The recent earthquake in Haiti is a disaster of epic proportions. It is a humanitarian disaster with an estimated 200,000 dead. It has also caused a catastrophic collapse in confidence in the Haitians’ ability to repay their debts. Haiti is now an insolvent sovereign, by way of natural disaster.
Most sovereign insolvencies are the result of public fiscal failures or private sector capital flight. While the attribution of fault ranges in those cases from controversial to clear mismanagement, the inability to repay debts because of natural disasters is uncontrovertibly without fault. The absence of fault on the part of the insolvent sovereign creates a colour of right for debt relief. However, at present such relief is determined unilaterally by creditors.
The Paris Club members have agreed to cancel US$214 million in debt, and urged other creditors to similarly do so. In contrast, the IMF has agreed to make a $100 million loan, interest-free for two years, to Haiti but will not relieve any of the $900 million outstanding.
While I do not know the interest rate on the $900 million IMF loan to Haiti, if it were a mere 5% the interest accumulated would be over $100 million before 2013. In effect, the IMF is extending Haiti’s credit so the country can pay the compound interest on its existing loans for 2-3 years, without relieving any of the principal obligations.
Insofar as the Haitians pay their debts going forward, they have absorbed the cost of their natural disaster, and subsumed the risk taken by investors in Haitian sovereign debt. My personal opinion is that the investors in the sovereign ought to have been aware of the risk of natural disaster, and insofar as they acknowledged such risk it was their duty to have insured against such events – or otherwise absorb the its potential cost. The burden of a natural disaster that undermines the ability to service sovereign debts should not be compounded by onerous debt obligations.