in 2004 and 2005 when hurricanes Ivan and Emily caused damage costing more than 200% of GDP.
Since the loss of EU export markets, the biggest hard currency earner has been tourism, particularly the cruise ship industry. However, the industry was hit by the financial crisis in 2008, and Grenada and its neighbours suffered severe reductions in external income.
Governments tried to cope with these shocks through foreign loans, but when economic growth could not be restarted quickly, debt skyrocketed. In Grenada, the debt has reached nearly 100% of national income, close to levels in European crisis countries.
In March, Grenada’s government stopped making payments to private creditors. Roughly 40% of the debt is owed to private bondholders, and another 40% to multilateral institutions such as the IMF, World Bank, Caribbean Development Bank and Inter-American Development Bank. The remainder is on the books of governments, including Taiwan, Kuwait and oil-rich neighbour Trinidad and Tobago.
As there is no standard rules-based procedure for resolving sovereign debt crises, the Grenadian finance ministry, which has fewer staff and technical capacities than a treasurer in a medium-sized municipality in the US, has to negotiate with all its creditors in parallel, a tricky process. The bondholders are dispersed all over the world. Multilateral institutions have a policy of not negotiating their claims at all. And while governments sometimes reduce debts, there is no procedure to do so.
To get a fair outcome from the financial and logistical mess, the Grenadian Conference of Churches has proposed that negotiations on reducing the debt should take place with all creditors. This would be a major step forward for Grenada, and for dealing with debt problems elsewhere in the world. The last comprehensive debt reduction deal we know of was the cancellation of much of Germany’s debt in 1953, which resulted in annual debt payments falling to less than 3% of export revenues. Grenada’s payments are more than 20% of export revenues.
The Grenadian churches have proposed that an independent body should assess how sustainable the debt is. Under the current system, the IMF has monopolised such assessments. But the IMF is itself a major creditor, and represents the interests of powerful creditor countries. This makes it inherently biased, seeking to protect its money, and that of others such as western banks. The IMF’s double role as lender and expert has led to absurd assessments by the Washington agency.
The Conference of Churches is inspired by the biblical concept of cancelling debts; a jubilee. Debts do not always have to be paid, even where they have been legitimately contracted. So far, the Grenadian government has reacted positively to the proposal, and has indicated it would like to negotiate with all creditors. An IMF delegation visited the island last week. International support is needed to give Grenada the strength to stick to its course.
If Grenada does stand firm, decisions on this island of 105,000 people could have implications for billions of others. The UN and many renowned economists have proposed the creation of a fair and impartial sovereign debt workout mechanism; a Grenadian debt reduction across all lenders would be a step towards making it happen.
Such a body could be developed along the principles of national insolvency regulations, which protect individuals and companies from protracted crises, and make all lenders comply with debt reductions. The UK government has opposed such a mechanism. In contrast, other governments including Norway, Germany, Argentina and many of the groupings of developing countries, support the idea.
On 1 July, Grenada is due to make payments on debt owed to western governments, including £270,000 to the UK. Grenada is already in default on payments to private creditors; the next step would be for these payments to be suspended, before a full debt conference.
The amounts involved are huge for Grenada and tiny for the lenders. But the stakes are much higher because of the positive example that could be set by fairly dealing with a government debt crisis. It is fear of this precedent that will motivate vested interests to push Grenada into piecemeal debt reductions for a few creditors, leaving others to be paid in full, and the island in a debt crisis for years.
Beyond academic discussions about how debt could actually be dealt with, this is a concrete case of a government that needs support and political backing for a pioneering effort. A successful approach in Grenada could have huge repercussions for achieving debt justice.
(Reproduced from the guardian newspaper in England)