It’s a code name for “do the things the right way”. Because your own interest – that’s what’s important – it’s your own interest, for the debtor country, to be transparent. On today’s episode of Expert Answers we’re looking at debt. Not just how much is owed but to who and under what terms. The brains here at the World Bank call it debt transparency. But what exactly is that? And why is it so important? Well for an expert answer on this and other questions, we’re joined by the World Bank’s Global Director for Macroeconomics, Trade and Investment. A man who has spent his entire life studying issues around public debt. Marcello Estevão, I want to start by asking what exactly is Debt Transparency? It’s a word we hear thrown around quite a bit. So the idea of transparency is making sure that all the data are out there. The creditors themselves can see how much you can afford to borrow. The population and civil society organizations can see the type of debt you are getting. And this at the end of the day is good for the country because you are going to get better terms. You are going to make debt decisions that are going to be consistent with your ability to repay, to your ability to grow, to repay that. So, to be clear, we’re not talking about just the amount of money that a country owes. Because we often hear about that. You know, “this country or that country has become straddled with debt”. We’re talking about who the debt is owed to and under what conditions that debt was lent – or that money was lent to this country. Exactly, because – think about it, the same amount of debt may mean very different things depending on the interest rate. So if the interest rate is low enough – say the country’s growing much more than that. One could say the debt is going to repay itself. So the terms matter – they matter a lot. And transparency is a code name for “do the things the right way”. Because it’s in your own interest – that’s what’s important – it’s in your own interest – for the debtor country – to be transparent. And when it comes to the composition of debt – not just the amount that’s owed, but who it’s owed to – what have been some of these changes? I’ve been reading about non-Paris Club Debt. Can you explain what that is and what some of these bigger trends are? So what happened, say in the last ten to twenty years, is that the international economic order changed. So what were the traditional creditors continue being creditors but with time all the players begin generating enough savings in their economy that they have resources to lend. And those players are lending and they are helping a lot of development elsewhere but that causes some stress in the coordination mechanism of the international creditors. Why? Because they are not part of this traditional way to coordinate, which is the Paris Club. Why is important to coordinate? Well, think you owe money – your mortgage – to several banks. Ok? Wouldn’t it be nice if those banks communicate with each other and say look – –“Here’s the conditions…”
–“Here’s the conditions and that’s what I did. You maybe want to do the same. Oh no he’s a good guy he can afford this debt and all that.” So coordination matters. If you have lack of coordination, you can have someone doing something that is very good – in my example – for its own bank but bad for the system of banks. What are the benefits that a borrowing country can derive from being more transparent? Better terms. Terms that are more – more attuned to the conditions on the country. If you’re not transparent and creditors know that they are going to put a premium on the interest rate. So the old story again – the market in the US. You’ve seen what happened in the 2000s. There was all this, “Oh I can give you a loan and can’t even know what your income is. It doesn’t matter.” But you know it’s a variable rate – there’s a little premium there. So the loan had a fixed rate for a little while and then suddenly became variable and a lot of people got into trouble. But why there was some uncertainty about your true quality as a debtor.
–Right. So if the creditor knew everything about you, you could really design – in collaboration with you – what the best interest rate is. So, knowledge is power for both sides and it’s power in the sense it can allow the creditor and the debtor to choose a package of loans that may fit your conditions. Thank you so much for your time.
–You’re welcome. So we’ve learned that Debt Transparency is all about knowing not just how much debt is owed but to who and with what strings attached. Greater transparency can have huge benefits for both borrowers and lenders. For more information on that, be sure to check out WorldBank.org. Thank you so much for checking out our new series. Be sure to subscribe to the World Bank on YouTube. Please send us any feedback or suggestions that you might have. Leave us a comment below, send us an email. And send us that question that you would like
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