    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

                         H.R. 2634, THE JUBILEE ACT FOR

                        RESPONSIBLE LENDING AND EXPANDED

                           DEBT CANCELLATION OF 2007

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                NOVEMBER 8, 2007

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 110-80

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
    CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
    LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
    NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
    MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
    GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
    JULIA CARSON, Indiana                RON PAUL, Texas
    BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
    GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
    DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North
    MICHAEL E. CAPUANO, Massachusetts        Carolina
    RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
    WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
    CAROLYN McCARTHY, New York           GARY G. MILLER, California
    JOE BACA, California                 SHELLEY MOORE CAPITO, West
    STEPHEN F. LYNCH, Massachusetts          Virginia
    BRAD MILLER, North Carolina          TOM FEENEY, Florida
    DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
    AL GREEN, Texas                      SCOTT GARRETT, New Jersey
    EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
    MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
    GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
    LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
    ALBIO SIRES, New Jersey              RANDY NEUGEBAUER, Texas
    PAUL W. HODES, New Hampshire         TOM PRICE, Georgia
    KEITH ELLISON, Minnesota             GEOFF DAVIS, Kentucky
    RON KLEIN, Florida                   PATRICK T. McHENRY, North Carolina
    TIM MAHONEY, Florida                 JOHN CAMPBELL, California
    CHARLES WILSON, Ohio                 ADAM PUTNAM, Florida
    ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
    CHRISTOPHER S. MURPHY, Connecticut   PETER J. ROSKAM, Illinois
    JOE DONNELLY, Indiana                KENNY MARCHANT, Texas
    ROBERT WEXLER, Florida               THADDEUS G. McCOTTER, Michigan
    JIM MARSHALL, Georgia                KEVIN McCARTHY, California
    DAN BOREN, Oklahoma

            Jeanne M. Roslanowick, Staff Director and Chief Counsel
                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        November 8, 2007.............................................     1
    Appendix:
        November 8, 2007.............................................    23

                                   WITNESSES
                           Thursday, November 8, 2007

    Caliari, Aldo, Director, Rethinking Bretton Woods Project, Center
      for Concern....................................................    10
    Flood, Gerald F., Counselor, Office of International Justice and
      Peace, United States Conference of Catholic Bishops............     8
    Watkins, Neil, National Coordinator, Jubilee USA Network.........     4
    Woods, Emira, Co-Director, Foreign Policy in Focus, Institute for
      Policy Studies.................................................     6

                                    APPENDIX

    Prepared statements:
        Waters, Hon. Maxine..........................................    24
        Caliari, Aldo................................................    26
        Flood, Gerald F..............................................    38
        Watkins, Neil................................................    46
        Woods, Emira.................................................    61

                         H.R. 2634, THE JUBILEE ACT FOR

                        RESPONSIBLE LENDING AND EXPANDED

                           DEBT CANCELLATION OF 2007

                                  ----------

                           Thursday, November 8, 2007

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:05 a.m., in
    room 2128, Rayburn House Office Building, Hon. Barney Frank
    [chairman of the committee] presiding.
        Members present: Representatives Frank, Waters, Moore of
    Kansas, Green, Cleaver, Bean, Moore of Wisconsin, Sires; Bachus
    and Bachmann.
        The Chairman. We will begin. Our senior Republican, who is
    of course one of the major sponsors of this program both in the
    past and today, will be joining us shortly. We are returning to
    a subject in which this committee has played a leading role,
    and it is time to resume that role.
        It was members of this committee--our former chairman, Mr.
    Leach, whose picture is appropriately there to my left in the
    rear; the current ranking member, Mr. Bachus; the gentlewoman
    from California, the chairwoman of the Housing Subcommittee;
    and myself--who pushed for this to happen in the first place
    over the objection of many, including people in the Clinton
    Administration, and it was frankly one of the rare times in
    recent years when both the Republican House leadership and the
    Clinton Administration were overruled by a vote on the Floor of
    the House. The religious communities also participated
    strongly, and the four of us worked on this, and we are back at
    it.
        Let me say that I think the moral case for debt relief is
    almost self-evident. No matter what you think about past
    practices, and in many cases, past practices were wrong on the
    part of the borrowing countries, on the part of the lending
    institutions in countries, whatever you think, sadly today,
    overwhelmingly the victims are innocent people, residents of
    these countries, and our job is to alleviate their misery.
    There is a great deal of talk about how we go forward with
    economic development, and there are legitimate concerns about
    that. But there is no room for any intellectual doubt that
    getting rid of this overhang of debt is an essential
    precondition to any progress.
        And so the committee is resuming this. We take a good deal
    of heart from the fact that--well, let me put it this way. It
    is a common lie for people to say that they do not like to say,
    ``I told you so.'' In my experience, everybody likes to say,
    ``I told you so,'' and in fact, personally, I can say--and
    people have heard me say this before--that it is one of the few
    pleasures that improves with age. And those of us on the
    committee, and I'm joined by the gentleman from Alabama who is
    one of the leading advocates of it, those of us who were in the
    lead on the debt relief previously can say, ``We told you so.''
    It has worked well. It has been very helpful. It has been one
    of the most--given the situation in Africa and some other
    places, it's hard to say it was a positive thing, but it did
    more to diminish the negatives that we confront than any other
    single thing I can think of.
        So, we think it worked well enough for us to do it again,
    and we will be pushing the governments, the international
    financial institutions, to move forward with that. I very much
    welcome this panel, and it is the beginning of a serious
    legislative effort, once again, in a bipartisan way, and you
    will see this committee, I believe, pushing forward with this.
    With that, I will recognize the gentleman from Alabama, the
    ranking member, who as I said--when we did this the first
    time--was one of the leading sponsors and advocates, and he
    continues to be in that category. Mr. Bachus.
        Mr. Bachus. I thank the chairman. I thank you for holding
    this important hearing on the Jubilee Act, and for your
    leadership, as well as the leadership of Subcommittee
    Chairwoman Waters. I welcome the witnesses. Many of you, we've
    worked together, worked with our colleagues on debt reduction
    and poverty alleviation legislation for the poor countries of
    the world, for nearly a decade now. And I'm happy to say that
    those efforts have been remarkably successful.
        Mr. Chairman, as you know, myself and many of my colleagues
    on this committee took part last month in a fast in support of
    the Jubilee Act. The momentary hunger that I felt was nothing
    like the courageous weeks-long fast of Reverend David Duncan,
    of course. But fasting for one day cannot begin to compare with
    the constant hardships and the pangs of hunger experienced
    daily by millions of little boys and girls and even their
    parents and their families, who were born into what seems to be
    perpetual poverty, disease, and hunger in dozens of countries
    around the world.
        Congress can be a tough environment, and we say on occasion
    that we had a really bad day, a tough day. But we ought to be
    reminded that for billions of people throughout the world, that
    even on our worst days, we have more food, more shelter, more
    clothes, more security, more healthcare, and more of everything
    than our poor brothers and sisters have on their best days.
        In debating debt relief, I've often quoted Sister Rebecca
    Trujillo, a nun in Nicaragua. She was asked, ``How do the poor
    get through the day? How do they survive?'' Her answer was,
    ``Often they do not.''
        Mr. Chairman, we started something big with the Jubilee
    movement. NGOs, our witnesses, millions of people around the
    world joining together to make a historic commitment to debt
    relief in the year 2000. Since then, there has been even more
    or further debt forgiveness on the part of the G-8 nations. In
    countries where debt relief has been implemented, debt is down
    by two-thirds, and spending on reducing hunger and improving
    health, education, and social services is now 4 times the size
    of the previous debt payments.
        Since the start of the new millennium, the poverty rate in
    sub-Saharan Africa is down 6 percent. There are more children
    receiving healthcare and medical treatment, in fact, over a
    million more children in that area alone. Vaccinations are up,
    and throughout Africa, the percentage of students enrolled in
    primary school has gone up significantly.
        The Jubilee Act will build on those successes by making it
    possible to cancel the debts of up to 25 countries that are not
    now eligible for debt relief. Debt relief has improved the
    lives of millions of people at almost no monetary cost to the
    United States. If the Jubilee Act is successful, the U.S. share
    of debt reduction for the nine or so countries that would be
    eligible immediately would be $100 million. That's less than 50
    cents apiece for every man, woman, and child in this country.
    Surely the most generous country in the world can afford a
    commitment of 50 cents.
        Doing the right thing is the imperative here. But even if
    we consider cost, let us realize that the cost of not acting is
    not only hopelessness and unrest throughout the world, but also
    an increased threat of terrorism. Poverty breeds unrest and
    instability and creates the types of conditions that allow
    dictators and terrorists to survive and thrive. So, combatting
    global poverty is clearly in our own economic and national
    security interest.
        Debt relief is not the total solution to poverty, hunger,
    and disease, but it is a necessary first step. It is where the
    journey should begin to free these countries of the burden of
    debt, the chains of poverty, and the shackles of despair and
    enable them to minister to the economic and social needs of
    their citizens. Accordingly, I will continue to work with my
    colleagues to advocate this legislation both in the committee
    and in the House as a whole.
        I yield back the balance of my time, and I again welcome
    our witnesses.
        Ms. Waters. [presiding] Are there any other members who
    wish to make an opening statement? If not, I will recognize
    myself for 5 minutes. First, I'd like to begin by thanking
    Chairman Barney Frank and Ranking Member Spencer Bachus for
    organizing this hearing and for their support of the Jubilee
    Act. I also would like to thank the Jubilee Movement for all of
    their efforts over the past 10 years to cancel the debts of the
    world's poorest countries.
        The Jubilee Movement is one of the most outstanding
    humanitarian efforts I have seen in my entire career. Over the
    past 10 years, Jubilee has convinced Members of Congress,
    officials of the Clinton and Bush Administrations, and
    political leaders from around the world to cancel poor country
    debts. I'm so proud of my affiliation with the Jubilee Movement
    because it brought the needs of the world's poorest people to
    the attention of the world's most powerful leaders.
        I introduced the Jubilee Act to cancel the debts of
    additional needy and deserving poor countries and to ensure
    that the benefits of debt cancellation will not be eroded by
    vulture funds and irresponsible lending. Because of the
    tireless efforts of Jubilee Movement activists, the Jubilee Act
    now has 86 cosponsors. I look forward to hearing the views of
    the witnesses on how the Jubilee Act can be effectively
    implemented and how it will benefit the world's poorest
    countries and their people. I'm not going to get into the
    details of the Jubilee Act, because I know that is what the
    witnesses are here to do, but I request unanimous consent to
    have my complete statement included in the hearing record. And
    so without objection, it is so ordered.
        Without further delay, I will yield back the balance of my
    time, and we will now hear from our witnesses: Mr. Neil
    Watkins, national coordinator, Jubilee USA Network; Ms. Emira
    Woods, co-director, Foreign Policy in Focus, Institute for
    Policy Studies; Mr. Gerald F. Flood, counselor, Office of
    International Justice and Peace, U.S. Conference of Catholic
    Bishops; and Mr. Aldo Caliari, director, Rethinking Bretton
    Woods Project, Center of Concern. Thank you for being here, and
    we will start with Mr. Watkins.

     STATEMENT OF NEIL WATKINS, NATIONAL COORDINATOR, JUBILEE USA
                                NETWORK

        Mr. Watkins. Well, thank you, Congresswoman Waters. And
    before I begin, I would just like to offer a profuse thank you
    on behalf of the entire Jubilee Network to Chairman Frank,
    Ranking Member Bachus, and Congresswoman Waters. Your tireless
    leadership and support on debt cancellation has truly been a
    blessing, and you have all been long-time champions. We are
    really grateful for your leadership and all of this committee's
    leadership in addressing the crisis of international debt.
        I want to begin my testimony with a story about how debt
    cancellation works in Zambia. Earlier this year I had the
    opportunity to see the impact of debt cancellation firsthand
    when a Jubilee delegation visited the Siavonga Rural Health
    Clinic in the Zambian countryside. As we toured the clinic,
    Grace Chibanda, a pharmacist, showed us the pharmacy, which was
    full of anti-retroviral drugs for HIV/AIDS. Debt relief is a
    good thing, Grace told us. It is getting medicines for people
    who didn't have it before.
        Zambia is using its debt cancellation savings of $23.8
    million in 2006 in part to eliminate user fees for healthcare
    for impoverished people in rural areas. This means that an
    unpayable fee no longer stands between Zambia's poorest people
    and basic health services. Nurses and doctors we talked with
    confirmed that they had seen an increase in patients after the
    user fees were removed. It was truly inspiring to see the
    impacts of debt relief firsthand and to know that the relief is
    getting to Zambians who need it.
        In another example, Tanzania is also putting its debt
    savings to work, sending two million children to primary
    school. Since 1996, more than 30 countries have received some
    form of debt relief. Twenty-two nations have reached what is
    called completion point in the IMF and World Bank's Heavily
    Indebted Poor Country or HIPC initiative, and they have
    received now 100 percent cancellation of eligible debt stock.
        Debt cancellation committed under these programs to date is
    expected to reduce the debt stock of the 32 HIPCs, eventually
    canceling a total of $96 billion in debt under the Multilateral
    Debt Relief Initiative. This year alone, annual debt service
    savings from the MDRI will amount to $1.3 billion, almost all
    of which will go directly to fighting extreme poverty around
    the world. Congress and the Administration have each played
    important roles in achieving a bipartisan consensus for debt
    cancellation and should be proud of what has been accomplished
    so far.
        As supporters and advocates of debt cancellation, we must
    continue to be vigilant, to ensure that proceeds from debt
    cancellation reach the most impoverished people, but we are
    encouraged by the positive impacts of debt relief on the
    ground.
        Debt cancellation now has a 10-year record of success, and
    it is a proven tool to fight global poverty. But even after the
    debt cancellation provided to date, the world's most
    impoverished nations continue sending $100 million each day to
    the United States, the IMF, the World Bank, and other
    creditors. A majority of the world's impoverished countries
    remain mired in a debt crisis. A 2007 study of 41 poor
    countries that had not reached completion point in the HIPC
    initiative found that most of these countries were actually
    paying more on debt servicing today than they were in 1996.
    These are funds and payments that could be going towards
    meeting the millennium development goals.
        That is why we are saying that it is time to extend the
    promise of debt cancellation. The UK government has already
    begun to extend debt relief to impoverished countries who don't
    qualify for the HIPC initiative but who have proven that they
    can spend the money well and who need the relief to meet the
    MDGs.
        The Jubilee Act is modeled after this initiative and would
    extend debt cancellation to well-governed countries that need
    it to fight poverty. The Act could initially expand debt
    cancellation to nine more countries and ultimately could add 15
    beyond that.
        One of the countries that could benefit is Kenya. When I
    traveled to Kenya earlier this year, I saw crushing poverty
    similar to what I saw in Zambia. In Kibera, Africa's largest
    slum, we met children, parents, and community leaders. One of
    the people I will never forget was a 13-year-old girl named
    Mary, who was orphaned by AIDS. She dramatized and recited two
    poems for us while we were there, one about the devastation of
    AIDS for her and the people of Africa, and the other about AIDS
    leaving her and her other young friends without parents. Her
    strong spirit and resilience shone through as she spoke and
    moved to the rhythm of her powerful words. I didn't see the
    progress in Kenya, however, that I had seen in Zambia. Why? In
    part, because Kenya does not qualify for the current debt
    relief initiative, despite its strong need and improving public
    financial management. They don't qualify despite the fact that
    Kenya spends more servicing debt than on healthcare or water.
        Expanded debt cancellation can make a real difference for
    people in countries like Kenya and elsewhere. As we expand debt
    cancellation, however, we must be careful to learn the lessons
    of the past 11 years. We need to work for more responsible
    lending practices in the future and make reforms in the way
    debt cancellation is delivered by removing harmful conditions
    that are undermining the promise of debt cancellation.
        To conclude, the Jubilee Act is the smart thing to do. Debt
    cancellation is an effective and tested strategy for fighting
    poverty, and it is a good investment in our security and our
    image abroad. It is also the right thing to do.
        Thank you.
        [The prepared statement of Mr. Watkins can be found on page
    46 of the appendix.]
        The Chairman. Next, Ms. Woods.

    STATEMENT OF EMIRA WOODS, CO-DIRECTOR, FOREIGN POLICY IN FOCUS,
                      INSTITUTE FOR POLICY STUDIES

        Ms. Woods. Good morning, Chairman Frank, Ranking Member
    Bachus, and Subcommittee Chairwoman Waters. It is an honor to
    be here with you today. I really want to begin, as Neil began,
    by thanking you for your steady, sustained, and moral
    leadership on this issue. It is your bipartisan leadership that
    has brought already such tremendous strides on debt relief.
        My primary focus today will be to explain how I feel so
    strongly that debt cancellation should be granted without
    harmful conditions of past debt initiatives. My testimony is
    based on both my professional and personal experiences. I'm
    originally from Liberia and have seen firsthand the painful
    burdens of debt not only throughout the continent, but even in
    my own family.
        Congress and the President, together with your leadership,
    took a huge step forward 10 years ago when they stated that it
    was a moral imperative to give poor people in poor countries
    debt relief. Through your leadership, the burden of repaying
    debts incurred by rich and often irresponsible leaders began to
    be lifted. Yet today, we recognize that the bold steps forward
    from a decade ago did not go far enough. Previous schemes left
    out many eligible countries and also had onerous strings
    attached, conditionalities.
        The Jubilee Act before you today will extend debt
    cancellation to all impoverished countries that need relief to
    meet their millennium development goals. On average, low-income
    countries spend about $100 million a day just to pay interest
    on their debts, vital resources that could be spent on
    essential services. The Jubilee Act will bring relief where
    debts incurred by dictators and also debts that have been paid
    many times over through high interest payments can be relieved.
        I'd love to begin by sharing with you the story--it's a
    very difficult story--of my cousin, now 22 years old. For the
    sake of this testimony, and to protect her identity, I'll call
    her Anna. Anna and I met 2 years ago when I went home to
    Liberia after the decades of war. Anna had also just returned
    home after living much of her life in a refugee camp in Ghana
    called Bujumbura. At 20 years old, Anna had already experienced
    more of the direct impact of debt and conditionalities than a
    roomful of economists. My aunt and uncle had left Liberia for
    Ghana on foot when the war started in 1990. Anna was just 5
    years old. The ruthless dictator, Samuel Doe, accrued debt as
    he used U.S. taxpayer monies from the Reagan era as ``loans''
    to train and equip an army that he then unleashed against
    primarily innocent civilians. Charles Taylor unseated Doe and
    continued the ruthlessness until over 250,000 Liberians had
    been killed and Does' debt had ballooned to $3 billion.
        Ghana, where the camp was, had approved its first Economic
    Structural Adjustment Facility loan in May of 1995. In that
    year, the agreement led Ghana to begin selling off--
    privatizing--14 state-owned enterprises. Massive job losses in
    Ghana airways, Ghana railways, and the Electricity Company of
    Ghana, among many others, were the result. With Ghanaians
    forced out of jobs, the job market for Liberian refugees was of
    course much worse. My aunt and uncle could not find work in
    spite of their graduate degrees. Little Anna, then barely 10
    years old, could no longer go to school. This was because of
    the conditions of the international financial institutes which
    actually imposed user fees on the students at community-level
    schools in Ghana at that time.
        At the age of 13, my cousin practically lived in the
    streets. On Sunday afternoons, as my aunt went to church, Anna
    and other teenage girls would parade around the camp, scantily
    clothed, waiting for older men, many of whom did not live in
    the camp, to solicit them. This was their employment since
    school was no longer an option. When we met 2 years ago, Anna
    had two children, the eldest born when she was just 15 years
    old. Anna returned to Liberia, ready to start her life anew.
    But as Liberia repays its debt to the international financial
    institutions, there are no functioning hospitals. I fear that
    Anna may be one of the many undiagnosed yet living with HIV/
    AIDS, and the same conditionalities that denied her an
    education may now keep her from treatment, unless Liberia and
    many other countries in Africa and throughout the developing
    world can spend their scare resources on health, education, and
    basic services for their citizens, Anna's children, and many
    other children throughout the continent will continue to pay
    the heaviest price for the debt of dictators and the
    conditionalities of the international financial institutions.
        We know that this story is repeated throughout the
    continent. We recognize also the harmful impact of conditions
    throughout the continent. Many claim that the international
    financial institutions no longer impose these conditionalities.
    We have clear evidence from countries throughout the continent
    that in fact privatization of core industries, as well as
    liberalization of opening up of markets, particularly financial
    and banking sectors, continues today.
        We are incredibly concerned that unless the conditions, the
    harmful macroeconomic conditions attached to these initiatives
    are removed, there will continue to be disastrous implications
    even as we advance debt relief.
        There are many instances that we would love to share; I
    wanted to talk in particular about Mali. Mali, which had
    conditions tied to its poverty reduction strategy papers and
    its PRGF, the Poverty Reduction Growth Facility arrangement
    with the IMF, those conditions included water, banking,
    telecommunications, and agriculture, especially in companies
    dealing with cotton, Mali's biggest export earner. Mali sold
    off its rights to the French company SAUR in 2000. The process
    forced impoverished communities to pay for the first time for
    access to clean water.
        In a few short years, there were numerous complaints about
    mismanagement and claims by the Malian government that the
    companies had failed to run the water services according to
    contract. By 2005, the Malian government re-nationalized water
    and yet was seen as ``off track'' by the IMF.
        Countries that go a different path from the IMF are
    actually threatened not only from being tossed out of debt
    relief schemes but also from accessing other core financing
    from the development community. It is this stranglehold of the
    IMF through conditionalities that we must end.
        I urge this committee to support the Jubilee Act to fix the
    flawed debt relief by canceling odious debt, by eliminating
    harmful conditionalities, and by advancing steadfastly towards
    an Africa, Latin America, Asia, a developing world where people
    can pursue, health communities can pursue education for their
    children, can live lives of dignity.
        I believe this is what you all as members of this committee
    intended when you advanced debt relief a decade ago. If we take
    the necessary steps now to remove harmful conditionalities, we
    can meet your moral imperative of lifting the burden of debt
    for Africa and for much of the world.
        Debt has kept Africa in bondage long after the end of
    slavery and colonialism. This legislation could help break
    those chains. It won't solve all the problems of the world's
    poorest country, and it won't give my cousin back her
    childhood, but it will give these struggling nations a better
    chance of building strong, secure, and healthy societies.
        Thank you.
        [The prepared statement of Ms. Woods can be found on page
    61 of the appendix.]
        The Chairman. Next, we have Gerald Flood.
        Mr. Flood.

          STATEMENT OF GERALD F. FLOOD, COUNSELOR, OFFICE OF
     INTERNATIONAL JUSTICE AND PEACE, UNITED STATES CONFERENCE OF
                            CATHOLIC BISHOPS

        Mr. Flood. Thank you, Mr. Chairman. Mr. Chairman, and
    members of the committee, I would like to thank you for the
    opportunity to testify here today. Debt relief for poor
    countries has been a high priority for our Bishops Conference
    for many years. In my testimony I will be focusing on a number
    of issues at a level of technical detail which the Bishops
    would not normally address and on which therefore they would
    not have a position. Thus I offer my testimony primarily as a
    former development agency official who has worked on debt and
    related issues with both the World Bank and the Bishops
    Conference over quite a few years.
        I would like to begin by reiterating the expressions of
    thanks and appreciation which have already been mentioned by
    the previous witnesses, especially to Chairman Frank and
    Representatives Bachus and Waters for their strong and
    untiring, faithful--I don't know how many adjectives one could
    find to adequately express the leadership which they have
    exercised over many years in an effort to bring debt relief to
    millions of poor people in low-income countries around the
    world.
        Before getting to some of the issues, I had wanted to
    mention one specific case showing how the HIPC program is
    enabling Catholic Relief Services and a broad group of allies
    in Cameroon to lead a path-breaking effort to unite sustainable
    forestry management with rural community development throughout
    the country, but time won't permit, so I refer you to my
    written testimony on this.
        In looking at H.R. 2634, some members of the committee may
    be wondering why additional debt cancellation is necessary when
    so much debt relief is already being provided under HIPC and
    the more recent Multilateral Debt Relief Initiative. The
    problem is that there are a substantial number of poor
    countries that are not eligible for the HIPC program, let alone
    the MDRI.
        The disparity of treatment between HIPC countries and non-
    HIPC countries became clear when the World Bank and IMF
    conducted an examination of so-called ``debt sustainability''
    in the poorest countries, the so-called IDA-only countries, the
    countries that are only allowed to receive from the World Bank
    funds from their most concessionary arm. The primary objective
    of the exercise was to determine which countries should receive
    their future IDA financing either wholly or partially in the
    form of grants. When the exercise was conducted in 2005, it
    showed that 42 countries were at sufficiently high risk of debt
    distress to be eligible for grant financing, instead of the
    usual loans. The list included 29 HIPC countries plus 18 other
    countries. This meant that there were 18 non-HIPC countries
    rated as having a risk of debt distress equal to or greater
    than the HIPC countries. Like the HIPC countries, now they were
    going to get some grants going forward. But unlike the HIPCs,
    they would get no debt relief.
        One of the 18 non-HIPCs in this list is Lesotho, which
    reminds me of a remark made by the country's finance minister
    when he learned about the MDRI debt cancellation agreement. He
    told Reuters that one of the reasons Lesotho was not classified
    as an MDRI country was it had never defaulted on its debt. It
    is important, he said, that those who have paid their debts
    well, who run their mega-finances well, should be rewarded with
    debt forgiveness.
        The debt cancellation provisions of H.R. 2634 would address
    the concern expressed by the minister and bring deep debt
    relief within the reach of virtually all of the world's poorest
    countries. Some will note that the IDA-only criterion for
    eligibility under the bill will capture some countries with
    relatively low levels of external debt. Assuming one accepts
    the debt sustainability analysis as fully valid, and there are
    some questions about it, in determining really whether these
    countries who are so-called not at high risk of debt distress
    really are in bad shape as far as their debt, the fact is that
    however you slice it, the countries, all of these countries are
    ones with very high levels of poverty, and thus they need to
    maximize the amount of resources that they can marshal to
    promote human development and move toward the millennium
    development goals for reducing poverty.
        We believe that the IDA-only requirement is a reasonable
    standard for determining which countries should be eligible for
    debt cancellation. I would also like to address briefly the
    cost of the debt cancellation. I have made a rough estimate of
    the amount of funds the United States needs to commit through
    the next three IDA replenishment periods--Fiscal Year 2008
    through Fiscal Year 2017--in order to finance the cost of the
    debt cancellation. I'm unable to provide a firm estimate
    because much of the information required for an accurate
    estimate is not publicly available. My rough estimate then is
    that the cost to the United States would be roughly $1.5
    billion for the 3-year IDA 15 period, from Fiscal Year 2008 to
    Fiscal Year 2010, and that would mean an average of about $500
    million a year. In the next IDA replenishment period, the
    figure would rise to $3.5 billion. The reason for that is the
    assumption that Bangladesh would come in during that period to
    debt cancellation and they have a very high level of
    multilateral debt. And then in the following 3 years, it would
    drop to $2.4 billion, and the figure for future years would
    drop still further.
        Just a reminder that we're talking about debt that is going
    to become payable over the next 30 to 40 years, because these
    are very long-term debts. And what we're talking about is the
    cost of reducing or eliminating the need for these countries to
    pay their debt service each year over these 40 years. This is
    why the cost has to be calculated over a long period of time.
        An important assumption is that IDA and the other
    international financial institutions would be replenished
    dollar-for-dollar for the foregone principal and interest
    payments of the debt canceled. This is the principle adopted
    for the MDRI and would be in line with the requirement of
    additionality contained in Section 3 of H.R. 2634.
        Other assumptions are explained in my written testimony,
    which also explains that the cancellation schedule I have
    assumed may slip substantially, resulting in lower initial
    costs and lower overall costs. And if, as likely, Vietnam does
    not apply for cancellation, this would also reduce costs
    considerably. There's much reason, therefore, for expecting
    that the estimate could be revised downward as more information
    becomes available.
        Thank you for your attention.
        [The prepared statement of Mr. Flood can be found on page
    38 of the appendix.]
        The Chairman. Mr. Caliari?

     STATEMENT OF ALDO CALIARI, DIRECTOR, RETHINKING BRETTON WOODS
                      PROJECT, CENTER FOR CONCERN

        Mr. Caliari. Thank you very much, Mr. Chairman. It is an
    honor for me to have the opportunity to testify today before
    this committee. I am going to be focusing on the provisions of
    the Jubilee bill that address responsible lending and
    borrowing. I am going to talk about the rationale for those
    provisions, some of the futures of the currency system, which I
    would argue discourages responsible lending, and I am going to
    talk about how the provisions in the bill will improve over the
    current system in different ways that I am going to explain.
        Mr. Chairman, members of the committee, the unfinished
    agenda on debt that the Jubilee Act addresses involves an
    expansion of debt cancellation, but we are also aware that if
    we want these, as well as the recent round of debt
    cancellation, to have lasting effects, we also need to look at
    the way ahead. That is why provisions in the bill to ensure
    responsible lending and borrowing are an inseparable part of
    this unfinished agenda on debt.
        Why is this important? Because the promotion of debt
    cancellation in impoverished countries comes from the belief
    that debt cancellation can free resources currently spent in
    servicing debt for productive and social spending that are
    required in those countries. However, if after the
    cancellation, debtor countries engage again in excessive
    borrowing, we will soon be back in the same situation where
    social and productive spending is curtailed by large amounts of
    debt service. Jubilee is also concerned with ensuring that the
    affected population has a say in the process of public debt
    generation. In the past, too many debts were taken on via
    mechanisms that were non-transparent, non-accountable, and,
    ultimately, of little benefit to the population in the indebted
    country.
        Today, the gains that a number of low-income countries
    expected to achieve through recent debt cancellation are
    starting to be eroded. There are two main concerns I want to
    raise in this regard.
        The first is that the debt levels of countries benefitting
    from debt cancellation are rapidly rising again because of new
    borrowing on a non-concessional basis. This concern has been
    underscored by the G-8 and the international financial
    institutions. There are a number of creditors that have not
    participated in debt cancellation that may actually free-ride
    on the cancellation, that is take advantage of the newly
    attractive debt profile of countries receiving debt
    cancellation for providing financing on a non-concessional
    basis.
        This dynamic is especially acute in beneficiaries of the
    Multilateral Debt Relief Initiative. The lower debt ratios of
    the beneficiaries in this initiative put them back in a
    position where they represent an attractive debt profile. After
    the MDRI, this is, excluding new lending after the MDRI, the
    debt stock ratios in most recipient countries will be
    significantly lower. In this situation, creditors that may not
    have participated in the debt relief effort may seek to profit
    by lending on a non-concessional basis.
        This non-concessional financing comes mostly from bilateral
    creditors not in the Paris Club, or emerging creditors, such as
    China, Brazil, India, Korea, Kuwait, etc., but there is also
    considerable non-concessional financing that comes from export
    credit agencies that are ironically in OECD countries. These
    are the same countries that are providing, on the other hand,
    the relief.
        Also, there are, of course, commercial credits and bonds.
    Some of these countries are now able to issue instruments in
    the international capital markets, something they were not able
    to do before.
        Second, the threat to the gains from debt relief comes from
    litigating creditors, such as ``vulture funds.'' These are
    creditors who profit by buying cheap sovereign debt in
    secondary markets and then maximize recovery via litigation and
    other pressure mechanisms. And it is a key reason why the debt
    these vulture funds bought cheaply now has become something
    that they can sue for in a higher amount, the reason to this is
    the debt cancellation received by some of the debtor countries
    on the other side of these contracts.
        So what about the current system? Do we have a current
    system to stop unsustainable, irresponsible debt? Well, to
    prevent countries receiving debt relief from falling back into
    debt due to non-concessional borrowing is that the
    international financial institutions adopted 2 years ago
    something called the Debt Sustainability Framework. And in
    Annex 1 of my statement, you will find a summary of how the
    framework works. The framework has as a purpose to determine
    how much new borrowing on a non-concessional basis low-income
    countries can incur. And based on a number of factors, it
    assigns a debt threshold to each country and it is assumed that
    the financial needs of those countries that go beyond that
    threshold need to be satisfied via grants. This framework is
    what we can say the current system is doing to discourage
    unsustainable lending, and it is quite ineffective and unfair,
    especially to the debtor but also, and I have to say this, for
    many of the creditors, for a number of reasons.
        What the system does is, with regard to the creditors, the
    international financial institutions are doing outreach to
    foster a culture of coordination around the framework. It is no
    surprise that this is proving quite difficult. In fact, the
    rate of success of the HIPC initiative to bring onboard non-
    Paris Club creditors was very low. Why would anybody think that
    the creditors would suddenly put their heart into joining an
    initiative where they have to match even more debt relief? If
    anything, the incentives out there for them to do that are
    exactly the opposite. There is more debt forgiveness at stake,
    so creditors that are not part of the initiative can profit
    even more from staying out of it and even lending on a
    profitable basis to countries whose debts have been wiped out.
    At the same time, international financial institutions would
    sanction the debtor. Either reduce the grant allocations or
    give assistance in harder terms to countries that are found to
    be borrowing beyond their acceptable debt ceilings.
        Now how effective is this? Everybody knew at the time of
    establishing the Debt Sustainability Framework that in order
    for it to work, countries were going to need a significantly
    higher volume of grants than before. Now, if you know what has
    been happening with grant assistance, it has been going down.
    So discretionary grants is why countries go around to get
    funding on a non-concessional basis and the solution to this is
    that they say, ``Okay, if you do that, we will cut your grant
    allocation further.'' Well, of course, this is only going to
    worsen the problem and the creditors know it, and I quote in my
    testimony documents from IDA that leave no doubt that this is
    known by the creditors.
        So what we are proposing is a package of measures that we
    believe will significantly improve the current situation. Chief
    among these measures is that the bill calls on the executive to
    seek the international adoption of a binding legal framework
    that guarantees that no creditor can take or expect to take
    financial advantage of acquired or newly awarded debt relief
    through the terms and rates of their new lending to beneficiary
    countries. The way these measures will stop irresponsible
    lending is of a striking simplicity: It is based on setting the
    incentives right for new lending and borrowing. This is why it
    needs to be a binding framework; a mere code of conduct would
    not realign the incentives. If unsustainable lending occurs and
    the debtor needs debt forgiveness in the future, the creditor
    that engaged in unsustainable lending will have to take an
    equitable share in the burden of the losses. So every creditor
    lending to a country has an incentive to make sure its lending
    is not above what the borrower can safely undertake, which is
    exactly the opposite of today where creditors that typically do
    not provide debt relief have every incentive to lend above safe
    levels, knowing that they will be protected in the event debt
    forgiveness is required.
        The hope, of course, is that no new debt forgiveness will
    be necessary. This is the beauty of this measure, that it is
    first and foremost a preventive measure.
        Mr. Chairman, the bill also contains measures on
    transparency, the availability of grants, and measures dealing
    with vulture funds. I will be happy to address them in a
    question and answer session. With that, I will finish.
        [The prepared statement of Mr. Caliari can be found on page
    26 of the appendix.]
        The Chairman. Thank you. I neglected to ask unanimous
    consent that all the written statements be put into the record
    in their entirety, along with any other material the members
    might like. I will begin the questioning with our colleague
    from California who has been a consistent leader on this issue.
        Ms. Waters. Thank you very much, Mr. Chairman. And I would
    like to thank all of our witnesses who are here today helping
    us to understand more and more about debt relief. I would like
    to address a question to Ms. Woods. The Jubilee Act would
    eliminate harmful economic conditions for debt cancellation in
    the future, but this will not undo the harmful effects of IMF
    conditions on countries that have already received debt
    cancellation, countries like Mali and Ghana, which you
    described in your testimony. And I have to share with you that
    many of our members are very proud of complete debt relief, but
    they do not understand how it could be that a country could
    receive debt relief and find themselves worse off after they
    have gotten the debt relief than before. You talked about the
    conditions that are placed on getting this debt relief. Could
    you describe a little bit more how some of these conditions
    create more poverty, and would you describe how this Act could
    help with that problem?
        Ms. Woods. Thank you so much for that brilliant question. I
    think it goes to the heart of the matter. The issue is that the
    conditions attached to the Debt Relief Initiative actually
    first take away the space for developing countries to choose
    their path to development. That is the first problem. It is
    inherently undemocratic because essentially you have
    institutions based in Washington telling countries what they
    should prioritize in their spending, so it all sounds like
    tossing words around, ``privatization,'' and
    ``liberalization,'' but essentially what is happening is that
    countries around the continent have their citizens paying
    taxes. So if you take for example Mali, citizens may be paying
    taxes and may assume that key services like water which have
    been provided in the past would continue to be provided through
    their taxes, but instead the IMF says, ``No, sell off your key
    industries to the highest bidder.'' And it is often the
    multinational corporations that are swooping in and saying we
    can manage those services better.
        It is based in a political argument that says government
    should be shrunk, that services should be provided by
    corporations, and so what is happening is corporations are
    coming in but as we see in example after example, corporations
    are not necessarily doing it better. We do not have to go to
    Mali, we can look right here in D.C. at healthcare as one
    example to see that it is not always the private sector that
    does the best job, right? So that is a broader argument but in
    the African continent, it impacts people's lives in a more
    desperate manner because people are already after decades of
    resources being extracted, even in wealthy countries,
    relatively wealthier countries like Nigeria, oil is flowing out
    of communities that have no schools, no hospitals, not even
    decent housing. So as corporations are coming in with their
    search for profits, ignoring communities, the services are not
    necessarily being provided better, and yet it is almost as if
    people are being asked to pay more. So the intent in seeking
    out the moral imperative of debt relief was to actually lift
    the burden off of poor communities but in fact what you have is
    the selling off of core services, which means people are forced
    out of their jobs as those services shrink, and also people
    have to then pay for those services to be provided. So whether
    it is telecommunications or water or healthcare or education,
    it is people already at the brink who are paying the heaviest
    price.
        Ms. Waters. Thank you very much.
        Ms. Woods. Thank you.
        The Chairman. I would just interject briefly that there is
    a lot of debate about the place of morality in politics, today
    we are talking about morality in politics, and I think we
    should in the deepest sense. The gentleman from Alabama?
        Mr. Bachus. I would like the panel to just comment if you
    would on the ``vulture funds,'' and what would be the most
    effective way to counter their negative activities? One thing I
    am concerned about is in the bill we propose to give the
    countries that are subject to suit or are targeted by the
    vulture funds to make legal counsel available to them or legal
    advice in combating these things, I am wondering about is that
    the most effective? I think that is obviously one of the things
    we should do. And are we going to be successful in court or are
    they going to be successful in court in fending these funds
    off, and that there are contracts, as much as we hate that
    fact? But any comments you would like to make just to inform
    us?
        Mr. Watkins. Yes, thank you for that important question.
    The vulture fund issue is not new. The original vulture cases
    actually happened in the 1990's. But, unfortunately, in the
    past year, actually we have seen an up-tick in the number of
    cases, perversely because the countries that have gotten debt
    relief now have money, more resources, and so the creditors are
    saying, well, this is a good opportunity to swoop in. It is a
    really perverse system.
        A couple of things, you mentioned the language in the bill,
    which would basically ask the U.S. Treasury Department to
    provide greater legal and technical assistance to countries. I
    think that is an important first step, just so that countries
    know what their options are when they are faced with these sort
    of suits. Another approach, which could help in the short term,
    would be the World Bank actually has something called the Debt
    Reduction Facility, which buys back at-risk private debt from
    poor countries. So what that can do is, and it has done, is
    actually take debts, which are not yet the subject of lawsuits,
    and actually buy them back from the private sector so that it
    sort of takes that off the market. So there are a couple of--
    basically that fund could be increased.
        There are a couple of policy changes that could happen. The
    fund could be made available to pre-decision point countries.
    One of the countries right now that we are very concerned about
    with the vulture fund issue is Liberia, and we think that
    Liberia should have access to this sort of support. And
    basically countries should be able to go back more than once to
    this fund if they again see that future debts are threatened by
    these lawsuits. So those are I think what is in the bill and
    some work around the Debt Reduction Facility could help in the
    short term. Ultimately though the reality is that two-thirds of
    these suits, these lawsuits that have happened, have been
    brought in either the United States or the United Kingdom. So
    if we are going to address the problem at its root, we need to
    look at I think legal changes in the United States and look at
    a way to address the problem of U.S. courts, that a lot of
    these cases in fact are happening right now in courts in the
    United States.
        Mr. Bachus. Mr. Caliari?
        Mr. Caliari. Thank you very much for that question. Just to
    complement what Neil was saying, just to emphasize, some of the
    measures that are in the bill, as Neil has said, are short
    term, not only short term but in fact when you are talking
    about for example providing financing for countries to be able
    to buy back the debt from these vulture funds, what you are
    basically doing is also subsidizing an activity that in the
    first place is morally questionable--for example, just take the
    case of Zambia, when they bought debt at $308 million and then
    sued for $55 million and the court then did award them $15
    million. So probably in a case like that, what you would have
    had if the country had been able to buy that debt, it is buying
    the debt for the $55 million, right, just to stop the threat.
    And that is not ultimately what we want to do, although in the
    short term it is necessary. But in the long term, I just want
    to emphasize there is no really way around having a framework,
    a legally binding framework that will ensure that all creditors
    have to share equitably on the losses when a country needs debt
    relief, and this really requires that the bill calls on the
    executive to pursue, to seek the adoption of this
    multilaterally binding framework. It is a long-term solution
    but it is ultimately the only one that is really going to solve
    the problem.
        The Chairman. We will take the gentleman from Missouri
    next, and then we will break. There is only the one vote and if
    the panel--this is a very important issue, so I assume you
    would not mind waiting? I will come back, and the gentlewoman
    from Wisconsin, and maybe some others, so we will have time for
    the gentleman from Missouri to ask his questions. We will be
    back probably in about 20 minutes. Mr. Cleaver?
        Mr. Bachus. Mr. Chairman?
        The gentleman from Missouri went on a fast as part of this
    effort, and I would like to commend him and he has spoken out
    very forcefully on debt relief. I would like to compliment him.
        The Chairman. I thank the gentleman for that. The gentleman
    is recognized.
        Mr. Cleaver. Thank you, Mr. Chairman, and I thank the
    ranking member. As I read through your testimony, it was,
    ``Damned if you do and a damned if you do.'' If you do not
    request financial assistance from the World Bank and other
    institutions, you are not going to be able to address the
    mammoth problems you face. And then if you do receive it and if
    you repay it, you are going to deepen the mammoth problems that
    you face. I am not so sure that we should not make corrections
    on the other end when the loans are being made. The question is
    this, would it be in the best interest of those nations
    receiving the largesse from richer nations or the World Bank,
    if on the receiving end, the repayment period is stretched out
    years and years and years and years as opposed to trying to
    repay the loan over a short period of time or the beginning of
    the repayment of the loan over a short period of time. What we
    do sometimes in municipal government is that we will lease land
    to some entity that has a government purpose for one dollar for
    75 years, and everybody knows and understands when you do that,
    that there is a public purpose and so you do not want to burden
    this entity. So I am wondering, I support debt relief
    obviously, but I am wondering if maybe we should not do
    something on the front end to even remove the psychological
    trauma of wondering how you are going to make it when you have
    to begin to repay the loan, am I clear? Okay.
        Mr. Flood. Well, that is a very important question. I think
    that is a question actually which a lot of these--many of the
    shareholders of the multi-lateral development institutions have
    been concerned about in recent years, and I give credit to the
    Administration; they were concerned about the kind of issue you
    are talking about. If you take a look at most of this multi-
    lateral debt, which is the kind of debt we are talking about
    trying to get canceled, most of it is already on very long term
    and very low interest. The IDA loans, for example, are 40 years
    long, and they have a 10-year grace period where you do not
    have to pay any principal and you only pay a small service
    charge. The problem is that in spite of those easy terms, these
    countries still managed over time to accumulate an awful lot of
    debt and get themselves in an unsustainable position so that
    they needed debt relief. That was one of the reasons for of
    course the HIPC program and the subsequent debt relief programs
    that were developed. But even then, a couple of years ago, the
    Treasury Department, our Treasury Department, said it is
    obvious that a country like Niger cannot pay back anything. Why
    are we kidding ourselves? They are so poor, they are not in a
    position to be repaying debt. And what happens is you have kind
    of a lend-and-forgive cycle. The World Bank would make a loan
    to Niger and then after a few years, Niger would have trouble
    paying it back, so the World Bank would make another loan so
    that they would have the funds with which to repay the earlier
    loan. This is a kind of a never-ending cycle of lend and then
    not getting paid, so you have to lend again so they can have
    the money that they can use to pay you back. The money is just
    revolving in a circle. So they said you have to give them
    grants, this is what is going to happen. So a lot of these
    countries now are receiving grant funds, not loans at all from
    IDA for example, but getting the money without having to pay
    any of it back. And this is a new feature. The question though
    is whether the criteria that are used for determining which
    countries should receive grants are adequate, and this is a
    debate that goes on. But it is an advance, they are making an
    advance in that respect. But there is still the question, for
    all the countries we are talking about, is even though a lot of
    them, most of them, are going to be in a position to get some
    grants going forward, they still have this large overhang of
    debt from the past, which is hanging over them and which they
    really need to get rid of.
        Ms. Woods. So we are all here as member of the Jubilee
    Network and strong supporters of debt cancellation, 100
    percent, no strings. We will keep telling you that daily. I
    think we are also, and you see it in much of our testimony,
    recognizing that debt relief is just a small part, an important
    part, but a part of the picture. Debt relief must be
    accompanied by changes in trade in particular. If you think
    about Africa, you should think richness, you should think
    resources, right? But those resources, whether it is the oil or
    the uranium, I could go on and on in terms of the richness of
    the continent.
        The Chairman. Well, you could if we did not have a vote.
        Ms. Woods. Sorry, you have a vote. The point is that debt
    cancellation is a critical first step. But in looking at the
    big picture, which your question goes to, we have to also look
    at changes that will bring a fair trade opportunity so that
    African countries do not have to continuously go asking for
    loans but that the richness of the continent can actually
    benefit the citizens of the continents themselves.
        The Chairman. We are going to have to break now for the
    vote, but we will come back. There could be a second round.
    This is a very important subject, and I will be back. The
    gentlewoman from Wisconsin and other members may also come back
    and have some further questions. We should be back in about 20
    minutes or less.
        Ms. Woods. Thank you.
        [Recess]
        The Chairman. We will reconvene. Other members may be back
    but, as I listened, there are obviously a number of things we
    want to deal with here, but the vulture fund issue is obviously
    a tough one for us to get a handle on legally. And I remembered
    and I checked with my staff, which has been doing such good
    work, I remembered the proposal that had been forwarded by Ann
    Krueger at the IMF for some international bankruptcy regime.
    Would someone get that door, please, and close it? And it does
    seem to me that if that had been in place, we would be a lot
    better off. I would be interested in your views about whether
    you think an international bankruptcy regime would be useful
    and, if so, what could we do? Obviously, we cannot simply
    legislate it, but how would we go about pushing for that,
    should that be part of what we are trying to do in this? Let me
    start with Mr. Caliari.
        Mr. Caliari. Thank you very much. I think you are
    absolutely right, ideally an international bankruptcy system
    would be the way to replicate. I was talking about incentives.
    What you have at a domestic level in every country is the
    domestic bankruptcy system where the creditors know that if a
    debtor goes bad, they are going to have to take some losses,
    right? There is a system for that. We do not have that system
    at an international level. What we de facto have is the
    combined work of different systems that have been created, one
    on top of the other, to try to develop a solution and the
    solution is driven by the creditors alone, so there you have
    already a significant difference with what happens at the
    domestic level where there is an independent authority usually
    issuing judgment. So in the bill we do not go into the details
    of--we do not say actually it needs to be a bankruptcy system--
        The Chairman. That is why I asked you.
        Mr. Caliari. Yes, okay, we are saying that there is a need
    to actually address this incentive problem and the only way to
    address the incentive problem is with a binding legal
    framework. What you have here is the problem of collective
    action, where no individual country and no individual creditor
    would have a willingness to take action on its own.
        The Chairman. No, in fact, they are afraid that they will
    then be disadvantaged.
        Mr. Caliari. Right.
        The Chairman. It will be a ``beggar thy neighbor''
    situation.
        Mr. Caliari. Exactly.
        The Chairman. Let me go on--
        Mr. Caliari. But just let me say one thing about the SDRM
    proposal, which you referred to, which actually I am not sure
    we will be necessarily in a better place because the problem
    with the SDRM is that it did put the IMF, which is--
        The Chairman. Well, it does not have to be that one.
        Mr. Caliari. Right, exactly.
        The Chairman. That would be the question I would ask people
    to think about, when we come back, for us in February, let me
    put it this way: In some cases, if you are afraid bad things
    are going to happen, you can condition what you are doing and
    say to people, ``Well, do not do that.'' But you really cannot
    say to the poor countries, ``We are not going to give you the
    relief,'' because they are being driven to this. So it did seem
    to me that is one that we should be thinking out and then how
    to do it. Mr. Flood, on the bankruptcy issue?
        Mr. Flood. I guess I have not thought about this for a
    while, so I am not going to be able to give you a very good
    answer.
        The Chairman. Okay.
        Mr. Flood. But I do remember one of the problems with it,
    the idea floated around for an international bankruptcy system,
    was that the debtors did not like it. They were afraid that
    they were going to be thrown into bankruptcy against their
    will. This would cause them more problems than it would solve.
    So you had that sort of lack of interest on the part of many of
    the debtors to get involved with that kind of a thing.
        The Chairman. But would that be curable if it was drafted
    properly?
        Mr. Flood. I think it would have to be drafted as a
    voluntary system.
        The Chairman. Okay. Ms. Woods?
        Ms. Woods. I think the critical thing here is a fair and a
    transparent process. And, yes, I think there are a lot of us
    that will quibble with the process that was already presented,
    the sovereign debt restructuring mechanism,--
        The Chairman. Forget that.
        Ms. Woods. --and we can debate that. But, overall, a
    process that brings open, transparent discussion so that there
    are not backdoor deals with hedge funds and other type funds, I
    think brings up a bit more openness. So what we need is a
    process where parliaments, where citizens and really everyone
    can see what is the actual debt and have a more open process.
        The Chairman. I really urge you to start working on that.
    Frankly, conceptually and intellectually, debt relief is kind
    of easy, and I think we will put that bill through, but we want
    to do some of the other things. And also when we do debt
    relief, we are going to be told about moral hazard, and it does
    seem to me that the greatest moral hazard here is the absence
    of a bankruptcy system. That is the license for not worrying
    about whether people can repay, the absence of a bankruptcy
    system is probably one of the major ones.
        Mr. Watkins?
        Mr. Watkins. I would agree with what other panelists have
    said, that I think it is a missing feature in the international
    system right now, that such a system--we are seeing all these
    problems with vulture funds, with creditors not participating,
    and that is fundamentally, there needs to be put in place less
    of a patchwork of these initiatives involving certain creditors
    here and there and more of an over-arching framework.
        The Chairman. Well, I appreciate that and I really urge
    you, there is a great deal of expertise here, and I think again
    some of these questions are relatively easy, although they can
    become difficult politically. I was struck as I listened, it
    just occurred to me as my staff briefed me and I listened, that
    the vulture fund is a very significant issue, and we need to be
    able to deal with it.
        The other question is similar in the sense that we have the
    people who are willing to discharge their debts may be feeling
    they are being taken advantage of and that is additional third
    country lending. So Country A forgives the debt of Country B,
    and then Country C, as in China, then decides to make more
    loans. Is there any way we can deal with that or should we? Mr.
    Caliari?
        Mr. Caliari. Yes, certainly the only way a system like this
    can work is if it includes all public and private creditors, so
    in public creditors you have to include a country's lending
    through different windows also, which is important.
        The Chairman. What is the likelihood of their agreeing, do
    people have any sense of it?
        Mr. Caliari. Yes, for any measure like this, a request for
    collective action, you always need a leader, a champion, to
    start, and so it may take some years. Of course, this is not
    something that is going to happen tomorrow, but you do need
    somebody who is going to start. If you wait until everybody
    agrees to start the process, then it is never going to happen.
        The Chairman. Yes.
        Mr. Caliari. Sorry, and I do not think that has deterred
    the U.S. Government in the past when there are things that the
    government feels strongly that need to be pushed at an
    international level, taking the leadership, finding allies to
    go ahead and do it, I do not think that has been a deterrent.
    And so I think it is important that the Congress calls on the
    Executive Branch to pursue this at the international level.
        The Chairman. Mr. Flood?
        Mr. Flood. Yes, well, I think that this gets into
    geopolitical issues, a lot will depend on what China thinks is
    in its own interest here. If you are talking about China, that
    is the big player here, but India to some extent as well. But
    one thought that had occurred to me is that why not try to get
    them more to the table where they are discussing these issues
    in a forum where they would be willing to listen and be willing
    think that perhaps their point of view about how some of these
    development issues should be addressed would be taken into
    account, like giving a bigger voice to the board of the World
    Bank, something like that. That might help, get them sort of--I
    hate to use the word ``co-opt,'' but get them into the dialogue
    on all these issues with the others instead of operating
    independently.
        The Chairman. Ms. Woods?
        Ms. Woods. I think the principle that you are recommending
    is a good one, and that is for donors to coordinate a bit
    better and that you do not have the United States coming in, or
    the United Kingdom coming in with all their protocols and
    essentially adding demands on the developing countries
    independently, so some type of better coordination I think is a
    good principle to move forward. But I think it goes a step
    further, I think there is also a need for the debtor countries
    to have sort of a cartel, so to speak, and to be able to come
    together to kind of map out their plan. And it may be that they
    are wanting to go to China or Malaysia or a number of other
    countries that are offering development finance without
    conditions.
        The Chairman. One of the things I was reminded of by Mr.
    Caliari is that we, the United States, are in significant
    arrears to IDA, and so that may be one of the factors driving
    countries to do this. One of the ways we should deal with this
    is--and I think we may be writing, some of us, this is our
    fault, this is not a campaign of the President, this is a
    congressional problem, we need to do better on the IDA thing.
    Mr. Watkins?
        Mr. Watkins. Yes, just a bit on that. One of the problems
    is, as Aldo Caliari mentioned earlier, that countries do not
    have access to concessional finance, so they are turning to
    China.
        The Chairman. So the IDA thing would be--
        Mr. Watkins. IDA is a source, more grant-based finance is
    critical for this move forward. I think the other thing, as we
    talk about bankruptcy or arbitration processes, the importance
    of thinking about responsible lending, what does responsible
    lending practice look like, what sort of standards should be in
    place so that we do not again accumulate new odious debt.
        The Chairman. Well, I agree but the problem is to deal with
    responsible lending, you need sort of unanimous consent of the
    lenders because one irresponsible lender can in fact profit
    from the others. Let me add this, and then I am going to call
    on the gentlewoman from Wisconsin, who has been one of our
    active members who has an interest in this. The governmental
    responsibilities, that is why we are here, but it does seem to
    me with some of the lending, when we think about some of the
    countries, that the non-governmental organizations of civil
    society can be relevant. It does seem that here is a case where
    it is a moral persuasion. There are countries doing the lending
    that do not want to be thought ill of, that have a self-image
    that I think you can affect, so we are not abdicating, it is
    our part too. But I think this is an important thing for us to
    be able to do together.
        The gentlewoman from Wisconsin is recognized for 5 minutes.
        Ms. Moore of Wisconsin. Thank you, Mr. Chairman. I guess I
    want to start out by asking, I believe it is Mr. Watkins, a
    question. You had with respect to the vulture funds, you say
    that the World Bank should buy back some of the debt and
    increase this fund and that countries ought to be able to come
    back more than once. What do you see as the under-riding
    obstacles or conditions that exist within the World Bank
    structure to prevent countries from doing that? I know that
    president certainly is very worried about vulture funds at this
    time. If this were so easy, why would not she just do it, what
    are the barriers?
        Mr. Watkins. As I understand it, it is simply World Bank
    policy that countries cannot access the fund prior to reaching
    decision point on the Debt Reduction Facility. So it should be
    a matter of being able to change that policy, and that would
    make it possible for countries like Liberia to move forward. I
    think another point that is interesting on the vulture fund
    piece, it is just a question of information and disclosure.
    One, progressive reform that we could, just building on what I
    suggested earlier, that we could--we do not know a lot about
    who these vulture funds are, even if they are U.S. citizens who
    are involved. So could we somehow find a way to disclose what
    are these funds paid, who are they, what actions are they
    taking? That sort of basic information on the if you in essence
    by debt on the secondary market and you are distressed debt
    fund or U.S. individual, should we not have access to that sort
    of information in addition to the World Bank level work?
        Ms. Moore of Wisconsin. Right, well, they will say that
    they are private funds and so that is why this disclosure is
    very difficult. It is a challenge that this committee deals
    with all the time.
        Let me ask another question that is perhaps is a very
    theoretical and macroeconomic, and perhaps, Ms. Woods, you
    would like to weigh in on this as well with Mr. Watkins or
    other members of the panel, would it be useful to try to have
    the United Nations, I understand that most of these cases have
    been brought in the United Kingdom and the United States'
    courts, but would it be useful to have the G-8 countries or the
    United Nations define odious debt so that it would be a
    preemptive strike and discourage investors from in fact lending
    and having financial transactions with countries where there
    are dictators, where they are financing these wars? I think the
    story of Africa is a story of these criminals, I think that are
    in charge of government, and so if we were to define odious
    debt at the level of the United Nations, do you think that that
    would be something that we can pursue at the United Nations
    level that would discourage these investors and in fact prevent
    these folks from winning in court?
        Ms. Woods. Well, Aldo spends a lot of time on UN issues, so
    I am sure he will want to comment on this as well, but
    essentially yes, I think it is critical to begin to have
    international law that says that dictator debt essentially is
    illegitimate. And we have a practice from 1898 set forward by
    the United States when they essentially took over Cuba and said
    that the debt owed to Spain was odious debt and took steps to
    have that debt canceled. You had the Bush Administration again
    with Iraq use that same principle of odious debt, and so you do
    have established practice. I think it would be extraordinary
    and extremely timely for this committee to encourage the
    administration at the United Nations and elsewhere to advance
    an international convention or some type of international legal
    binding mechanism that actually--
        Ms. Moore of Wisconsin. Vulture funds did not even come up
    at the last UN meeting, Mr. Chairman and Ms. Waters.
        Mr. Watkins. Right.
        Ms. Moore of Wisconsin. It did not even come up.
        Mr. Watkins. Right.
        Ms. Moore of Wisconsin. So that is why I asked that
    question.
        Mr. Watkins. Now, I do think there is an opportunity
    because the UN in 2008 is going to be advancing the Financing
    for Development Conference that was held in Monterrey, Mexico
    is re-convening, and so you will have an international
    conference looking at development finance issues, and clearly
    issues of debt are on that agenda, so there is an opportunity.
    What would be needed is leadership from the United States.
        Ms. Moore of Wisconsin. Well, Ms. Waters, for example, is
    on the Judiciary Committee, I do not know which jurisdiction,
    which committee has that, but she is also on this committee
    too, so I am so happy that she is here to hear this. Mr.
    Chairman, will you yield me just 30 more seconds?
        The Chairman. Yes.
        Ms. Moore of Wisconsin. Thank you because I would like Mr.
    Caliari to be able to respond at the suggestion of Ms. Woods.
        Mr. Caliari. I really think she has covered it quite well.
    I totally agree with her opinion. You need a convention that is
    going to be binding on domestic courts because at some point
    the place where these debts is enforced is in court. So if
    there is a convention like that, that is multilaterally agreed,
    then as you say you can prevent these folks from winning in
    court, and I think that will be very important progress.
        Ms. Moore of Wisconsin. Thank you so much. I yield back.
        Ms. Woods. Thank you.
        The Chairman. I want to thank you. And we really do want to
    keep working with you on how to--we are going to move on this,
    this committee will be voting on this bill next year, and
    designing a bankruptcy system will be part of the other
    safeguards we can put in. We will also be urging that we pay up
    our IDA debt because that reduces the push factor there. I
    appreciate this, and the members of our staff, myself, the
    gentlewoman from California, and others will remain in contact.
    The hearing is adjourned.
        [Whereupon, at 11:40 a.m., the hearing was adjourned.]
                                A P P E N D I X

                                November 8, 2007
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