As a growing number of countries face the possibility of debt crises, the United Nations General Assembly has approved a set of nine basic principles for sovereign debt restructuring processes in an effort to provide for debt restructuring that is fair and economically sustainable.
The principles were forwarded to the General Assembly after two years of deliberations by the Ad Hoc Committee on Sovereign Debt Restructuring Processes, which agreed to them at the third working session on July 27-28 held at the UN headquarters in New York, IPS reported.
They had originally been put forward by the Group of 77 and China, which had also been responsible for initiating the establishment of the committee in 2014.
Six countries voted against the resolution, including the United States, claiming that the UN was not the forum to discuss debt restructuring and that such a mechanism would create uncertainty in financial markets. Most developed countries boycotted the Ad Hoc Committee’s working session in July, as did the International Monetary Fund.
They declared 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.
Preserving Creditors’ Rights
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.
During one of those sessions, Nobel laureate economist Joseph Stiglitz gave a keynote speech in which he pointed to Greece and Argentina as recent examples of countries that have suffered because of inadequate frameworks for debt restructuring. In the absence of an adequate framework for debt restructuring, he said, economies often go into deep recession, as happened in both countries.
He also noted that there has been little progress in implementing the framework for dealing with sovereign debt that was established by the Commission of Experts on Reforms of the International Monetary and Financial System, which studied the 2007-2008 global economic and financial crises and which Stiglitz himself chaired.
Excessive Indebtedness
Stiglitz identified five reasons why the issue has once again reached the top of the policy agenda. First, many countries are facing problems of excessive indebtedness. Sovereign debt is no longer a problem of the past, it is a current event in Greece and Puerto Rico, and there are potential crises brewing in many countries around the world.
Secondly, court rulings, particularly in the US and UK, have highlighted the incoherence of the current system and have made orderly debt restructuring, at least in some constituencies, more difficult, if not impossible. Capitalism within countries could not work without a framework for debt restructuring, and this is why every country has a bankruptcy law to facilitate the restructuring of debt.
The third reason is that there has been a movement of debt from banks to capital markets and this has increased significantly the difficulties of debt renegotiations because there are many more creditors with often conflicting interests at the table.
Fourthly, and not as well recognized as it should be, is the development of CDS (credit default swaps), which are financial instruments for shifting risk, which can bring to the negotiating table parties who have no economic interest in a settlement.
Worse still, they may have economic interest in not having a settlement.
And the fifth reason is the growth of vulture funds whose business model involves holding out against settlement and noncooperation (with the debtor country) in order to obtain payments greater than those participating in the debt restructuring exercise. This business model is making debt restructuring under existing institutional arrangements much more difficult if not impossible.
