2.1 A fragmented legal sphere

The HIPC framework occupies a hybrid legal space within an equally amorphous regime of international sovereign debt. The governance of sovereign debtFootnote ³ represents an anomaly in contemporary international economic law given the progressive shift towards greater formalisation, legalisation and judicialisation of international economic affairs in the last three decades. In response to the increase in cross-border obligations resulting from economic globalisation, other areas of the global economy – notably international trade and investment – have witnessed a proliferation of international legal and other transgovernmental regulatory regimes aimed at the harmonisation, codification and adjudication of international rules. However, despite the rapid globalisation of capital and financial flows, the governing framework for international sovereign debt continues to be characterised by a high degree of informality and plurality of regulatory form.

Sovereign debt remains governed by a patchwork of municipal law, primarily of key financial centres, such as New York or London, the choice of forum for debt contracts, and supplemented by a network of official and unofficial organisations and networks, including international financial institutions, such as the International Monetary Fund (IMF) and the World Bank, and informal creditor groups, such as the Paris Club (see below) for rescheduling official sector debt and the London Clubs (or Bank Advisory Committees) for commercial bank debt. More recently, there is also evidence to suggest that international arbitration, notably under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID), may controversially be emerging as an alternative forum for the settlement of claims arising from sovereign defaultFootnote ⁴ (Cross, Reference Cross2006; Waibel, Reference Waibel2011, pp. 209–315; 2007).

Although there is an emerging international normative framework aimed at guiding and co-ordinating official and private lending policies and practice, some resulting from developments linked to the HIPC initiative (see Part IV), these mainly take the form of ‘soft law’ instruments, such as institutional operational policies, best practice guidelines and codes of conduct that are not legally binding unless they are incorporated into the municipal laws of the committed states (see Gelpern, Reference Gelpern2012, pp. 12–14; Rieffel, Reference Rieffel2003, pp. 18–23). Crucially, despite recurrent episodes of sovereign debt crises, particularly in the post-Bretton Woods era, and the heightened potential for financial contagion from a debt-distressed sovereign state in a globalised financial market, no formal international mechanism exists to co-ordinate orderly sovereign debt workouts in the event of imminent or actual defaultFootnote ⁵ and to restore debt-distressed states to a more sustainable fiscal position (see Herman, Ocampo and Spiegel, Reference Herman, Ocampo, Spiegel, Herman, Ocampo and Spiegel2010a, pp. 1–20; Rieffel, Reference Rieffel2003, pp. 1–8; Waibel, Reference Waibel2011, pp. 3–21).

Contemporary sovereign debt restructuringFootnote ⁶ relies on what Herman et al. term the ‘informal imperfect coordination of the debtor and its creditors, usually by the IMF under the guidance of the Group of 7 major industrialized countries’ (Herman et al., Reference Herman, Ocampo, Spiegel, Herman, Ocampo and Spiegel2010a, p. 4). Without a legally binding sovereign insolvency mechanism, this involves a series of ex-post, informal and voluntary negotiations between the debtor and its creditors (p. 3). While this process may have been regularised through a series of customary practices – typically involving an indebted state adopting an IMF adjustment programme (see below) and scheduling negotiations with respective creditors and multilateral financial agencies for appropriate debt relief and financial support (Gelpern, Reference Gelpern2012, pp. 12–14; Herman et al., Reference Herman, Ocampo, Spiegel, Herman, Ocampo and Spiegel2010a, pp. 4–5) – there is limited legal basis for this practice.

Both the Paris and London Clubs have been central to the re-organisation of the debt of sovereign states but neither is formally constituted nor possesses any legal personality to act independently of their constituent creditor states or commercial banks respectively (Cosio-Pascal, Reference Cosio-Pascal, Herman, Ocampo and Spiegel2010, p. 231; Gelpern, Reference Gelpern2012, p. 13; Rieffel, Reference Rieffel2003, pp. 56–57). Debt restructurings are voluntary with loosely defined rules of procedure and informal guidelines for debt treatment. At the Paris Club, negotiations are conducted on the basis of a set of customary principles – case-by-case approach, consensus in decision-making, conditionality of debt treatments, solidarity of implementation and comparability of treatment Footnote ⁷ – and a prescribed menu of restructuring terms and a menu of rescheduling terms that differentiated between classes of debtor state (ILA, 2010, p. 12; Paris Club, 2007, pp. 44–46, Annex 2; Vilanova and Martin, Reference Vilanova and Martin2001, pp. 4–13; see discussion in Part III). Although the outcome of negotiations, recorded in an Agreed Minute, provides the framework for subsequent bilateral agreements between the debtor and individual creditors, this document itself is not legally binding on the Paris Club creditors nor on non-Paris Club creditors from whom the debtor state has to seek comparable debt relief (Cosio-Pascal, Reference Cosio-Pascal, Herman, Ocampo and Spiegel2010, pp. 242–243; Rieffel, Reference Rieffel2003, pp. 72–76, 91).

At the same time, while the IMF is a pivotal feature of the sovereign debt landscape, it does not have a formal role in debt restructurings. The IMF's Articles of Agreement establishes it as a ‘permanent institution’ providing ‘the machinery for consultation and collaboration on international monetary problems’ (Article 1(i) of the IMF Agreement) but does not confer a specific authority on the organisation to mediate in sovereign debt negotiations and certainly not to impose a mandatory process on a debtor state and its creditors. Instead, the IMF's role in sovereign debt workouts rests primarily on its general mandate to provide financing to countries in financial distress under Article 1(v) of the IMF Agreement and, for low-income countries, under Article V(2)(b) and associated trust instruments.Footnote ⁸ Debt sustainability assessments conducted by the Fund in discharge of its fiduciary duties under this role commonly forms the analytical framework for sovereign debt restructurings, while the accompanying adjustment programme, imposed pursuant to the IMF's attendant obligation to ‘establish adequate safeguards’ for the use of Fund resources under Article V(3) and the aforementioned trust instruments,Footnote ⁹ effectively places the IMF in the default, albeit informal, role of delegated monitor of debt restructuring conditions (see discussion in Part III).

The centrality of the IMF to the debt restructuring process has been buttressed by its customary status as a preferred creditor, alongside the World Bank, meaning that debts to these multilateral institutions have traditionally been excluded from Paris Club treatments and, more recently, from private rescheduling (Martha, Reference Martha1990, pp. 813–815). This role and status accords the IMF with significant authority, not only as a financier itself, but also as a gatekeeper to other sources of financing by acting as a ‘reputational intermediary’, helping Member States establish or, re-establish financial and economic credibility with other creditors through adherence to the terms of an adjustment programme (Broome, Reference Broome2010, pp. 41–42; Reference Broome2008, pp. 130–132).

Accordingly, the governing regime of sovereign debt is less about the enforcement of formal legal obligations than about the broader disciplinary mechanisms that structure relations between a debtor state, its creditors and the international financial community. As Bucheit and Gulati argue, the law of sovereign debt ‘is mostly about what the international community expects sovereign states to do by way of honouring their financial commitments, and only marginally about the rules that national courts apply when a sovereign debtor is sued under a commercial debt instrument’ (Bucheit and Gulati, Reference Bucheit and Gulati2010, p. 65, emphasis added). These normative expectations are supported by a corresponding discursive regime that legitimises or sanctions certain conduct in relation to sovereign borrowing and lending (see below) and are enforced through legal means, such as litigation or arbitration, but more so through diplomatic negotiation and mediation and backed by the threat of foreclosed access to official and commercial credit and further reputational consequences of defaulted debt, including loss of foreign investment and withdrawal of external trade (see Bucheit and Gulati, Reference Bucheit and Gulati2010, pp. 65–66; Tomz, Reference Tomz2007). In other words, while law plays an important part in structuring and regulating sovereign debt relations, it is only part of a wider set of disciplinary mechanisms that constitute this fragmented regime.

2.2 Disciplinary narratives of sovereign debt

Undergirding this system of formal and informal networks of law, diplomacy and custom in the sovereign debt regime is a set of powerful narratives that have shaped not only the contours of the regulatory framework for sovereign debt but also the wider international financial system and international economic law generally. These narratives have served to first, rationalise, embed and legitimise particular constructions of the international economic order and, in this manner, influenced the scope, design and content of the international economic law, including the law, policy and practice of sovereign debt.

Here, the contributions of socio-legal scholarship and critical development theory is instructive in deconstructing how these narratives have been utilised to embed and sanctify some of the key normsFootnote ¹⁰ in the field of sovereign debt and to privilege certain legal, regulatory and policy outcomes over others. Both traditions conceive of law and legal regimes and of international development policy respectively as systems of symbols and signification, creating meaning and normalising or delegitimising images and representations of social, political and economic organisation which consequently shapes the regulatory and operational outcomes of their respective spheres of influence (see Berman, Reference Berman2005; Black, Reference Black2002; Crush, Reference Crush and Crush1995; Merry, Reference Merry1992; Rose, Reference Rose1994; Tarullo, Reference Tarullo1985; Tucker, Reference Tucker, Munck and O'Hearn1999).

Socio-legal researchers, in particular, have harnessed the epistemological utility of narratives as a means of understanding the relationship between law and non-legal normative orders and the social fields they inhabit (Engle, Reference Engle1993; Ewick and Silbey, Reference Ewick and Silbey2003; Reference Ewick and Silbey1995). Ewick and Silbey, for example, explore how narratives serve as ‘cultural productions’ that ‘are generated interactively through normatively structured performances and interactions’ (Ewick and Silbey, Reference Ewick and Silbey1995, p. 211). The device of narrative here is regarded as more than a functional mode of communication or mere story-telling. Instead, it is viewed as a mode of cognition that is characterised by a number of specific linguistic features including the ‘selective appropriation of past events and characters’ that are ‘temporally ordered’ and which are bound together by an overarching structure or ‘emplotment’ (Ewick and Silbey, Reference Ewick and Silbey2003, p. 1341). Narratives, in this sense, can be understood as discursive acts that when performed within specific social (or indeed economic or political) contexts are capable of producing meaning, mediating action and constituting identities (Ewick and Silbey, Reference Ewick and Silbey1995, pp. 201–203).

The sovereign debt regime in this sense is perceived not only as a collection of rules and practices but also a set of common and highly symbolic understandings about, inter alia, the scope and content of sovereign borrowing and lending and the respective entitlements and obligations of debtors and creditors. These historically contingent and socially constituted constructions of economic discipline and order, affirmed and reified through repeated narrations in legal and non-legal domains, can and do shape the expectations and direct the behaviour of actors in the sovereign debt regime. Narratives can thus contribute towards the reproduction of existing social, economic and political power by functioning first as ‘mechanisms of social control’ – instructing actors ‘about what is expected’ and warning ‘of the consequences of nonconformity’ – and second by colonising consciousness by privileging one ‘configuration of events and characters’ over ‘alternative stories’ (Ewick and Silbey, Reference Ewick and Silbey1995, p. 213).

Viewing sovereign debt governance as a set of disciplinary discourses – or what Black terms ‘regulatory conversations’ or ‘communicative interactions’ (Black, Reference Black2002, p. 163) – enables us to consider how certain narratives have become deeply embedded in the legal and customary practices and policy trajectories of the international sovereign debt regime and have consequently been predominant in shaping the normative and institutional framework of this regime. It provides a prism through which we can understand how the legal, regulatory and policy framework for sovereign debt is influenced by the underlying political and economic interactions between actors in the sovereign debt regime at the same time as it contributes to sanctioning the dominant scripts that structure these relations. Narratives of sovereign debt embody specific understandings about sovereign debt transactions that are deployed and repeated by political and economic actors and, in doing so, lend authority to the concepts articulated through law and development policy and practice.

A key narrative that has formed a central plank of the sovereign regime in the postwar period has revolved around the notion of sanctity of contracts, based on municipal contract law, and the related international legal principle of pacta sunt servanda (pacts must be respected). The former places primacy on the contractual form as the expression of parties' free will and autonomy and resists interference, statutory or judicial, in the commitments made in the agreement unless these obligations are renegotiated with the consent of the parties. The latter principle, which has been codified in the Vienna Convention on the Law of Treaties (VCLT) 1969, binds state parties, including for the most part, successor governments, to agreements they enter into in good faith, and for agreements to be interpreted similarly in good faith in accordance to their ordinary meaning in their context and in the light of their object and purpose (Articles 26 and 31 of the VCLT 1969).

Taken together and broadly interpreted, these narratives form a powerful disciplinary discourse on the nature of state obligations in a global market economy. Specifically, they stress the importance of adherence to contractual and international obligations as a tacit consent to limitations on the debtor state's absolute sovereignty, and therefore a signifier of its wider commitment to governance by the rule of law. This view of sovereign debt, partly facilitated by the move towards restricted sovereign immunity that waives immunity of sovereigns from commercial litigation in key financial centres,Footnote ¹¹ creates a sharp but often artificial distinction between a state's sovereign act and its commercial activity, with sovereign debt viewed primarily as a commercial transaction between the state and its creditors to be governed primarily by private law. It also highlights another prevailing assumption in the sovereign debt regime that states – due to their unlimited sovereign capacity to tax within its territory – cannot officially go bankrupt or be declared insolvent the same way that an individual or company could under municipal law (Buckley, Reference Buckley2010, pp. 1–2).

One of the most important outcomes of this narrative of contract and commitment has been its role in legitimising the exercise of repeat rescheduling of sovereign debt as well as the associated practice of defensive lending at the international financial institutions (see Bradlow, Reference Bradlow2009, pp. 8–19). A defining feature of the sovereign debt regime prior to the late 1980s had been the traditional refusal of creditor states and international financial institutions (IFIs) to countenance the prospect of significant debt write-downs for indebted countries and the corresponding practice of the IMF and the World Bank in securing financing via stabilisation or policy-based (structural adjustment) loans in order to facilitate countries' continued servicing of external debt (pp. 12–13). As Bradlow observes, ‘both the IMF and the World Bank worked to enforce the principle of pacta sunt servanda’, conditioning their support to Member States ‘meeting all debt related obligations in a timely manner’ (p. 12).

This narrative has been moderated to some extent in the last decade, first with the advent of the IMF's policy on lending into arrears, enabling the IMF to lend to Member States in arrears to their private creditors – initially to sovereign banks and latterly extended to bondholders – contingent on countries entering into rescheduling negotiations with their creditors (Simpson, Reference Simpson2006, p. 10; IMF, 2002, para. 14). Subsequently, the relaxation of Paris Club restructuring terms, beginning with the Toronto terms in 1988, the precursor to the HIPC terms of treatment, have enabled partial cancellation of eligible debt stock for low-income countries (Vilanova and Martin, Reference Vilanova and Martin2001, pp. 4–7; see further discussion in Part III). Nonetheless, as a general principle, the underlying logic of contractual enforcement as the bedrock of international financial stability and as signals of debtor governments' economic credibility continues to persist. Critically, this narrative has been instrumental in informing and justifying the decentralised nature of sovereign debt restructuring and resisting the introduction of an international legal framework for sovereign insolvency.Footnote ¹² Underpinning this narrative is the logic of debtor ‘moral hazard’, that is the argument that enabling a debtor to easily exit from contractual obligations will lead to more risky borrowing policies since the costs of such default will be borne by the creditors and not the debtor state. Consequently, the cost of borrowing will increase to reflect the additional risks to the lender, affecting all debtors as a group.

Elevation of the contractual form as the core regulatory instrument for sovereign debt transactions has meant that the discursive regime underwriting the governance of such debt has also been supplemented by a narrative of contractual exclusivity that draws upon and expands upon the common-law principle of privity of contract that precludes enforcement of a contract by or against third parties (see Collins, Reference Collins2003, pp. 302–303). The essence of this underlying logic in the sovereign debt regime is twofold: (a) the sovereign debt contract is an agreement between the sovereign debtor and its creditor, private or public; and (b) the renegotiation of any contractual terms should be determined primarily with reference to the financial or commercial content of these agreements and should disregard extraneous considerations.

Two related outcomes flow from this discursive logic. First, it confines the participants of any process of sovereign debt restructuring to the debtor state and its external creditors, the parties to the official debt contract, and, in many cases, the IMF, as the lender of last resort and de facto mediator, thereby eliminating the representation of other stakeholders, most notably the citizens of the indebted state through, for example, their elected representatives. This ignores the public character of sovereign debt or the nature of sovereign debt restructurings as ‘exercises of public authority’ by government officials acting on behalf of domestic constituents (von Bogdandy and Goldmann, Reference Von bogdandy and Goldmann2012, pp. 1–14). Second, this narrative prioritises the financial interest of creditors over and above the other contingent fiscal liabilities of a state in the exercise of its public authority, such as pensions and social security liabilities, as well as obligations for the provision of public services, development or poverty reduction (see Herman, Ocampo and Spiegel, Reference Herman, Ocampo, Spiegel, Herman, Ocampo and Spiegel2010b, p. 492).

The prioritisation of a state's obligations to its external creditors ahead of domestic interests is further reflected in the disciplinary logic of adjustment that accompanies a contemporary restructuring operation. The centrality of an IMF-designed and -supervised programme of fiscal and monetary austerity to sovereign debt restructuring agreement reinforces the problematisation of the debtor state in circumstances of debt or financial crises while playing down external structural causes of indebtedness. This practice, applied in most sovereign debt restructurings involving public financial support, localises the problem of sovereign indebtedness and legitimises the image of the debtor state as an inefficient, if not irresponsible, trustee of domestic resources, thereby sanctioning the rehabilitative interventions of the international community. Debtor states are required to demonstrate prudence in the use of the aforementioned public funds through reductions in fiscal expenditure and deflationary monetary policies in attempts to reduce debt ceilings and continue servicing external debt. In many cases, although exogenous causes of indebtedness are not wholly discounted, in the absence of an international sovereign insolvency regime that can, inter alia, mandate automatic standstills on debt repayments and provide rules for seniority in debt service, a public rescue package accompanied by an economic adjustment programme remains the only mechanism available to the international financial community to intervene in a sovereign debt crisis.

3.1 Constraining the fear of exit

Situated within this constellation of regulatory orders, the HIPC initiative represents an unprecedented effort by the international community to deal collectively and uniformly with the problem of sovereign indebtedness, albeit for a limited number of eligible countries. Introduced in its first iteration in 1996 by the Bretton Woods institutions and major creditor states, the HIPC initiative was a response to what Callaghy termed as ‘a central structural dilemma of our times – the emergence of a group of weak states and economies that have not been able to benefit as easily or quickly from economic reform and democratization as elsewhere in the world’ (Callaghy, Reference Callaghy2002, pp. v–7) – that posed serious challenges to a functioning of the global economy, to international security and, more importantly, to the legitimacy of neoliberal economic globalisation.

While it is beyond the scope of this paper to consider in detail the complex causes of this structural dilemma, it is important to note the key roles played by the international creditor community and the IFIs in sustaining the patterns of economic and geopolitical dependency and weak institutional and political governance that had been instrumental in consigning this cohort of countries to long-term indebtedness by the 1990s. Many low-income countries found themselves stuck in ‘an international poverty trap’ in which the cycle of economic stagnation and pervasive poverty, stemming from a lack of domestic resources for investment and public services and compounded by exogenous problems such as trade shocks and natural disasters, was reinforced by the countries' engagement with the international trade and financial system (Gore, Reference Gore2003, pp. 110–112).

The liberalisation of capital flows which began in the 1970s with the collapse of the fixed exchange rate regime under the Bretton Woods system and the recycling of ‘petrodollars’ by international banksFootnote ¹³ through commercial loans to developing countries in Latin America, Asia and Africa contributed to the build-up of excessive debt burdens in developing countries (Aggarwal, Reference Aggarwal, Aggarwal and Granville2003, pp. 14–15). At the same time, developing countries, as primary exporters of raw materials, were faced with the depreciation of commodity prices, due in part to the collapse of international mechanisms for stabilising such prices and the unequal terms of international trade which prevent countries from moving up the trade value chain into more lucrative manufacturing and service sectors (see Gore, Reference Gore2003, pp. 110–112; SAPRIN, 2004). Successive neoliberal policies of IFIs, implemented through structural adjustment programmes and centred on the deregulation, liberalisation and privatisation of national economies, further magnified domestic resource constraints while contributing towards the rupture of fragile political institutions and state capacity through austere fiscal and monetary strategies (ibid).

Crucially, reliance on external financing, mainly from official creditors, had left HIPCs in a vicious debt cycle with aid disbursements and new borrowing routinely used to service old loans and clear arrears and resulting in an ever-increasing accumulated debt overhang (ibid: 111; Fogarty, Reference Fogarty, Aggarwal and Granville2003, p. 236). Repeated rescheduling of debt by Paris Club creditors and the introduction of a series of more flexible terms of treatment for highly indebted states, starting in 1988 with the Toronto terms that allowed up to a 33 per cent reduction on non-concessional debt and progressing up to the Naples terms in 1994 allowing for up to 67 per cent debt reduction, had barely alleviated the debt burden of these countries, partly due to accumulated debt owed to multilateral creditors which were not rescheduled (Callaghy, Reference Callaghy2002, pp. 15–17; Paris Club, 2007, p. 44, Annex 2).

By the mid 1990s, it was clear that a more concerted international response was necessary to deal with the debt crisis, not only on humanitarian grounds but also as a geo-strategic imperative. Although the HIPCs were marginally integrated into the global financial system so that default on debt would not constitute a major risk to the international financial system (Fogarty, Reference Fogarty, Aggarwal and Granville2003, p. 236), the ramifications of a mass default by these countries, accompanied by rising domestic tensions resulting from the social and economic dislocations of indebtedness and structural adjustment, would be geo-politically significant as it would signal a major loss of faith in the economic trajectories of neoliberalism that was structuring the global economy.Footnote ¹⁴ Tackling the third world debt crisis was fundamental to addressing what Pahuja terms ‘the fear of exit’ of these countries from the international economic order (Pahuja, Reference Pahuja2000, p. 797) and quelling any incipient insurgency from third world governments that may have heightened third world resistance to globalising economic relationsFootnote ¹⁵ (Pahuja, Reference Pahuja2000, p. 797; also Tan, Reference Tan2011, pp. 78–80).

At the core of the HIPC framework was therefore the aim of reducing eligible countries' debt burden to ‘sustainable levels’ to enable them to permanently exit the rescheduling process but to continue participating within the global economy, including resuming normal debt service (Callaghy, Reference Callaghy2002, p. 36; Paris Club, 2007, p. 53, Annex 4). Determination of eligibility was to be assessed by the IMF and the World Bank's concessional lending arm, the International Development Association (IDA), based on the countries meeting a number of criteria, including: (a) eligibility for borrowing from the IDA; (b) possessing an unsustainable debt burden – assessed using a formula that calculates the ratio of the country's net present value (NPV) of debt to exports – that cannot be addressed through traditional, primarily Paris Club, mechanisms; and (c) having established a track record of economic reforms supervised under an IMF or World Bank programme (IMF, 2013a). To obtain ‘full and irrevocable’ debt relief (‘Completion Point’), countries have to demonstrate continued good progress under the economic reform programmes, including implementing key reforms agreed at an eligibility or ‘Decision Point’ stage and, after 1999, having adopted and implemented a Poverty Reduction Strategy Paper (PRSP)Footnote ¹⁶ for at least a year (IMF, 2013a).

This system placed the Bretton Woods institutions at the helm of the HIPC framework, responsible not only for the initial debt sustainability assessments but also for the design, implementation and supervision of the economic reform programmes that are central to the regime. In addition, the IMF and IDA were charged with the management of the trust funds (see below) from which resources are drawn to finance the debt relief operations, making them de facto administrators of the HIPC scheme. In this manner, the HIPC initiative shifted the locus of the governing framework for sovereign debt for this group of counties from Paris to Washington DC (Callaghy, Reference Callaghy2002, p. 36), subjecting all HIPCs to the policies and procedures of the Bretton Woods regime. One important consequence of this move is the opening up of the black box of the sovereign debt machinery at the Paris Club and generating a more transparent process of debt restructuring, at least for the HIPCs, partly due to the information disclosure policies of the Bank and Fund.Footnote ¹⁷ As Callaghy notes, the HIPC initiative established precedent by ‘making debt sustainability indicators explicit and applicable to all members of a specifically demarcated set of countries’ (p. 17).

The roles of the Bank and Fund were further enhanced when the initiative was substantially reviewed in 1999 to allow for ‘faster, deeper, and broader debt relief’ (IMF, 2013a), expanding the number of countries eligible for the initiative by lowering the debt sustainability thresholds, and broadening the coverage of debt reduction, including allowing for bilateral debt reduction of up to 90 per cent under the Cologne terms of treatment of the Paris Club (IMF, 2013a). Importantly, the 1999 reforms initiated an explicit link between debt and development policy by attaching social conditions to debt relief arrangements through the introduction of the aforementioned PRSPs, which were to also form the basis of other forms of concessional financing at the Bank and Fund (IMF, 2013a; also Tan, Reference Tan and Nadakavukaren2013, and discussion below). As part of the HIPC process, countries are required to demonstrate how resources freed up by savings from debt relief are to be channelled towards poverty reduction expenditures, even though this may create greater fiscal pressures on the debtor state if additional resources from official and private financiers are not forthcoming to bridge the financing gap (see below).

The inception of the IMF- and IDA-administered mechanism central to the HIPC process consolidated the position of these two institutions in the driving seat of the HIPC regime and cemented the initiative's location within the policy framework of international development. The HIPC framework's partial emergence from a social and religious movement – the international Jubilee campaign which saw churches and religious groups partner with networks of transnational, professionalised non-governmental organisations (NGOs) to call for a cancellation of third world debt before the millennium year – also meant that the HIPC initiative was inextricably linked to broader issues of social justice and poverty reduction. In particular, the linking of debt relief with international development targets, such as the attainment of the Millennium Development Goals (MDGs), provided the moral impetus for the alleviation of the debt burden and sanctioned the use of aid to deliver such relief (Tan, Reference Tan and Nadakavukaren2013). This narrative provided donor/creditor governments with the legitimacy to apportion aid to debt relief measures which, as Rieffel noted, in the context of voter ‘aid fatigue’ in these countries, ‘[d]ebt forgiveness was an easier sell than committing new aid’ (Rieffel, Reference Rieffel2003, p. 179).

3.2 Aiding the paradigm shift

As in other areas of sovereign debt, the governing regime for the HIPC regime is regulated through a combination of legal, quasi-legal and political instruments. Although embedded within a multilateral framework of international relations involving sovereign states and international organisations, there is no binding international legal authority for the framework. Instead, it is authorised through a series of communiqués from the G7 and the Development and InterimFootnote ¹⁸ Committees, the political oversight committees of the Bank and Fund respectively, and implemented through the pre-existing Paris Club system and via trust funds established at the IMF and World Bank for the treatment of multilateral debt.

An important aspect in the design of this framework was squaring the objectives of debt relief and debt sustainability with the core principles and disciplinary narratives which structure the sovereign debt regime. Two significant concerns underlined plans for delivering debt relief under the HIPC initiative: (a) developing modalities for reducing debt to the IFIs, namely to the IMF and the World Bank, without undermining the customary practice of the inviolability of multilateral debt and jeopardising the Bank and Fund's de facto creditor status; and (b) designing a system of uniform treatment for all eligible countries that was consistent with the case-by-case approach which did not amount to a system of generalised debt relief or which resembled the beginnings of an international statutory framework for sovereign insolvency (see Callaghy, Reference Callaghy2002, pp. 14–16, 34–36; Fogarty, Reference Fogarty, Aggarwal and Granville2003, pp. 237–238; Guder, Reference Guder2009, pp. 48–50; Rieffel, Reference Rieffel2003, pp. 184–185).

The outcome was a framework that built upon the pre-existing debt restructuring mechanisms ‘in a very complicated way’ (Callaghy, Reference Callaghy2002, p. 36), creating a series of nested processes and creative technical and legal modalities that maintained the relative power dynamics between the Bretton Woods institutions on the one hand and the Paris Club creditors on the other. Central to this operation was the characterisation of HIPC debt relief as an exercise of official development assistance rather than as a formal debt write-down. The reduction of debt stock or foregone debt service owed to bilateral and multilateral creditors is largely met by official financing rather than outright cancellations (see below). This, along with the insertion of a sunset clause requiring countries to participate within a specified time horizon,Footnote ¹⁹ ensures that the scheme is temporally constrained, limited to a subset of low-income countries and restricted from expanding into a permanent mechanism for generalised debt relief or from forming the basis of an international insolvency framework. It also anchors the HIPC initiative firmly within the realm of international development policy as opposed to the legal framework of sovereign debt and international financial law, with important consequences for the evolution of the sovereign debt regime as a whole and for relations between debtor states and their creditors.

Under the HIPC framework, debts owed to Paris Club creditors are restructured in accordance to Paris Club treatment terms – using the Naples terms under the 1996 initiative and latterly the Cologne terms under the 1999 revision – but debt reduction is commonly financed through aid budgets of the creditor states rather than absorbed as a debt write-down or loan loss (Cosio-Pascal, Reference Cosio-Pascal, Herman, Ocampo and Spiegel2010, p. 250). Although it creates an obvious concern over the so-called ‘additionality’ of HIPC debt relief – where resources earmarked for debt relief could have been delivered as ‘real transfers’ for development and poverty reduction projects (Cosio-Pascal, Reference Cosio-Pascal, Herman, Ocampo and Spiegel2010, p. 250; also World Bank, 2006, pp. 9–10) – this technical manoeuvre ensures that for the most part, the fundamental principle of pacta sunt servanda is not altered by the debt restructuring process in that, formally, the debt owed to the creditor state is repaid in full, albeit from other sections of the creditor state's budget.

Financing debt relief from aid budgets in this manner is justified by the fact that HIPC debt relief is effectively a ‘debt for poverty alleviation swap’ in which foreign currency liabilities are converted into domestic liabilities linked to poverty alleviation' (Cosio-Pascal, Reference Cosio-Pascal, Herman, Ocampo and Spiegel2010, p. 250), a core objective of foreign aid programmes. This process demonstrates the complex, political nature of bilateral debt and highlights the problem of treating debt relief as an aid exercise rather than according to the rules of commercial lending. As Cosio-Pascal notes, the paradox of the HIPC initiative is that while overseas development aid (ODA) resources are being utilised to cover budgetary or export agencies' losses resulting from the loss of value of HIPC debt in creditor countries, ‘the pressure for poverty alleviation expenditures is put on the poor countries’ domestic budget' through the aforementioned debt swap arrangement (p. 251).

Eligible debt owed to the IMF and World Bank and most other multilateral creditors under the HIPC framework is similarly discharged through grants and, in rare cases, loans from trust funds established at the Bretton Woods institutions and consisting of bilateral donor contributions and resources from the multilateral institutions themselves. These resources are used to prepay or purchase portions of the debt owed by HIPCs to the respective institutions (debt stock cancellation) or to meet debt service payments when they fall due so that ‘the loans are cancelled progressively over [time]’ (Guder, Reference Guder2009, p. 49). While it appears tautological, this process ensures that debts to multilateral institutions, notably the IMF and World Bank, are not officially cancelled, although the terms of the respective debt agreements would be revised to take into account the new repayment modalities (pp. 54–55). It also guarantees that the institutions' de facto preferred creditor status is not affected by HIPC operations as it guarantees ‘repayment’ of debt owed to them by the HIPCs (pp. 54–55).

At the IMF, HIPC costs are covered by resources, contributed by donors and from the net income and gold sales of the Fund, to a special operations fund for HIPCs – currently the Poverty Reduction and Growth (PRG)-HIPC Trust FundFootnote ²⁰ – established pursuant to Article V(3) of the IMF Agreement (see Section 2.1). Once a country reaches Completion PointFootnote ²¹ under the HIPC initiative, a grant or, exceptionally, a loan, from the trust fund is ‘deposited into an escrow account to cover debt-service payments to the IMF under an agreed schedule’ (World Bank and IMF, 1998, para. 23). A parallel system operates at the IDA where the World Bank's Debt Relief Trust Fund (DRTF) (formerly known as the HIPC Trust Fund) is similarly financed by donor contributions and from the net income of its non-concessional arm, the International Bank for Reconstruction and Development (IBRD), and these resources are used to cancel debt stock or meet debt service of eligible countries (World Bank and IMF, 1998, para. 22; Guder, Reference Guder2009, pp. 58–59). Resources from the fund can also be used to grant relief on debt owed to other multilateral institutions, such as the African Development Fund (AfDF) (World Bank and IMF, 1998, para. 22). Similar trust funds have been established for debt relief operations under the Multilateral Debt Relief Initiative (MDRI) that was introduced in 2005 to cancel in full all eligible debt owed by HIPCs to major multilateral institutions, including the IDA, IMF and the AfDF, upon reaching Completion Point (Tan, Reference Tan2007).

Due to the voluntary nature of the HIPC initiative and the use of the Paris Club process as its primary restructuring platform, the participation of non-Paris Club creditors has been contingent on bilateral negotiations between these creditors and the debtor state seeking comparable treatment.Footnote ²² As Laryea observes, given the ‘sublegal’ nature of the HIPC initiative where enforcement is ‘limited to moral suasion and “naming and shaming”’, not only can minority holdout creditors refuse to participate in the restructuring, they can also compromise the objective of the HIPC by taking advantage of the fiscal space created by the debt relief assistance by collecting on debt they hold (Laryea, Reference Laryea2010, p. 196). The IDA and IMF have been active in encouraging the involvement of such creditors on behalf of HIPC debtors, and the IDA has been particularly instrumental in securing the participation of commercial creditors through its Debt Reduction Facility (DRF). The facility, established in 1989 to support the commercial debt buyback operations of IDA countries, finances such transactions through donor contributions and income from the IBRD (IDA and IMF, 2011, paras. 15–16; IDA, 2012, para. 1).

This strategy has extinguished a considerable amount of commercial debt and also reduced the problem of litigation against HIPCs by commercial creditors – mainly so-called ‘vulture funds’ or investors who have purchased such debt on the secondary market at deep discount with the objective of recovering the full value through litigation – by incentivising their participation in the HIPC initiative (IDA and IMF, 2011, para. 15–17). However, it also highlights the vulnerability of a debt relief framework based on ad-hoc negotiations and voluntary agreements and one that is heavily reliant on the subsidy of official development finance for its success.

This practice contradicts the debtor ‘moral hazard’ logic inherent in the narrative of contract and commitment (see Section 2.2) by paradoxically creating potential for risky and opportunistic lending behaviour, thus encouraging ‘moral hazard’ on the part of creditors.

4.1 New norms and narratives

Despite the overarching characterisation of the HIPC and MDRI schemes as instruments of development policy rather than law, and the corresponding lack of formal legal change in the sovereign debt regime, the HIPC framework has altered the landscape of sovereign debt, particularly in relation to the governance of third world debt. Not only has the HIPC initiative established significant policy and institutional innovations at the IMF and the World Bank, it has also challenged some of the central tenets of international sovereign debt while importing new normative values into the field of sovereign debt relations.

This re-scripting of sovereign debt narratives represents one of the key contributions of the HIPC initiative to the development of the international sovereign debt regime. As discussed in Section 2.2, the discourses that underpin sovereign debt have been as instrumental as its legal framework in shaping the expectations and conduct of actors within the sovereign debt regime. These narratives, ascribed to collectively by regime constituents, can legitimise or denounce certain behaviour and institutional practices which can, in turn, influence the legal, policy and regulatory framework of the sovereign debt regime. Consequently, the reconstruction of key representations and imagery regarding the scope and content, rights and obligations of actors of the regime can lead to changes in the governance of the regime itself. In other words, in rewriting some of the dominant scripts in the sovereign debt regime, the HIPC initiative can and has contributed to legal and regulatory change within the governing regime of sovereign debt.

First, by introducing and, to some extent, legitimising the use of the term ‘debt forgiveness’ in the lexicon of sovereign debt, the HIPC framework has tempered the narrative of contract and commitment (see Section 2.2) that has formed an important disciplinary component of the regime and challenged dominant assumptions regarding the sanctity of sovereign debt, potentially ‘creating space and support for more ambitious solutions to debt crises’ (Jochnick, Reference Jochnick, Jochnick and Preston2006, p. 133). The HIPC initiative represented the culmination of a gradual process of ‘ratcheting up’ debt reduction for highly indebted countries at the Paris Club (Callaghy, Reference Callaghy2002, pp. 16–17) from the Toronto to the Naples to the Cologne terms that ultimately provided for up to 90 per cent debt relief. In doing so, the initiative officially recognised that in some exigent circumstances, sovereign debt can be significantly written off by creditors. This includes cancelling previously inviolable multilateral debt, despite the complex machinery that had to be designed to protect the preferential status of the international financial institutions (see Section 3.2).

Accordingly, the HIPC initiative has paved the way for fresh consideration of other grounds for debt cancellation using principles derived from municipal contract law and public international law. Since the framework's inception, there has been a discernible increase in international academic and policy interest and advocacy activity focused on challenging the legitimacy, if not legality, of sovereign debt contracts and on highlighting creditor culpability for the accumulation of unproductive and unsustainable debt by developing countries. These initiatives have focused on both: (a) assessing the procedural and substantive fairness of the contractual relationship between the debtor state and its creditors, including factors such as economic duress or asymmetry in bargaining power, which may vitiate a debtor's legitimate consent; and (b) evaluating creditor compliance with their fiduciary duties, such as pre-disbursement due diligence and financial oversight, and, in the case of sovereign and multilateral creditors, their broader obligations under international law, such as human rights and environmental law.

Accordingly, there has been a resurgence of interest in the contemporary application doctrine of odious debt and the associated but broader notion of ‘illegitimate debt’. The former relates to a concept, first articulated by jurist Alexander Sack in 1927, that debt incurred by a government (or ruler) against the interests of its citizens for the purpose of strengthening the despotic regime or for personal gain of the ruler are odious, provided that the lenders were aware that the proceeds of the loan were diverted for such purposes, and therefore unenforceable against a successor government of the odious regime (Bucheit and Gulati, Reference Bucheit and Gulati2010, pp. 67–68; Gentile, Reference Gentile2010, pp. 157–158; Howse, Reference Howse2007, pp. 4–5). The notion of illegitimate debt covers a wider spectrum of debt contracted wilfully by or without due diligence of the creditor against the interests of the state's citizens and which have the function of, inter alia, legitimising an undemocratic rule; furthering the overt political or economic interests of the creditor state; contributing to violations of social, economic or political rights or environmental degradation; or otherwise perpetuating cycles of economic stagnation and aid dependency (see Jochnick, Reference Jochnick, Jochnick and Preston2006; SLUG, 2012, pp. 11–12).

These concepts, yet to be tested before a court or tribunal, have contributed to the construction of a valuable political platform for the emergence of an alternative conceptual framework for sovereign debt governance. The doctrine of odious debt, for example, was invoked in calls for the cancellation of Saddam Hussein-era Iraqi debt and in the restructuring of Nigerian debt at the Paris Club in 2005. Although the contribution of the odiousness debate to the eventual restructuring exercise for both countries was superseded by other imperatives, notably the strategic and geo-political importance of both countries to key creditor states (see Damle, Reference Damle2007; Gelpern, Reference Gelpern2005; Gentile, Reference Gentile2010), they nonetheless created a precedent for further political campaigns of this nature.

More controversially, Ecuador justified its 2008 default on sovereign bonds on grounds that a government-initiated debt audit, the first of its kind in the world, found most external debt contracted by Ecuador between 1976 and 2006 were ‘illegal’ or ‘illegitimate’ due to irregularities in the loan contracts or because they violated domestic or international lawsFootnote ²³ (Gentile, Reference Gentile2010, pp. 151–152; Mansell and Openshaw, Reference Mansell and Openshaw2009, pp. 168–169). In 2012, Norway became the first creditor country to institute a comprehensive debt audit of the ‘legitimacy ‘of its loans to developing countries (Eurodad, 2012). This followed the unprecedented cancellation in 2006 of Norwegian export credits to five countries – Egypt, Ecuador, Peru, Jamaica and Sierra Leone – under its Ship Export Campaign between 1976 and 1980 on grounds that it held joint responsibility with the debtor states for the failure of the development programmes to which these loans were attached (Howse, Reference Howse2007, p. 16).

The international campaign for such debt audits, spearheaded by prominent transnational NGOs such as the European Network on Debt and Development (Eurodad), expands upon the precedents established by the HIPC initiative in broadening the focus of sovereign debt beyond the explicit terms of the contractual arrangement. The HIPC framework's emphasis on poverty reduction and public expenditure management and its requirement that beneficiary states demonstrate, in their PRSPs and respective Letters of Intent (for IMF loans) or Letters of Development Policy (for IDA financing),Footnote ²⁴ how resources from debt service are to be channelled into social expenditure or economically productive activities have challenged the traditional assumption that sovereign debt contracts are purely commercial matters of governments and remain the purview of executive state action. The initiative has not only highlighted the public character of sovereign debt but has also broadened the previously narrow conception of debt sustainability beyond merely a consideration of a debtor state's formal capacity to meet debt service, acknowledging that there may be other claims on state finances that command greater moral, if not legal, merit than debt servicing.

In so doing, the HIPC initiative has also recognised the intergenerational tensions – that the people bearing the burden of repaying debt are not necessarily those who contracted the debt nor reaped its benefits – that exist in the contracting of sovereign debt and the issues of equity that arise from these tensions. This infusion of non-traditional values into the sovereign debt regime has been crucial in shaping the developments in the post-HIPC era. The HIPC initiative's grounding in a broader platform of social justice and its location within a wider discourse of development (see Part III) has meant that the official architects and administrators of the framework – the IFIs and bilateral creditors – have had to confront issues that have hitherto been regarded as extraneous to the debt contract, including operationalising developmental concepts such as public participation in policy-making and country ownership of economic policies and facilitating results-oriented outcomes of public policies that are the objectives of the PRSP (see IMF, 2013c).

To this end, there have been international efforts mainly by civil society groups and international organisations, but supported by a number of debtor and creditor states, to develop ex-ante national and international mechanisms to promote responsible sovereign lending and borrowing. These mechanisms mainly take the form of non-binding and voluntary ‘soft law’ instruments, including the OECD's Principles and Guidelines to Promote Sustainable Lending Practices in the Provision of Official Export Credits to Low-Income Countries (OECD, 2008), and the more recent high-profile Principles on Promoting Responsible Sovereign Lending and Borrowing sponsored by the United Nations Conference on Trade and Development (UNCTAD) and funded by the Norwegian government. Although varied in content, these codes of conduct primarily seek, inter alia, to develop best practices and guidelines to govern the contracting of sovereign debt and to improve risk management and accountability in sovereign finance on the part of borrowers and lenders (Gelpern, Reference Gelpern2012, pp. 3–5; OECD, 2008, pp. 2–4; UNCTAD, 2011, pp. 2–3).

The establishment of the PRSP process has further reshaped the narrative of contractual privity in sovereign debt relations. The involvement of stakeholders in the planning of a document that is central, at least on paper, to the process of debt relief has challenged the traditional perception that a loan or credit agreement is a fundamentally commercial transaction between the debtor state government and its creditors. The acknowledgement that citizens and civil society actors can and should play a role in economic policy-making related to sovereign debt contracts has important discursive ramifications on how the process of sovereign debt restructuring is perceived. While the functional role of the PRSPs remain limited,Footnote ²⁵ the process of involving a broad base of stakeholders in the consultative process of economic policy development recognises that there are interested parties beyond the debtor government and its creditors in any sovereign debt contract and that these interests should be taken into account in a restructuring process.

4.2 Debt and the undermining of development

The policy and legal innovations of the HIPC framework has greatly leveraged the movement for the cancellation of third world debt and the reform of the sovereign debt regime. As discussed in the previous section, the HIPC initiative has challenged key disciplinary narratives of the pre-existing regime and provided the catalyst for reshaping sovereign lending and borrowing practices. However, there remain serious limitations to a debt relief mechanism modelled on the HIPC framework. Inasmuch as the HIPC framework's focus on the relationship between debt and development and its location within international development policy have contributed to incremental change in the governing framework of sovereign debt, these reconstituted narratives and operational reforms have also foreclosed more radical revision of the sovereign debt regime.

First, the HIPC initiative is severely limited in its application and its success as a debt relief instrument has only been guaranteed by its exceptionality. The clear demarcation of eligibility – financially, temporally and geographically – confines the initiative to a limited set of low-income countries. Beginning with the term ‘heavily indebted poor countries’ itself, the language and imagery of underdevelopment and pervasive impoverishment has been deployed to distinguish HIPCs from other developing countries, to legitimise the exclusion of non-HIPC IDA countries from the framework and justify this differential treatment between members of the IMF and IDA. As discussed in Part III, the architects of the HIPC initiative were, from the outset, concerned with ring-fencing what they considered highly concessional terms of the HIPC framework in order to prevent the expansion of the initiative into a wider system of generalised debt relief for all third world states.

The portrayal of HIPC countries varyingly as economically stagnated, politically corrupt and unstable and cripplingly deficient in social and institutional capital contributed to delimiting debt reduction under the HIPC initiative to countries in most urgent need of international intercession and financial rehabilitation. It created the moral and political impetus for exceptional debt reduction and justified the conscription of public finance – from bilateral and multilateral creditors – to cover the costs of the initiative. But conversely, this discourse also legitimised the sweeping and highly intrusive interventions of the creditor community into the indebted state by positing the extensive governance reforms – ranging from the imposition of the quasi-political practice of participatory policy-making under the PRSP process to intensive donor/creditor and IFI supervision of the country's public expenditure management (PEM) systems – as prudent fiscal and fiduciary oversight of the debtor state by the international community (see Tan, Reference Tan2011, pp. 134–166).

This intimate relationship between the HIPC framework and international development policy has meant that the rationalising discourse of sovereign debt relief of third world states remains overwhelmingly paternalistic and centred on anachronistic clientalist relationships between the debtor state and its creditors that have structured third world engagement with the exterior in the postwar period. With the HIPC qualification and debt restructuring process highly contingent, as discussed in Part III, on assessments by the Bretton Woods institutions and co-ordination of debt reduction by the Paris Club creditors, the HIPC process has reinforced the fundamentally political nature of sovereign debt governance and, along with the maintenance of the logic of adjustment discussed in Section 2.2, emphasised the continuing problematisation of indebted states as architects of their own crises. Although the HIPC initiative has generated a wider global interest in securing creditor co-responsibility for the accumulation of unsustainable debt in the third world, the initiative itself has been narrowly focused on rehabilitating the errant debtor for the purpose of reinserting it into the global economic order, that is, bringing its debt burden back to ‘sustainable levels’ to enable its return to the discipline of the global market.

Accordingly, the HIPC framework has reinforced the ‘myth of normalcy’Footnote ²⁶ (Tarullo, Reference Tarullo1985) that has sustained the international economic legal order in the postwar period by drawing a dichotomy between those states which adhere to the rules of international economic law and general principles of a ‘civilised’ international society and those who do not and hence have to be rehabilitated through a series of development interventions. The problems of the HIPCs are therefore constructed as departures from the norm of sovereign debt transactions and as Callaghy's aforementioned ‘structural dilemma’ (Callaghy, Reference Callaghy2002, pp. v–7). The characterisation of third world indebtedness as discrete cases of sovereign profligacy rather than outcomes of systemic failures of international financial governance decouples the problem of indebtedness from the broader conduct of international economic relations. Instead, an unsustainable debt burden is viewed primarily as one resulting from poor economic governance and bad political choices,Footnote ²⁷ a rhetoric that has been employed in the current financial crisis to represent the misguided policies adopted by the peripheral states in the Western economy.

Treating HIPC debt relief as aid rather than formal debt write-downs reinforces the asymmetrical relationship between the debtor/recipient state and the creditor/donor states and IFIs and blurs the boundaries between development policy and the regulation of sovereign debt while raising important questions of equity in international economic relations. First, the process compounds the moral hazard inherent in using public resources to underwrite the risk of commercial and quasi-commercial lending. Under the Naples and Cologne terms, only non-concessional loans are written down in compliance with the OECD ODA policies, with ODA credits rescheduled over a longer time frame (Paris Club, 2007, Annex 2, pp. 45–46). These rules, coupled with the use of DRF funds to finance commercial debt buybacks, mean that the HIPC initiative effectively utilises public finance to compensate for commercial losses. These costs are not only borne by taxpayers in creditor countries but also by citizens of debtor states who forgo the additional resources that could otherwise have been allocated as aid, and other IMF and World Bank members that have contributed by way of interest and other charges to the income of these institutions used to subsidise the initiative (see Part III).

The HIPC's location within the arena of development policy rather than international law further fragments the governing regime of sovereign debt by delineating debt relief according to the economic status of debtors. The creation of hierarchies of indebtedness between different states through the process of categorising and evaluating eligibility also creates hierarchies of entitlements and hierarchies of treatment that can stymie progress towards the greater harmonisation of sovereign debt restructuring practices. As it stands, contemporary efforts to reform the process of sovereign debt restructuring distinguishes between sovereign debt owed to commercial creditors and that owed to official creditors, with proposals for treating commercial debt demarcated from that of official debt.Footnote ²⁸ The IMF's 2002 proposal for a Sovereign Debt Restructuring Mechanism, for example, excluded the treatment of official debt from the proposed framework while ‘market-based’ approaches, such as the insertion of collective action clauses in sovereign bond agreements to expedite consensus during restructuring, and the development of codes of conduct, such as the Principles of Stable Capital Flows and Fair Debt Restructuring in Emerging Markets, have focused on restructurings between debtor states and their private creditors (Hagan, Reference Hagan2005, pp. 352–353; Ritter, Reference Ritter2009, pp. 5–10).

This fragmentation continues to preclude the development of a comprehensive, equitable and universal mechanism for debt restructuring with pre-established and binding rules of conduct for all actors, including the oft-cited Chapter 9 of the US Bankruptcy CodeFootnote ²⁹ that provides a process for restructuring insolvent local municipalities in the US. The focus of the HIPC framework on restoring debtors to a sustainable debt position to resume debt service rather than on the provision of ‘sufficient relief for a “fresh start” … that gives the debtor country economy room to grow’ (Herman et al., Reference Herman, Ocampo, Spiegel, Herman, Ocampo and Spiegel2010b, p. 492) reinforces the underlying narrative in the sovereign debt regime that sovereigns cannot and do not go bankrupt despite the significant costs to human development of indebtedness that the initiative itself has highlighted. Instead, the initiative continues to sanction the status quo governing sovereign debt restructuring premised on a piecemeal, ad-hoc and highly political process of debt restructuring that can result in a prolonged and disorderly resolution of financial crises, as witnessed in the recent Eurozone crisis.

Finally, the failure of the HIPC initiative to account for the broader deficiencies of the international financial system that have contributed to the accumulation of third world debt and its reluctance to engage in the broader questions of debt sustainability in a globalised economy means that its operational relevance going forward in the sovereign debt regime is limited. A ring-fenced initiative such as the HIPC is disengaged from wider concerns that the international system lacks a central co-ordinating mechanism for addressing and resolving acute or chronic sovereign debt crises. It places the responsibility for dealing with chronic debtors, all low-income states with persistent balance-of-payments problems coupled with heavy external dependency, on the IMF and World Bank. This is problematic given that these institutions lack the specific constitutional mandate to deal with such crises in a sustained and comprehensive way (see Guder, Reference Guder2009, p. 13). The dominance of the Paris Club in this process further undermines efforts to address third world debt in a sustainable manner given the limited participation of non-Paris Club creditors in the process. Importantly, for many low-income countries, the emergence of new sovereign creditors, notably China but also other emerging market countries such as Brazil, India and South Africa and oil-rich nations such as the Gulf States, means that any future resolution of debt crises must involve a broader set of negotiations beyond those involving a small cartel of Western states.