Vatican-backed report seeks financial reform to avert decades of lost development

By Libby George

LONDON(Reuters) -A commission launched by the late Pope Francis has outlined financial reforms it says could help to avert decades of lost development in poor countries that face onerous repayments as global public debts reach record levels.

The Jubilee Commission report is published ahead of the once-a-decade United Nations Financing for Development Conference that takes place in Seville, Spain, later in June.

The environment for this jubilee-year campaign could hardly be more different from the last - 25 years ago - that yielded billions in historic debt forgiveness. 

Mariana Mazzucato, a University College London professor and member of the commission, said today's debt crisis was symptomatic of "a broken investment model".

"The solution has to be public investment strategies that build productive capacity, domestic value added and sustainable fiscal space," she said.   

The report recommends measures including more debt suspension initiatives and steps to ensure money from institutions, such as the International Monetary Fund and the World Bank, does not end up flowing from countries to private creditors. 

It also urges legal changes in London and New York - the jurisdictions for most bond contracts - to disincentivise creditors from refusing to take part during debt restructurings.     

After the debt forgiveness that followed the previous jubilee campaign, many developing countries, freed of their existing debt, turned to more expensive private lending, and China's lending ballooned. 

As a result, countries including Sri Lanka, Zambia and Ghana slid into default.

A wave of sovereign defaults unleashed by the COVID-19 pandemic - and exacerbated by the pressure of Russia's invasion of Ukraine and a global rate-hiking cycle that boosted borrowing costs - largely crested last year. 

But the commission said dozens of countries are still squeezing spending to repay debt - with long-term implications for development and social cohesion.     

Average interest costs for developing countries as a share of tax revenues has almost doubled since 2014, while 3.3 billion people - and more than half of Africans - live in countries that spend more on debt service than health. 

The system, the commission's leaders said, traps countries in a cycle in which private lenders send cash when times are good - but quickly shut off access when global risk re-emerges. 

When lenders of last resort, such as the IMF, send money, the commission said that money often goes towards repaying creditors to avoid default. 

Martin Guzman, commission co-chair and Argentina's ex-Economy minister, said that created a problem for both creditors and debtors.

"They don't come to the table with the right conditions for engaging timely and sustainable restructurings, and that aggravates the development crisis," he said.

(Reporting By Libby George; editing by Barbara Lewis)