A committee of the UN General Assembly has adopted nine principles for sovereign debt restructuring.  This is a timely outcome as more countries are facing debt crises and thus the need for debt restructuring that is fair and economically sustainable. 

A United Nations committee has adopted a set of nine principles for sovereign debt restructuring after two years of deliberations.  A report will now be submitted to the UN General Assembly for its review and action.

The adoption of the Principles on Sovereign Debt Restructuring Processes is 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 will be part of the Chair’s summary to be 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 have also been 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 (the grouping of developing countries in the UN) and China, 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. These are 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). The webcast is available here.

“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.

THE NINE PRINCIPLES

The nine principles adopted by the Ad Hoc Committee to guide sovereign debt restructuring processes are as follows:

1. 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.

2. Good faith by 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.

3. Transparency should 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.

4. Impartiality requires 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.

5. Equitable treatment imposes 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.

6. 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.

7. Legitimacy entails 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.

8. Sustainability implies 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.

9. Majority restructuring implies 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.

For more information:

·       The webcast of the 3rd working session of the Ad Hoc Committee on Sovereign Debt Restructuring Processes - General Assembly is available here

·        South Centre work on Debt Restructuring is available here

·        Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System is available here

- 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.

Source: Southnews, No. 95, 7 August 2015

South Centre: www.southcentre.int