UN adopts sovereign debt restructuring principles

In July, a United Nations committee adopted a set of nine principles for sovereign debt restructuring. The article below explains these principles and the significance of the whole move. Since then, the UN General Assembly has in a resolution adopted these nine principles.

Adriano Jose Timossi and Manuel F. Montes

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THE adoption of the Principles on Sovereign Debt Restructuring Processes (see box next page) 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.

The principles had originally been put forward by the developing-country Group of 77 and China, which 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 (IMF) 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 should lead to a stable debt situation in the debtor state, preserving creditors' rights while promoting economic growth and sustainable development, minimising 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 Ambassador to the UN Sacha Llorenti, 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 a UN Conference on Trade and Development (UNCTAD) Working Group on a Debt Workout Mechanism comprising experts, legal scholars, investors, policymakers and civil society representatives.

At the third working session of the committee, Ambassador Denis G Antoine of Grenada delivered a statement on behalf of the President of the UN General Assembly (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 multilateral 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-winning economist Joseph Stiglitz, currently a professor at Columbia University and former Chief Economist and Senior Vice President at the World Bank, gave a keynote speech. Stiglitz had been the chair of the Commission of Experts on Reforms of the International Monetary and Financial System established by the President of the UN General Assembly in 2008, which studied the 2007-08 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 the 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.

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 committee since the UN is 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. '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,' 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. He pointed to the debt crises faced by Greece and Puerto Rico, and potential crises in many countries around the world.

Secondly, court rulings, particularly in the US and the 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 there is no international framework and no international law. The committee, Stiglitz said, was setting principles which will guide the creation of that kind of international law. Meanwhile what is in place 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.

The fourth reason - which Stiglitz said is not as well recognised as it should be - is the development of credit default swaps, which are financial instruments for shifting risk. The parties at the debt negotiating table may thus 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.

The fifth reason is the growth of vulture funds, whose business model involves holding out against settlement and non-cooperation (with the debtor country) in order to obtain payments greater than what is available to 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 at the UN headquarters by the committee chair Llorenti; Ambassador Maria Cristina Perceval, Permanent Representative of Argentina to the UN; Carlos Alberto Bianco, Secretary of International Economic Relations, Ministry of Foreign Affairs and Worship of Argentina; and Richard Kozul-Wright, Director of the Division on Globalisation and Development Strategies at UNCTAD.

'This constitutes a historic moment when it comes to resolving the issues of foreign debt restructuring,' said Llorenti at the press conference.

However, Llorenti 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 IMF, 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.

Adriano Jose Timossi is a Senior Programme Officer with the Global Governance for Development Programme at the South Centre. Manuel F Montes is the Senior Advisor on Finance and Development of the South Centre.  The above article first appeared in SouthNews (No. 95, 7 August 2015), a service of the South Centre to provide information and news on topical issues from a South perspective.

The nine principles THE nine principles adopted by the UN 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 re-establishment 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, minimising 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, jeopardised 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.

         *Third World Resurgence No. 300, August 2015, pp 19-21