UN adopts landmark resolution on principles for sovereign debt restructuring

The UN General Assembly has adopted a set of principles to guide sovereign debt restructuring, taking what has been welcomed as an important step towards plugging a major gap in the international financial system.

by Bhumika Muchhala

NEW YORK: The United Nations General Assembly on 10 September adopted a resolution on principles to guide sovereign debt restructuring processes.

This landmark resolution was submitted to the General Assembly by South Africa (current chair of the Group of 77 and China developing countries). It had been 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 six countries: the United States, Germany, the United Kingdom, Japan, Canada and Israel. Forty-one countries abstained from voting either yes or no.

The votes reflect the typical geopolitical 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 UN 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 framework for sovereign debt restructuring (see below), the nine core 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 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 came 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 such a framework. Bolivia chaired the Committee. The nine principles were the outcome of negotiations within the Committee (see TWE No. 598/599).

The results of the vote for the General Assembly resolution on the principles, when compared to the September 2014 vote, reflect an increase of 12 countries for the “yes” vote and a decrease of five countries for the “no” vote. The same number of 41 countries abstained in both years.

The countries whose votes changed from an abstaining vote in 2014 to a “yes” vote this year were Iceland, Ukraine, Armenia, Serbia, Papua New Guinea and Montenegro. The countries whose votes turned from a “no” vote to an abstaining vote were Australia, Czech Republic, Finland, Hungary and Ireland.

With the exception of the six countries that voted against the principles, all other developed countries abstained. Developing countries that also abstained included Mexico, Colombia and Gabon.

Debt-stricken Greece abstained, although it 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 in July. 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 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 needed to now march with vigour to achieve the post-2015 development agenda and to ensure that no one was left behind.

In direct opposition, the European Union 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 was 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 was of great interest to the group because unsustainably high debt burdens remained a major challenge to the economic development of the region. Debt servicing had far exceeded expenditure on social services, including health and education, which had 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 posed a serious challenge to the group, which suffered a disproportionately high ratio of debt to gross domestic product (GDP).

Australia said it did not support any unilateral right to debt restructuring. However, it expressed a commitment to work towards achieving a solution.

Russia, voting in favour of the principles, said it had always supported improvement in the sovereign debt restructuring process within the UN and the principles adopted provided 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 was a text in favour of stability. Debt was responsible for inequality and took advantage of less developed countries. It was wrong to say that the UN, as a democratic forum where all sovereign countries had a voice, was not the right forum for debt discussions. Countries had a right to restructure debt and it was crucial to put an end to the power of vulture funds that fed on the lack of global legislation to take advantage of many poor countries.

Argentina stressed that the current economic crisis highlighted how foreign debt had become for many countries a heavy burden that endangers growth and employment. It was necessary to change the international financial architecture so that no one would suffer from the exploitation by vulture funds.

Bolivia, which had chaired the Ad Hoc Committee, said the adoption was the culmination of a process that had seen tireless efforts of several delegations and support of the Secretary-General as well as the President of the 69th General Assembly. This collective endeavour had the potential for creating long-term positive economic outcomes for developing countries.

Cuba said countries that were held back economically because of punitive debt repayment conditions could now look forward to better days. However, the resolution only represented 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 affected inclusive development and political stability globally. By adopting the resolution, the UN was formalizing a set of basic principles for restructuring debt and thereby laying down powerful markers for dealing with sovereign debt. The principles themselves were non-binding in nature and India called for voluntary adherence to them.

Singapore said it voted in favour of the resolution because the non-binding principles on debt restructuring were 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 at the United Nations, which had the legitimacy to deal with challenges that affect the international community as a whole. The resolution provided a fair basis for debt restructuring in the interest of all parties concerned. Debt crises were costly and led to cuts in spending on health and education, undermining overall economic health. The adoption of the text, following open and transparent negotiations, had provided a set of principles towards establishing a multilateral framework on sovereign debt restructuring.

Nicaragua said it was important to put into practice mechanisms that could prevent and resolve economic crises. The basic principles put forth in the resolution must be at 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 was best suited on the agenda of the United Nations. As long-term debt sustainability was central to sustainable development, the resolution opened the door for further discussions on all forms of external debt.

Brazil said the current international financial architecture was 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.

Positive reactions

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 was a positive step towards clarifying which existing rules and principles of international law apply to sovereign debt issues, and would provide legal guidance on how to prevent and deal with vulture funds.

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 was too often the case, sovereign debts could also throw millions of people into poverty, in particular when resulting in a debt crisis.

The UK’s Jubilee Debt Campaign reacted positively to the vote, saying that it could prove to be a historic breakthrough because the vast majority of nations had 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 stressed that it was outrageous that the UK government had 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. It stressed that because inequality was directly connected to a country’s debt, the principles to guide sovereign debt restructuring were critical to creating 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.                                      

Third World Economics, Issue No. 600, 1-15 September 2015, pp11-12, 5