The choice for one creditor as a choice against another

My argument suggests that the decision for one creditor is simultaneously a decision against another. The purpose of this section is to substantiate the assumption that an interdepen-dency exists between choosing among various loan offers.

The most obvious starting point is to analyze whether debtor governments themselves consider an overall debt limit when making borrowing decisions. After all, if governments self-impose a maximum amount of debt it follows that they cannot accept all loan offers they receive. Such a debt limit would therefore introduce an interdependency where the decision for one creditor is also a decision against others.

My fieldwork uncovered evidence of such self-imposed debt limits. For example, when investigating the process of borrowing in Colombia⁶ the importance of the Inter-Parliamentary Public Debt Commission [Comision Interparlamentaria de Credito Publico (CICP)] became apparent. I also learned that one of the official tasks performed by the CICP is to examine whether the debt to be contracted will increase Colombia’s overall debt stock to an unsus-tainable level. While such a level is not clearly defined, it does suggest that the process of borrowing considers an overall debt limit.

Matters are more evident in Ecuador. Under the influence of past debt crises, Ecuador’s current constitution requires that the overall debt stock not exceed a specific threshold.

More particularly, the total external debt stock may not exceed 40% of Ecuador’s gross domestic product (GDP). Public debt officials in the Ecuadorian Ministry of Finance were aware of this, as the answer to my question regarding where Ecuador currently stands was given without any hesitation: “ Our current external debt is at 29% of GDP, as we have a debt stock of$ 17 million and a GDP of $70 million” (Anonymous, 2011a).

A further observable implication of the claim that governments choose amongst cred-itors is instances of rejected loan proposals. While we can observe which loans a country

6 See Section 3.3

obtains, quantitative data on rejections is typically not available. In fact, obtaining any in-formation on events that were not realized is a challenge. Nevertheless, during my fieldwork I was able to uncover some evidence of instances of governments rejecting loan offers.

For example, Colombia had several opportunities to borrow from the Chinese. For one, the Chinese have been readily available for negotiations as the Chinese Development Bank has maintained a permanent office in Bogota since 2007 (Guarin, 2011). In addition, I was told by several interviewees that loan offers have been extended to the Colombian government. Public officials told me of loan proposals by the China Export-Import bank that were rejected by the government (Chac´on Pe˜na, 2011a). This was validated by an interviewee who worked for the Ministry of Foreign relations (Garcia, 2011). The economic and commercial counselor to the Chinese ambassador also confirmed that loan offers had been made, but noted that the Colombian government has been hesitant to accept these offers (Quan, 2011).

More specifically, it is known that the Chinese offered to finance several public works projects in Colombia. For example, already in 2005, Colombia wanted to build an alterna-tive to the Panama Canal, a so-called Canal Seco [Dry Canal]. The government solicited foreign creditors – among them, the Chinese – interest in financing this project. The Chi-nese were initially thought of highly, but they were not selected for the project (Garcia, 2011; Leiteritz, 2011). In addition, government officials confirmed that the Chinese offered a loan to the State-Owned Enterprise ColPetrol. Yet again, this loan offer was rejected (Rojas Hayes, 2011). Thus, the Colombian government had several opportunities to obtain loans from China. Instead, it chose to reject these loan offers and borrow from traditional lenders such as the IMF, western governments and the private capital market.

A corollary of rejected loan offers on the part of the recipient government is the presence of competition amongst creditors. My interviews with representatives of lending institu-tions in Ecuador, Peru and Colombia confirmed that such competition is real and fierce.

For example, a representative of the German development agency stated that there is com-petition between them and the Chinese with respect to whose loan offer is accepted by the Ecuadorian government. In particular, there were instances where the Germans wanted to finance particular projects in Ecuador, but lost out to the competing Chinese offer (Rast, 2011). The reverse was the case in Colombia, where a Chinese official implied that their loan proposal had been defeated by a western loan offer (Quan, 2011). This coincides with the information that the Colombian Inter-Parliamentary Commission of Public Debt has in the past rejected loan proposals (Rojas Hayes, 2011).⁷

With respect to multinational lenders, interviewees were undecided whether BRIC loans were crowding out loans from the World Bank or IMF. Some observers stated that there is no competition, as the sectoral focus of projects financed by the World Bank and China differs (Escobar Arango, 2011). However, while a former World Bank representative agreed that the sectoral overlap is minimal, that is beside the point. With limited borrowing capacities, the decision is between creditors, not between sectors (Perry, 2011). Similarly, a former employee of the IMF stated that multilateral organizations are directly competing with the Chinese (Steiner, 2011), an assessment that was shared by Colombian officials in particular (Martinez, 2011).

Bilateral lenders are also aware of the competition. When interviewing representatives of the French Development Agency [Agence Francaise de D/’eveloppement, AFD] I asked whether they felt it necessary to compete with other creditors. In their view, this was indeed the case. In fact, the conversation then turned into a comparison between the loan offers the AFD typically makes to governments of developing countries and those of its competitors. For this purpose, the interviewees were explicit about the information they had about their competitors. With respect to the interest rate, for example, the AFD charges LIBOR plus 120 basis points, which is the same rate as demanded by the CAF [Corporation Andina de Formento]. Larger institutions such as the World Bank or the

7 However, it was not possible to obtain further details on the loans that the Commission rejected as their records are not public

IADB charge LIBOR plus 100 basis points and 90 basis points, respectively, but – as was pointed out repeatedly – attach somewhat more stringent conditions than the AFD. The knowledge of their competition was impressive.

In sum, there appears to be much evidence that an overall debt limit that would in-troduce interdependency amongst creditors. The debt limits institutionalized in countries borrowing processes, instances of governments rejecting loan proposals and creditors being aware of the competition amongst themselves all point to the conclusion that a govern-ment’s decision for one creditor is simultaneously a decision against another.