Opinion: UN Committee adopts principles for sovereign debt restructuring

By Adriano José Timossi and Manuel F. Montes Reprint | | Print | |En español

Adriano José Timossi is Senior Programme Officer of the Global Governance for Development Programme (GGDP) of the South Centre and and Manuel F. Montes is senior adviser of the South Centre, Geneva.

GENEVA, Sep 17 2015 (IPS) - As a growing number of countries face the possibility of debt crises, the United Nations General Assembly has approved a set of nine basic principles for sovereign debt restructuring processes in an effort to provide for debt restructuring that is fair and economically sustainable.

The principles were forwarded to the General Assembly after two years of deliberations by the Ad Hoc Committee on Sovereign Debt Restructuring Processes, which agreed to them at the third working session of the on 27-28 July held at the UN headquarters in New York. They had originally been put forward by the Group of 77 (the coalition of developing nations) and China, which had also been responsible for initiating the establishment of the committee in 2014.

Six countries voted against the resolution, including the United States, claiming that the UN was not the forum to discuss debt restructuring and that such a mechanism would create uncertainty in financial markets. Most developed countries boycotted the Ad Hoc Committee’s working session in July, as did the International Monetary Fund (IMF).

The right of a state to design its own macroeconomic policy, including restructuring of its sovereign debt, without being frustrated or impeded by abusive measures, is one of the agreed-upon principles. Additionally, they declare that sovereign immunity from jurisdiction and execution regarding sovereign debt restructurings is a right of states before foreign domestic courts and exceptions should be restrictively interpreted.

Another principle is sustainability, which implies that sovereign debt restructuring workouts lead to a stable debt situation in the debtor state, preserving creditors’ rights while promoting economic growth and sustainable development, minimizing economic and social costs, warranting the stability of the international financial system and respecting human rights.

Other principles include good faith by both the sovereign debtor and all its creditors; transparency to enhance the accountability of the actors concerned; impartiality among all institutions and actors involved in sovereign debt restructuring workouts; equitable treatment for creditors; legitimacy, entailing respect for the requirements of inclusiveness and the rule of law; and majority restructuring, which implies that sovereign debt restructuring agreements that are approved by a majority of creditors are not to be impeded by other states or a non-representative minority of creditors.

The process of developing these principles included numerous informal working sessions, at which participants discussed the proposals by the Group of 77 and China, along with several principles based on the outcome of the UNCTAD Working Group on a Debt Workout Mechanism, comprising experts, legal scholars, investors, policymakers and civil society representatives.

During one of those sessions, Nobel laureate economist Joseph Stiglitz gave a keynote speech in which he pointed to Greece and Argentina as recent examples of countries that have suffered because of inadequate frameworks for debt restructuring. In the absence of an adequate framework for debt restructuring, he said, economies often go into deep recession, as happened in both countries. He also noted that there has been little progress in implementing the framework for dealing with sovereign debt that was established by the Commission of Experts on Reforms of the International Monetary and Financial System, which studied the 2007-2008 global economic and financial crises and which Stiglitz himself chaired.

In his address, Stiglitz also welcomed the Ad Hoc Committee’s work, noting that the UN, and not the IMF, is the right place for discussing these issues related to sovereign debt restructuring. Noting that the IMF is an institution of creditors, he said that to put it in charge of debt restructuring would be akin to asking Citibank to design the bankruptcy law in the United States. “We know how they would design the law, it would have indentured servitude,” he said. “We need a fair bankruptcy law, an efficient bankruptcy law and the bankruptcy laws that come out of creditors are neither fair nor efficient. The only place where one can have creditors and debtors at the table is the UN.”

Stiglitz identified five reasons why the issue has once again reached the top of the policy agenda. First, many countries are facing problems of excessive indebtedness. Sovereign debt is no longer a problem of the past, it is a current event in Greece and Puerto Rico, and there are potential crises brewing in many countries around the world.

Secondly, court rulings, particularly in the US and UK, have highlighted the incoherence of the current system and have made orderly debt restructuring, at least in some constituencies, more difficult, if not impossible. Capitalism within countries could not work without a framework for debt restructuring, and this is why every country has a bankruptcy law to facilitate the restructuring of debt. However, Stiglitz noted, there is no comparable international framework or international law, but rather an incoherent system where one jurisdiction makes one ruling and another jurisdiction makes a different ruling and there is no place where these can be reconciled.

The third reason is that there has been a movement of debt from banks to capital markets and this has increased significantly the difficulties of debt renegotiations because there are many more creditors with often conflicting interests at the table. Fourthly, and not as well recognized as it should be, is the development of CDS (credit default swaps), which are financial instruments for shifting risk, which can bring to the negotiating table parties who have no economic interest in a settlement. Worse still, they may have economic interest in not having a settlement.

And the fifth reason is the growth of vulture funds whose business model involves holding out against settlement and noncooperation (with the debtor country) in order to obtain payments greater than those participating in the debt restructuring exercise. This business model is making debt restructuring under existing institutional arrangements much more difficult if not impossible.

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service.