UN General Assembly adopts principles for sovereign debt restructuring
In a landmark decision and by a large vote, the United Nations General Assembly adopted a resolution which contains nine core principles that should be respected when a country undertakes the restructuring of sovereign debt. The resolution is a significant step forward in supporting countries that have to restructure their debt and face creditors as well as “vulture funds.” This issue of South Bulletin highlights the issues and the process by which the resolution was adopted:
UN adopts landmark debt resolution on principles for sovereign debt restructuring
UN Committee adopts principles for sovereign debt restructuring
Political impasse limited UNGA’s debt work
Debt Crisis: Resolution and Workout Mechanisms
Debt Restructuring Mechanism: Options for Moving Forward
A Rule of Law for Sovereign Debt
This issue also talks about the impact of hedge funds’ activities on human rights and the consequences of foreign debt on human rights.
Other articles in this bulletin include:
Access to medicines and the right to health and life
The high prices of patented medicines: The case of Hepatitis C
Antibiotic resistance: a global plan at last
To download the entire South Bulletin, please click here. To read individual articles, please see below.
UN adopts landmark debt resolution on principles for sovereign debt restructuring
In a landmark decision and by a large vote, the United Nations General Assembly adopted a resolution which contains nine core principles that should be respected when a country undertakes the restructuring of sovereign debt. The resolution is a significant step forward in supporting countries that have to restructure their debt and face creditors as well as “vulture funds.”
By Bhumika Muchhala
The United Nations General Assembly adopted a resolution on principles to guide sovereign debt restructuring processes on the afternoon of 10 September.
This landmark resolution was submitted to the General Assembly by South Africa (current chair of the Group of 77 and China developing countries). It was initiated by Argentina in the wake of the vulture funds lawsuit by an international hedge fund against the country.
The resolution yielded a ‘yes’ vote from 136 countries from Latin America, Asia, Africa and the Caribbean. A ‘no’ vote was registered by 6 countries: the United States, Germany, the United Kingdom, Japan, Canada and Israel. An ‘abstain’ vote, meaning that these countries abstained from voting either yes or no, was registered by 41 countries.
The votes reflect the geo-political pattern in the UN where developing countries vote in favour of measures to increase the stability and fairness of the international financial system, while the most powerful developed countries often block such measures, arguing that such discussions must only take place within international financial institutions and not the UN.
The vote means that the UN General Assembly has declared that sovereign debt restructuring processes should be guided by nine basic principles. Unlike the Security Council, which has the power to issue legally binding resolutions, General Assembly resolutions are non-binding. But they carry political weight.
While the resolution does not reflect the original subject of establishing a multilateral legal mechanism for sovereign debt restructuring, the nine principles that have been adopted have been called a historical breakthrough because the vast majority of nations in the world have spoken out for a change to the current creditor-led debt system that has repeatedly failed numerous countries.
The resolution outlines nine core principles that should be respected when restructuring sovereign debt: sovereignty, good faith, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy, sustainability and majority restructuring.
The principle of sovereignty is encapsulated by the following language in the resolution, “A sovereign state has the right … to design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures.”
The principle of sustainability 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.
The principle of 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.
Transparency focuses on the need to enhance the accountability of the actors concerned.
Equitable treatment refers to the equitable treatment of creditors and debtors, and impartiality refers to the impartial conduct and decisions of all institutions and actors involved in sovereign debt restructuring workouts.
The principle of legitimacy entails respect for the requirements of inclusiveness and the rule of law.
Majority restructuring 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 vote comes one year and a day after the General Assembly first agreed to negotiate and adopt a multilateral legal framework for sovereign debt restructuring processes on 9 September 2014. Following the September 2014 vote, an Ad Hoc Committee was established on 29 December 2014, with the mandate to elaborate a multilateral legal framework for sovereign debt restructuring processes. Bolivia chaired the Committee.
The current vote results, when compared to last year’s vote results, reflect an increase of 12 countries for the ‘yes’ vote and a decrease of 5 countries for the ‘no’ vote. The overall movement is that of increased support for the momentum on debt restructuring. The same number of 41 countries abstained from a vote in both years.
The countries whose votes changed from an abstaining vote to a ‘yes’ vote are Iceland, Ukraine, Armenia, Serbia, Papua New Guinea and Montenegro. The countries whose votes turned from a ‘no’ vote in 2014 to an abstaining vote this year are Australia, Czech Republic, Finland, Hungary and Ireland.
With the exception of the six countries that voted against the principles, all other developed countries abstained from a vote. Southern countries that also abstained from a vote included Mexico, Colombia and Gabon.
Debt-stricken Greece abstained from voting. However, Greece made a significant break from the European Union’s collective boycott of the entire process by participating in the final negotiation session of the Ad Hoc Committee at the UN headquarters in New York.
Other developed countries, most notably the US, Japan and Canada, as well as the International Monetary Fund (IMF) also refused to participate in the three week-long negotiation sessions of the Ad Hoc Committee over the last one year.
Highlights of group/country statements during the vote
The G77 and China group of 134 developing countries said that the text provided a good basis for future discussions. The principles had been drafted in a way that brought a “win-win” situation for debtors and creditors. The issue of debt sustainability was central to achieving national and international development goals. The international community needs to now march with vigour to achieve the post-2015 development agenda and to ensure that no one is left behind.
Bolivia, who chaired the Ad Hoc Committee, said the adoption of the principles to guide debt restructuring validates a process that saw tireless efforts of several delegations and the support of the Secretary-General and the President of the 69th General Assembly. This collective endeavour has the potential for creating long-term positive economic outcomes for developing countries.
In direct opposition, the European Union (EU) stated that the resolution’s text contained a number of statements that did not accurately reflect international law or treaties. The EU stressed that the IMF is the appropriate institution to host global discussions on the subject.
The United States said the resolution was deficient on several counts, including the implication of a right of a State to debt restructuring and the threat to contractual obligations. A statutory mechanism for debt restructurings would sow uncertainty in financial markets. The US supported the EU saying that the United Nations was not the appropriate venue for such issues.
The Caribbean Community stated that the matter of a multilateral framework for sovereign debt restructuring is of great interest to the group because unsustainably high debt burdens remain a major challenge to the economic development of the region. Debt servicing has far exceeded expenditure on social services, including health and education, which has adversely affected overall socioeconomic development. Therefore, countries must be given an opportunity to undertake orderly debt arrangements as a means of stabilizing their economies.
The Alliance of Small Island States said debt sustainability poses a serious challenge to the group, which suffers disproportionately high debt-to-gross domestic product (GDP) ratio.
Australia said it did not support any unilateral right to debt restructuring. However, they expressed a commitment to work towards achieving a solution.
Russia, voting in favour of the principles, said they have always supported improvement in the sovereign debt restructuring process within the context of the UN, and that the principles adopted provide the basis for a fair, balanced and effective process for sovereign debt restructuring through a universal legal mechanism that could apply to all forms of external debt.
Also voting in favour, Iceland said that the resolution was a balanced text, and that ad hoc arrangements had created incoherence and unpredictability.
Argentina said the adopted resolution is a text in favour of stability. Debt is responsible for inequality and takes advantage of less developed countries. As a democratic forum where all sovereign countries have a voice, it is wrong to say that the UN is not the right forum for debt discussions. Countries have a right to restructure debt and it is crucial to put an end to the power of vulture funds that feed on the lack of global legislation to take advantage of many poor countries.
Argentina stressed that the current economic crisis highlights how foreign debt has become for many countries a heavy burden that endangers growth and employment. It is necessary to change the international financial architecture so that no one will suffer from the exploitation of vulture funds.
Cuba said countries that are held back economically because of punitive debt repayment conditions can now look forward to better days. However, the resolution only represents the first step of a process to address external debt in all its manifestations.
India said the issue of debt restructuring was not just a problem for developing countries. Debt affects inclusive development and political stability globally. By adopting the resolution, the UN is formalizing a set of basic principles for restructuring debt and thereby laying down powerful markers for dealing with sovereign debt. The principles themselves are non-binding in nature and India called for voluntary adherence to them.
Singapore said they voted in favour of the resolution because the non-binding principles on debt restructuring are a practical outcome of the Ad-Hoc Committee on that matter. However, the contractual rights of all creditors must be taken into account. Any further consideration of the issue must secure the active and inclusive participation of debtor and creditor countries, the IMF and other financial institutions.
The Union of South American Nations (UNASUR) said an important step had been taken today at the United Nations, which has the legitimacy to deal with challenges that affect the international community as a whole. The resolution provides a fair basis for debt restructuring in the interest of all parties concerned. Debt crises are costly and lead to cuts in spending on health and education, undermining overall economic health. The adoption of the text, following open and transparent negotiations, has provided a set of principles towards establishing a multilateral framework on sovereign debt restructuring.
Nicaragua said it is important to put into practice mechanisms that can prevent and resolve economic crises. The basic principles put forth in the resolution must be the basis of a legal framework for any future agreement. Nicaragua reaffirmed the role of the General Assembly as a universal and equitable forum on matters of economic nature.
Chile said the matter of sovereign debt restructuring was a global challenge that is best suited on the agenda of the United Nations. As long-term debt sustainability is central to sustainable development, the resolution opens the door for further discussions on all forms of external debt.
Brazil said the current international financial architecture is not conducive to the achievement of the UN’s Sustainable Development Goals (SDGs). Brazil also expressed regret that not all international financial mechanisms had participated in the discussions.
During the concluding negotiations of the debt committee in July, Ambassador Denis G. Antoine of Grenada delivered a statement on behalf of the President of the General Assembly (H.E. Sam Kutesa of Uganda). He said that the set of nine principles “constitutes an important contribution on sovereign debt restructuring, since the principles could serve as a basis for future deliberations of the UN General Assembly towards a multi-lateral legal framework for sovereign debt restructuring processes with the participation of all Member States.”
He added that the work of the committee, having been carried out through a transparent and participatory approach, will contribute towards the goal of increasing the efficiency, stability and predictability of the international financial system and achieving sustained, inclusive and equitable economic growth and sustainable development.
The United Nations Conference on Trade and Development (UNCTAD), which has long been developing a roadmap and guide to sovereign debt workouts, said that the UN committee’s decision is an important step that UNCTAD has been advocating for the past 30 years. It is a movement towards a more rational way of handling sovereign debt crises from the very fragmented and unfair system currently in place.
UNCTAD also stated that it is problematic how the same rules and practices that have been created at national levels to manage debts do not exist at the international level. This absence of international bankruptcy laws is a major gap in the international system.
At the same July session, Nobel prize economist Joseph Stiglitz, currently Professor of Columbia University and former Chief Economist and Senior Vice President at the World Bank, had also delivered a keynote speech, where he congratulated the committee for establishing the set of principles on which to build such a framework.
Stiglitz 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 economies often go into deep recession — depressions as we see today in Greece — as we saw in Argentina,” he said.
He especially welcomed the UN as the right place for discussing these issues, instead of the IMF. “The IMF is an institution of creditors. You would not ask Citibank to design the bankruptcy law in the United States,” he said. “We know how they would design the law, it would have indentured servitude. 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 also identified five reasons why sovereign debt 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. Greece, Puerto Rico and several Caribbean countries are in the throes of worrying debt crises. There are potential crises waiting to erupt in many countries around the world.
Second, 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. One jurisdiction makes one ruling and another jurisdiction makes a different ruling, resulting in no place where these different rulings can be reconciled.
Capitalism could not work without a framework for debt restructuring, and this is why every country has a bankruptcy law, he said. Unfortunately there is no international framework and no international law for sovereign bankruptcy, and this absence is why UN principles that can guide the creation of much needed international law are critical.
Third, there has been a movement of debt from banks to capital markets and this has significantly increased the difficulties of debt renegotiations. There are so many more creditors with often conflicting interests at the table.
Fourth, the development of credit default swaps, which are financial instruments whose objective is to shift risk, is not as recognized as it should be. The parties at the table at those negotiations may have no economic interest in a settlement. Instead, they may have economic interest in not having a settlement. The consequences of the separation of the ownership of claims and economic interests have not been taken on board fully and it is imperative to do that.
And the fifth reason is the growth of vulture funds whose business model involves holding out against settlements and non-cooperation with the debtor country in order to obtain payments greater than those participating in the debt restructuring exercise. These are making debt restructuring under existing institutional arrangements much more difficult if not impossible.
Meanwhile, Pope Francis has also endorsed the UN principles amidst Greece’s ongoing debt crisis.
The UN’s Independent Expert on the effects of foreign debt and human rights, Juan Pablo Bohoslavsky, released a statement saying that the resolution is a positive step towards clarifying which existing rules and principles of international law apply to sovereign debt issues, and will provide legal guidance on how to prevent and deal with vulture credits.
He stressed that sovereign debts should be geared towards implementing economic and social policies, with a view to achieving growth and development in the concerned countries. Unfortunately, as it is too often the case, sovereign debts can also throw millions of people into poverty, in particular when resulting in a debt crisis.
The UK’s Jubilee Debt Coalition reacted to the vote positively, saying that it could prove to be a historic breakthrough because the vast majority of nations have spoken out for a change to the broken debt system. From the Greek debt debacle, to Argentina being held to ransom by vulture funds, to decades-old debt crises in Jamaica and El Salvador the need for change has never been clearer.
The UK-based organization also critiqued the UK government, saying it is outrageous that the UK has chosen to put reckless lenders ahead of people around the world by voting against these principles.
The press release of Jubilee USA similarly expressed disappointment that the US voted against the UN’s important efforts to limit repeat financial crises. They stressed that because inequality is directly connected to a country’s debt, the principles to guide sovereign debt restructuring are critical to create inclusive societies.
The next steps will include a follow-up process to this landmark vote, which will ensure that the further development of the UN principles on sovereign debt restructuring processes will stay alive within the General Assembly in the immediate future.
Bhumika Muchhala is a Senior Researcher with the Third World Network.
UN Committee adopts principles for sovereign debt restructuring
A committee of the UN General Assembly adopted nine principles for sovereign debt restructuring. This was a timely outcome as more countries are facing debt crises and thus the need for debt restructuring that is fair and economically sustainable. The work and outcome of this Committee became the basis for the UN General Assembly resolution on 10 September.
By Adriano José Timossi and Manuel F. Montes
A United Nations committee adopted a set of nine principles for sovereign debt restructuring after two years of deliberations. A report was submitted to the UN General Assembly for its review and action.
The adoption of the Principles on Sovereign Debt Restructuring Processes was timely, as more countries are facing or are in danger of facing sovereign debt crises, and the need for and terms of restructuring their debts have become urgent and often controversial topics.
The nine principles were agreed to at the third working session of the Ad Hoc Committee on Sovereign Debt Restructuring Processes on 27-28 July held at the UN headquarters in New York. They were part of the Chair’s summary submitted to the UN General Assembly.
The principles had originally been put forward by the Group of 77 and China, who had also been responsible for initiating the establishment of the committee in 2014.
Although the principles were adopted by all countries present, it should be noted that most developed countries boycotted the meeting as they were not in favour of the ad hoc committee or the United Nations taking up this issue. The International Monetary Fund also decided not to attend.
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 principles.
Another principle is 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.
This outcome was the culmination of the three working sessions of the committee. There were also numerous informal sessions and consultations with various organisations and governments, including in locations outside of New York, led by Bolivia’s United Nations Ambassador Sacha Llorentty, who chaired the Committee.
The Ad Hoc Committee was established by a UN General Assembly resolution A/RES/69/247 of 29 December 2014, which mandated the Committee to elaborate a multilateral legal framework for sovereign debt restructuring processes.
In the past few months, many informal sessions were organised to negotiate the nine principles on debt restructuring. The principles had been proposed by the Group of 77 and China (the grouping of developing countries in the UN), and several of them were based on the outcome of the UNCTAD Working Group on a Debt Workout Mechanism comprising experts, legal scholars, investors, policymakers and civil society representatives.
Ambassador Denis G. Antoine of Grenada delivered a statement on behalf of the President of the General Assembly (H.E. Sam Kutesa of Uganda). He said that the set of nine principles “constitutes an important contribution on sovereign debt restructuring, since the principles could serve as a basis for future deliberations of the UN General Assembly towards a multi-lateral legal framework for sovereign debt restructuring processes with the participation of all Member States”. He added that the work of the committee, having been carried out through a transparent and participatory approach, will contribute towards the goal of increasing the efficiency, stability and predictability of the international financial system and achieving sustained, inclusive and equitable economic growth and sustainable development.
In the same working session, Nobel prize economist Joseph Stiglitz, currently Professor of Columbia University and former Chief Economist and Senior Vice President at the World Bank, gave a keynote speech. Mr. Stiglitz had been the chair of the Commission of Experts on Reforms of the International Monetary and Financial System which studied the 2007-2008 global economic and financial crises and called for a framework to deal with sovereign debt. However, progress on this proposal has been very limited, despite importance of the issue.
Stiglitz 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 economies often go into deep recession — depressions as we see today in Greece — as we saw in Argentina,” he said.
Prof. Stiglitz congratulated the committee for establishing the set of principles on which to build such a framework. He especially welcomed the fact that a set of principles is being put forward by the Ad Hoc Committee since the UN is the right place for discussing these issues, instead of the International Monetary Fund (IMF). “The IMF is an institution of creditors. You would not ask Citibank to design the bankruptcy law in the United States,” he said. “We know how they would design the law, it would have indentured servitude. 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. “The balanced nature of your report provides testimony to the fact that you are the right place and I think that you have done a great job,” Prof. Stiglitz said.
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. We are facing today the Greek debt crisis. Puerto Rico is facing a debt crisis. There are potential crises 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 could not work without a framework for debt restructuring, and this is why every country has a bankruptcy law but unfortunately we have no international framework, no international law and this committee is setting principles which will guide creation of that kind of international law. What we have today is 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. There are so 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). These are financial instruments for shifting risk. The parties at the table at those negotiations may have no economic interest in a settlement. Instead, they may have economic interest in not having a settlement. The consequences of the separation of the ownership of claims and economic interests have not been taken on board fully and it is imperative to do that.
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.
A press conference was held on 28 July 2015 at the UN headquarters by Ambassador Sacha Llorentty, Chair of the Ad Hoc Committee and Bolivia’s Permanent Representative to the UN; Ambassador María Cristina Perceval, Permanent Representative of Argentina to the UN; H.E. Carlos Alberto Bianco, Secretary of International Economic Relations, Ministry of Foreign Affairs and Worship of Argentina; and Dr. Richard Kozul-Wright, Director of the Division on Globalization and Development Strategies, United Nations Conference on Trade and Development (UNCTAD).
“This constitutes a historic moment when it comes to resolving the issues of foreign debt restructuring,” said Ambassador Llorentty at the press conference.
However, Llorentty noted that 11 countries had not supported the establishment of the committee in December 2014 and that these same countries have a greater share of the votes at the International Monetary Fund, which currently has a great say over sovereign debt issues.
Kozul-Wright said that part of the problem was that the same rules and practices that had been created at national levels to manage debts, did not exist at the international level. “At the international level where we have also high levels of indebtedness there is no equivalent of national bankruptcy laws and it’s a major gap in the international system,” he said.
Kozul-Wright also described the committee’s decision as an important step that UNCTAD has been advocating for the past 30 years. “This is a very important first stage in moving towards a more rational way of handling sovereign debt crises from the very fragmented unfair system that we have,” he said.
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THE NINE PRINCIPLES
The nine principles adopted by the Ad Hoc Committee to guide sovereign debt restructuring processes are as follows:
A Sovereign State has the right, in the exercise of its discretion, to design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures. Restructuring should be done as the last resort and preserving at the outset creditors’ rights.
Good faithby both the sovereign debtor and all its creditors would entail their engagement in constructive sovereign debt restructuring workout negotiations and other stages of the process with the aim of a prompt and durable reestablishment of debt sustainability and debt servicing, as well as achieving the support of a critical mass of creditors through a constructive dialogue regarding the restructuring terms.
Transparencyshould be promoted in order to enhance the accountability of the actors concerned, which can be achieved through the timely sharing of both data and processes related to sovereign debt workouts.
Impartialityrequires that all institutions and actors involved in sovereign debt restructuring workouts, including at the regional level, in accordance with their respective mandates, enjoy independence and refrain from exercising any undue influence over the process and other stakeholders or engaging in actions that would give rise to conflicts of interest or corruption or both.
Equitable treatmentimposes on States the duty to refrain from arbitrarily discriminating among creditors, unless a different treatment is justified under the law, is reasonable, and is correlated to the characteristics of the credit, guaranteeing inter-creditor equality, discussed among all creditors. Creditors have the right to receive the same proportionate treatment in accordance with their credit and its characteristics. No creditors or creditor groups should be excluded ex ante from the sovereign debt restructuring process.
Sovereign immunityfrom jurisdiction and execution regarding sovereign debt restructurings is a right of States before foreign domestic courts and exceptions should be restrictively interpreted.
Legitimacyentails that the establishment of institutions and the operations related to sovereign debt restructuring workouts respect requirements of inclusiveness and the rule of law, at all levels. The terms and conditions of the original contracts should remain valid until such time as they are modified by a restructuring agreement.
Sustainabilityimplies that sovereign debt restructuring workouts are completed in a timely and efficient manner and lead to a stable debt situation in the debtor State, preserving at the outset creditors’ rights while promoting sustained and inclusive economic growth and sustainable development, minimizing economic and social costs, warranting the stability of the international financial system and respecting human rights.
Majority restructuringimplies that sovereign debt restructuring agreements that are approved by a qualified majority of the creditors of a State are not to be affected, jeopardized or otherwise impeded by other States or a non-representative minority of creditors, who must respect the decisions adopted by the majority of the creditors. States should be encouraged to include collective action clauses in their sovereign debt to be issued.
Adriano José Timossi is a Senior Programme Officer of the Global Governance for Development Programme of the South Centre.
Manuel F. Montes is the Senior Advisor on Finance and Development of the South Centre.
Political impasse limited UNGA’s debt work
The work of the Ad hoc Committee on sovereign debt restructuring processes was met with strong resistance from developed countries. How to break the political impasse in New York to establish a multilateral legal framework for sovereign debt restructuring processes was a question that the Committee tried to answer throughout its work.
By Yuefen Li
On 9 September 2014, a vote took place at the 68th session of the United Nations General Assembly (GA) in New York on a draft GA resolution tabled by the G77 and China entitled “Towards the establishment of a multilateral legal framework for sovereign debt restructuring processes”. The resolution (A/68/304) was passed with 124 votes in favour, 11 votes against and 41 abstentions. Most of the developed countries either voted against or abstained. The resolution requests the establishment of an Ad hoc Committee to “elaborate and adopt through intergovernmental negotiations a multilateral legal framework for sovereign debt restructuring processes with a view, inter alia, to increasing the efficiency, stability and predictability of the international financial system and achieving sustained, inclusive and equitable economic growth and sustainable development, in accordance with national circumstances and priorities.”
This is a very encouraging development, yet the given timeframe is extremely ambitious. Even though the international debates on the topic have been going on for decades, heating up each time with the onset of a debt crisis and cooling down when the crisis was contained, up to now such debates have not yet come to fruition. Despite the lack of a formal sovereign debt restructuring mechanism which has been considered by many as a serious deficit or missing link in the international financial architecture, the reignited international debate since the global financial crisis has resulted in only less painful yet welcomed measures for improving debt contracts, which have been viewed as insufficient.
The Ad hoc Committee was mandated by GA resolution A/69/247 to organize three working sessions and adopt a proposed legal framework through intergovernmental negotiations. The first working session took place on 3-5 February 2015 while the second session was held on 28-30 April 2015 and the third session took place on 27-28 July 2015. The first two sessions discussed the gaps in the current sovereign debt restructuring processes, the options for moving forward, the political economy of debt restructuring, different elements/stages of a debt restructuring process, and potential guiding principles for debt restructuring. At the second working session, the Chairman of the Ad hoc Committee presented his own elements paper which includes his proposed guiding principles for sovereign debt restructuring.
The work of the Ad hoc Committee met with strong resistance from developed countries. Only several developed countries showed up at the two working sessions of the Ad hoc Committee. The rest of them pursued a non-engagement policy even though most followed the meetings via UN webcast. The Chairman of the Ad hoc Committee actively reached out to UN Member States, in particular the developed ones, as well as multilateral and regional institutions. However, there was no loosening up from the developed countries. On 19 May 2015, the European Parliament in Strasbourg voted Resolution on Financing for Development A-143/2015 calling for EU participation in the UN General Assembly process. It did not seem to have brought changes to the non-engagement approach pursued by the EU.
Time and again major developed countries have emphasized that the United Nations should leave the sovereign debt restructuring issue to the IMF, citing reasons that the IMF has mandates and expertise in this area of work. Developing countries, on the other hand, argued that quite a number of GA resolutions endorsed by consensus have requested the United Nations to work on the topic. The Second Committee of the UN General Assembly has an annual agenda item on debt issues and development. The United Nations Conference on Trade and Development (UNCTAD), the focal point on the debt issues within the UN system, has provided technical support to the GA discussion on debt issues for decades and also has specific mandates given by each UNCTAD ministerial conference to undertake both analytical work and technical assistance projects on debt issues including capacity building on debt management. As a matter of fact, UNCTAD published studies on debt restructuring long before the IMF started to work on a sovereign debt restructuring mechanism (SDRM). UNCTAD had also invited the IMF, the World Bank, regional development banks and other stakeholders to work together to formulate the Principles on Promoting Responsible Sovereign Lending and Borrowing. The G77 and China asked the question of why with such mandates and expertise, the United Nations, the most democratic and representative international institution in the world, should not discuss the issue of sovereign debt restructuring.
As the New York based diplomats had been overwhelmed with the preparation for several major UN high level conferences to be held in 2015, the time for serious and detailed negotiation of the sovereign debt restructuring legal framework was very limited. Therefore, the Chair of the Ad hoc Committee had focused the discussions on a set of principles for sovereign debt restructuring. It is hoped that the ambitious tasks mandated by resolution A/68/304 could be undertaken in a phased manner. However, how to break the New York political impasse is still a question waiting for an answer. At a time when old challenges for debt restructuring are still as persistent as ever and the new developments are making future sovereign debt restructuring even more difficult, to pray for a miracle to happen does not seem to be an option.
Yuefen Li is the Special Advisor on Economics and Development Finance of the South Centre.
Debt Crisis: Resolution and Workout Mechanisms
The need for and nature of a sovereign debt restructuring mechanism had been discussed at a committee of the UN General Assembly, in accordance with a resolution of the UNGA to set up such a mechanism which is intended to help countries experiencing an external debt crisis.
During the first meeting of the Committee on Sovereign Debt Restructuring Processes held at the UN in New York, the South Centre’s Chief Economist, Yılmaz Akyüz, made a presentation on “Crisis Resolution and International Debt Workout Mechanisms”. Below is his statement.
By Yılmaz Akyüz
International Debt Workout Mechanisms
Debt restructuring is a component of crisis management and resolution; it needs to be treated in the context of the current economic conjuncture and vulnerabilities.
International Debt Workout Mechanisms (IDWMs) are not just about debt reduction, but also include interim arrangements to provide relief to debtors including temporary hold on debt payments and financing.
IDWMs should address liquidity as well as solvency crises. The difference is not always clear. Most start as liquidity crises and can lead to insolvency if not resolved quickly. Liquidity crises also inflict serious social and economic damages as seen in the past two decades even when they do not entail sovereign defaults.
IDWMs should apply to crises caused by external private debt as well as sovereign debt. Private external borrowing is often the reason for liquidity crises. Governments end up socializing private debt. They need mechanisms that facilitate resolution of crises caused by private borrowing.
IDWMs apply to a legal, not an economic concept, of external debt. Legal concept: debt issued under foreign jurisdiction irrespective of its currency of denomination and holders. Economic (Balance of Payments) concept: debt held by non-residents irrespective of the law it comes under and its currency denomination.
Local-law debt should not come under IDWMs even when held by non-residents. This was agreed during the debate on the Sovereign Debt Restructuring Mechanism (SDRM) in the IMF in the early 2000s. For such debt governments have the means to resolve collective action problems.
Recent Crises and Current Vulnerabilities
Only one of the last 8 major crises in emerging and developing economies (EDEs) was due to internationally-issued sovereign debt (Argentina). Mexican and Russian crises were due to locally-issued public debt (tesobonos and GKOs); in Asia (Thailand, Korea, Indonesia) external debt was private; in Brazilian and Turkish crises too private (bank) debt played a key role alongside some problems in the domestic public debt market.
We have had no major new crisis in the South with systemic implications for over a decade thanks to highly favourable global liquidity conditions and risk appetite, both before and after the Lehman collapse, due to policies in major advanced economies, notably the US. But this period, notably the past six years, have also seen considerable build-up of fragility and vulnerability to liquidity and solvency crises in many EDEs (see the South Centre’s Research Paper 60). This is a matter of concern because favourable global financial conditions are unlikely to last over the coming years.
Sovereign international debt problems may emerge in the so-called frontier economies usually dependent on official lending. Many of them have gone into bond markets in recent years, taking advantage of exceptional global liquidity conditions and risk assessments. There are several first-time Eurobond issuers in Sub-Saharan Africa and elsewhere.
In emerging economies (EMEs) internationally-issued public debt as % of GDP has declined significantly since the early 2000s. Much of external debt (in BOP terms) of these economies is now under local-law and in local currency. However, there is a large build-up of private external debt in forex issued under foreign law since 2008. Many of them may face contingent liabilities and are vulnerable to liquidity crises.
Crisis Intervention
Interruption of access to international financial markets, stop in capital flows, foreign exit from local financial markets and capital flight by residents resulting in rapid depletion of reserves, currency collapse and interest rate hikes; governments are often too late to recognize the gravity of the situation.
IMF lending is typically designed to bail out creditors – to keep debtors current on their obligations to creditors – and to avoid exchange restrictions and maintain the capital account open.
The IMF imposes austerity on the debtor, expecting that it would make debt payable and sustainable and bring back private creditors. It has little leverage on creditors.
The problems with standard crisis intervention are: austerity can make debt even less payable; creditor bailouts create moral hazard and promote imprudent lending, and transform commercial debt into official debt, thereby making it more difficult to restructure; and creates risks for the financial integrity of the IMF.
Many of these problems were recognized after the Asian crisis, giving rise to the SDRM, originally designed very much along the lines advocated by UNCTAD throughout the 1980s and 1990s (though without due acknowledgement). However, it was opposed by the US and international financial markets and could not elicit strong support from debtor EDEs, notably in Latin America. It was first diluted and then abandoned.
The question of IDWMs was put on the back-burner after the early 2000s as strong global growth, unusually favourable conditions in international financial markets and rapid recovery of capital flows to EDEs led to complacency and served to obscure continued weaknesses and vulnerabilities in several EDEs. The matter has come back to the attention of the international community with the Eurozone crisis and then with vulture-fund holdouts in Argentinian debt restructuring.
A New IMF Proposal
After pouring money into Argentina and Greece whose debt turned out to be unpayable, the IMF has proposed a new framework to “limit the risk that Fund resources will simply be used to bail out private creditors” and to involve private creditors in crisis resolution.
The proposed intervention and crisis resolution would be different according to how the problem facing the country requesting IMF assistance is perceived.
Where debt is deemed to have a high probability of sustainability, the IMF would lend as usual, under the exceptional lending framework of 2002, while the country would make policy adjustments.
If debt sustainability looks uncertain, the IMF would require reprofiling (rollovers and maturity extension) before lending. If debt turns out to be unsustainable at the end of the IMF programme, then restructuring (debt relief) would be sought.
If debt is seen as unsustainable with a high probability, the IMF would require upfront debt reduction before lending.
Problems with the New Proposal
The proposed shift of the IMF away from creditor bailouts is welcome. But for several reasons the proposal does not provide a viable and reliable IDWM.
The IMF does not have a good record in sustainability assessments but wants to pass judgement on whether or not a country approaching it for assistance is solvent and needs reprofiling and restructuring. These decisions should mainly be left to the country concerned.
There is no legally binding framework for reprofiling and restructuring. They are left to negotiations between the debtor and the creditors, to be facilitated by various contractual provisions.
Reprofiling needs to be done quickly to prevent meltdown. This could be possible when debt is mainly in syndicated bank credits, but not when it is in widely dispersed bonds. Even in what is widely considered as successful instances of negotiations, agreements with banks in Korea, Brazil and Turkey came only after the deepening of the crisis as banks were interested in exiting quickly rather than rolling over their claims. Thus, in a statement at a G20 meeting, Korea hinted its agreement with many observers who “have found that Korea could have solved its liquidity problem sooner had a standstill programme been in place at the time Korea requested IMF assistance at the end of 1997″.
If creditors fail to agree to reprofile and restructure and the IMF does not lend without these, then it would effectively be telling the debtor to default.
But it makes no proposal to protect the debtor against litigation and asset grab by creditors.
Reform and Limits of Contract-Based Resolutions
The IMF and others have been making proposals for improving debt contracts by inserting better-designed CACs, stronger pari passu clauses etc. in order to facilitate negotiated settlements. There is a growing consensus that this route needs to be explored further in resolving liquidity and solvency crises.
However, there are well recognized limits to what negotiations can achieve.
A viable solution could be to rely on a judicious combination of contractual and statutory arrangements in different stages of crisis resolution.
Elements of a Workable IDWM
Statutory reprofiling: Need for temporary debt standstills and exchange controls whether it is a liquidity or solvency crisis or is caused by public or private debt. The decision would be taken by the country concerned and sanctioned by an internationally recognized independent body to impose stay on litigation.
Lender-in-possession financing: sanctioning standstills automatically grants seniority to new loans, to be used for current account financing, not to pay creditors or finance capital outflows. The IMF should be required to lend into arrears, but the private sectors can also be motivated to lend if terms are favourable since such lending would enjoy de jure seniority. In any case there would not be much need for new money since debt standstills and exchange controls limit the drain on reserves and the policy adjustment by the country can be expected to improve the current account.
Negotiated debt restructuring including maturity extensions, rollovers etc, aided by CACs and other measures designed to restrain holdouts. If financial meltdown is prevented through standstills and exchange controls, stay is imposed on litigation, adequate lender-in-possession financing is provided and contractual provisions are improved, the likelihood of reaching a negotiated debt workout would be very high in a large majority of cases. A statutory cram-down should be the last resort. It should be recognized that a statutory solution would intervene not only with creditors’ rights but also with sovereign rights of debtor countries. In this respect the pros and cons of various options (international bankruptcy courts, ad hoc panels, arbitration, and a dispute settlement system along the lines of the WTO) should be carefully assessed.
Role of the IMF and the United Nations
The role of the IMF in crisis management and resolution is incontrovertible. However, the IMF cannot be placed at the centre of IDWMs. Even after a fundamental reform, the IMF Board cannot act as a sanctioning body and arbitrator because of conflict of interest; its members represent debtors and creditors.
However, independent statutory bodies and mechanisms can be established within the IMF (as in WTO) if its governance is significantly reformed.
The United Nations successfully played an important role in crisis resolution in several instances in the past.
The Compensatory Financing Facility introduced in the early 1960s to enable developing countries facing liquidity problems due to temporary shortfalls in primary export earnings to draw on the Fund beyond their normal drawing rights at concessional terms resulted from a UN initiative.
Guidelines for negotiations of official and officially guaranteed debt of developing countries were effectively set at UNCTAD in 1980 through the adoption of TDB Resolution 222(XXI) which was seen by Michel Camdessus, the chairman of the Paris Club at the time, “as establishing the international legitimacy of the Paris Club within the international financial architecture.”
A more recent example concerns Iraq’s debt. After the occupation of Iraq and collapse of the Saddam regime, the UN Security Council adopted a resolution (No 1483) to implement stay on the enforcement of creditor rights to use litigation to collect unpaid sovereign debt. This was engineered by the very same country, the United States, which now denies a role to the UN in debt and finance on grounds that it lacks competence on such matters that mainly belong to the Bretton Woods Institutions.
More interestingly, that Security Council resolution on Iraq’s debt was duly complied with and implemented by the very same institutions, the IMF, World Bank and the Paris Club, which have refused to participate in these deliberations mandated by the General Assembly, presumably because they would not want to take guidance from the UN on debt restructuring.
Yılmaz Akyüz is the Chief Economist of the South Centre.
Debt Restructuring Mechanism: Options for Moving Forward
The need for and nature of a sovereign debt restructuring mechanism had been discussed at a committee of the UN General Assembly, in accordance with a resolution of the UNGA to set up such a mechanism which is intended to help countries experiencing an external debt crisis.
During the first meeting of the Committee on Sovereign Debt Restructuring Processes held at the UN in New York, the South Centre’s Special Advisor on Economics and Development Finance, Yuefen Li, made a presentation on “Options for Moving Forward”. Below is her statement.
By Yuefen Li
This Ad Hoc Committee is probably the intergovernmental body which is the highest in level and also with the largest country representation mandated to deal solely with the issue of the legal framework of sovereign debt restructuring. I agree with the distinguished delegate of El Salvador completely that having the meeting by the committee at the General Assembly by itself is already of great significance and a step forward in the international debate on the topic.
Previous speakers have eloquently dealt with the gaps of the current debt restructuring system. At the beginning of the global financial crisis, some people still had some misgivings as to whether or not the lack of a formal sovereign debt restructuring legal framework is a serious deficit or missing link in the international financial architecture. Economic and legal events since 2008 have brought a great deal more convergence to this topic. The acknowledgement of this as a systemic issue and as a governance issue has taken a stronger hold.
Right now, the centre of the debate has shifted to “options for moving forward”. This is naturally a crucial stage. The outcome of the international debate could end up with some contractual improvements, which are good, and yet leaving the fundamental problems unsolved to the next crisis, just like the 2002 debate. The other option is to try to take big steps forward in filling the gaps. This ad hoc committee is having this ambitious aim. Allow me to offer my two cents regarding how to move forward. To fill in the gap in debt restructuring processes would require an inclusive process, the active engagement of Member States and stakeholders of the private sector, the IMF and civil society. Unfortunately, the international debate has been, as in the past, unnecessarily polarized, giving rise to misconstrued fears of a multilateral legal framework on debt restructuring processes. Such fears need to be first of all dispelled or lessened. This could be the first step of our way forward. A process lacking inclusiveness would challenge the legitimacy of the outcome of the process.
I. Thus the first step could be to dispel misconstrued fears of a multilateral legal framework and make the GA process inclusive.
One fear is that the introduction of a mechanism would lead to loss for creditors from the developed countries and gains for debtors from the developing ones. This has turned the debate to an ideological fight between two camps, which was well reflected by the outcome of the vote for the United Nations General Assembly resolution for creating a “multilateral legal framework for sovereign debt restructuring” on 9 September 2014 in New York. Almost all the 52 countries who abstained or voted against the resolution were developed economies. The global economic landscape has changed dramatically in the past few decades with globalization and internationalization of finance. Creditors and debtors have been very much blurred nowadays. As a norm rather than exception, one country’s debt would be held by both developed and developing countries, and by foreign and domestic residents. Messy and delayed debt restructurings would incur political and economic losses and human sufferings to developing and developed countries alike, in some cases extremely unsettling politically and socially. In addition, sovereign-debt crises are no longer just a problem for developing countries, but also a major concern and burning problem for some developed countries as well.
The fear, which has been existing since the first time the idea of a legal framework surfaced, is the moral hazard problem. To make sovereign default too easy is like a nightmare haunting policy makers as if creating a legal framework amounts to creating a monster. However, many studies have shown that delayed defaults outnumber by many times strategic defaults. That is why “too late and too little” debt restructurings have been the most generally used for arguing in favor of a mechanism. Contrary to causing moral hazard, a mechanism aiming at more efficient and fairer debt restructurings would to various extents address the moral hazard problem as timely debt workout would minimize private sector bailouts like the massive socialization of private debt during the current global financial and economic crisis which could be considered as a much more serious and frequently occurring moral hazard problem during debt crises than the possible strategic default.
Another big fear is that a mechanism would lead to the loss of sovereignty even though maintaining sovereignty under the current procedure is a struggle for the debtor governments once they have to go through debt restructuring exercises. The ongoing legal fights between hedge funds and Argentina is a case in point.
The fear that the introduction of a mechanism would compromise debtor credit worthiness and lead to increased cost of borrowing is another long-standing fear. However the smooth introduction in debt contracts since 2003 of CACs without apparent cost and the recent surprisingly uneventful use of ICMA’s tightened up language of pari passu in debt contracts of Kazakhstan,Mexico and Viet Nam without increased cost have proved to the contrary of this fear.
All stakeholders should participate in this process, developed and developing countries alike. It is hoped the IMF, the regional economic commissions, the Paris Club, the private sector and the civil society all adopt an engaging attitude. Only so can all their concerns be taken into consideration in the process. In my previous incarnation of being the head of the UNCTAD debt and development branch we had such an inclusive process in the formulation of the principles on promoting responsible sovereign lending and it was a very rewarding and cohesive process.
II. The second step forward could be to identify guiding principles in conducting debt restructuring.
For the second step forward, you might want to consider identifying guiding principles in conducting debt restructuring.
As the topic has been discussed for decades, the aspirations of the legal framework on debt restructuring seem to converge: orderly, timely, equitable and comprehensive debt restructurings, which can restore medium term debt sustainability, were the aspired debt restructurings.
The identification of guiding principles for debt restructuring should be unpinned by achieving these aspirations. It is meant to have a common understanding of the assumed norms, which are regarded as the standard of cor