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Statement by Ms Yuefen Li
Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights

46th session

Human Rights Council

Interactive dialogue under Item 3

Geneva, 2 March 2021

H.E. Excellencies,
Distinguished delegates,
Ladies and Gentleman,
Representatives of civil society,

I am honored to address the Human Rights Council for the first time since my appointment last May as Independent Expert on foreign debt and human rights.

In today’s remarks, I would like to present the main elements and recommendations of my report on the role of credit rating agencies in debt crisis prevention and debt relief. I also wish to report to you my main activities so far. But before that, allow me to share my serious concerns with the imminent debt crisis that many developing countries are facing.

The COVID-19 pandemic has triggered multiple social, economic and human rights crises affecting millions of people. Debt levels, especially for public and external debt, have been rising fast, above all for developing countries, undermining the pandemic response and reversing poverty reduction and development progress. More than 50 per cent of low-income and least developed countries are assessed at high risk of /or already in debt distress. Five developing countries defaulted on their sovereign debt in 2020.If the international community does not take comprehensive, effective and immediate steps to provide substantial debt relief and financial support, many developing countries on the verge of default would sink. And with them, their most vulnerable population.

The UN Secretary-General recently stated that “No country should be forced to choose between providing basic services and paying their debts. We need a quantum leap in financial support to developing countries in the world”. However, developing countries have been using more tax revenue to service their debt, especially least developed countries and small island developing countries. This is regrettable as we are at a time when the financial and fiscal capacities of States ought to be geared toward avoiding further regression in social protection and human rights.

My report to the General Assembly last October, addressed these concerns and offered some recommendations. Record high public and private debt levels pre-COVID-19 have increased due to additional amounts of debt required to respond to the pandemic. With a global economy in a deep recession, there are ample reasons to fear a systemic debt crisis. Hence, a number of alternatives must be considered and acted upon, starting with a reform of the international debt architecture to make it fit for purpose. Measures should include temporary debt standstill, emergency financing, debt restructuring and debt cancellation.

I also issued a press release requesting the extension of duration and country coverage of G20 Debt Service Suspension Initiatives and debt relief by the IMF last May as well as a Note on a human rights-based debt relief options in the COVID-19 context, last August.

Since assuming the IE position, I have had opportunities to raise my concerns and discuss various measures in a number of high-level meetings on the Financing for Development process in the era of Covid-19 and beyond; I have spoken at quite a number of prominent intergovernmental meetings and forums organized in four continents. I have also participated as panellist in webinars and discussions organized by an ample range of stakeholders and have been invited to participate in meetings to discuss debt situation of specific countries and regions.

Distinguished delegates,

Allow me to turn now to the thematic report before you today, A/HRC/46/29. For decades, credit rating agencies have had an enormous influence on lending decisions of public and private investors and on market sentiments. In other words, they have a decisive impact on borrowing conditions and interest rates of sovereign and private debts as well as on access to international capital market.

This is not news. In fact, past financial and debt crises, in particular the sub-prime mortgage crisis and the Asian financial crisis have exposed the inherent structural problems of these agencies and their failure to perform the role they are supposed to. Many reform proposals have been put forward over the years. Unfortunately, not much progress has been made so far on those reforms. At the present juncture, in my view, the reforms can no longer be postponed, particularly to prevent further retrogression on economic, social and cultural rights because of their unfettered activities.

Credit rating agencies have been called “the fire alarm that never rings.” Actually, instead of warning of the coming of the crisis, they end-up contributing to it. A more effective, human rights-based international financial architecture is required now more than ever in order to respond to the socioeconomic downfall resulting from the global pandemic.

The so-called “big three” credit rating agencies control over 92 per cent of the global market. As mentioned in the report, these agencies suffer from birth defects, including conflict of interests, biased decision-making, oligopoly, and wrong business model. Often, their grading is procyclical and lacks human rights considerations, hence exacerbating financial market volatility and making Government’s efforts to contain debt crisis ineffective and increasing human suffering.

I acknowledge in the report that in recent years, there has been some indication of their interest to enhance rating standards by incorporating environmental, social and governance indicators. These steps could signal an opening towards a more systematic and consistent approach to human rights, in line with international human rights standards and norms, notably the guiding principles on foreign debt and human rights, and the guiding principles on business and human rights. I would be keen to engage with them in this discussion as part of a larger reform process.

Existing human rights standards can and should serve to guide a closer assessment of the role of credit rating agencies, as private business actors with clear and direct impact on States’ capacity to make use of maximum available resources to fulfil human rights obligations, especially in relation to economic, social and cultural rights. These standards apply to international cooperation and assistance as well, and should serve to protect and promote all human rights and to combat inequality, notably during times of crisis.

Ladies and gentlemen, participants:

Among my recommendations in the report is a call to States and the international community at large to reform the international debt architecture, including the role, criteria, transparency and accountability of credit rating agencies.

To reduce the frequency of debt crises, which would always have devastating impacts on the work, social services and livelihoods of the population. I also recommend to States to:

1. Reduce or break the current oligopoly of the “big three”. The lack of competition perpetuates wrongful behaviour and reduces the incentive to improve the quality of credit ratings. The removal of the oligopoly could be made possible through the encouragement of the entrance of new players into the market, including publicly owned credit rating agencies.

2. Address the issue of conflict of interest. The underlying cause of many of the problems for credit rating agencies is conflict of interest, and it is therefore necessary that the issue be addressed urgently. The “issuer pay” business model should be changed.

3. Introduce a system of monitoring and accountability of credit rating agencies. A system of accountability would make credit rating agencies try harder to do a better and more professional job in the rating process and reduce sloppy performances.

4. Strengthen the incorporation and application of relevant international human rights standards and norms in the context of the activities of credit rating agencies, including in the monitoring, supervision and reform of their functioning. Existing standards such as those included in the guiding principles on foreign debt and human rights and the guiding principles on business and human rights can be crucial.

Thank you very much for your attention and I look forward to our discussion.