Info Service on Finance and Development (May13/03)
7 May 2013
Third World Network
South reiterates need for debt workout, human rights approach
Published in SUNS #7576 dated 30 April 2013
New York, 29 Apr (Bhumika Muchhala) -- Developing countries have reiterated
the need for sovereign debt workout mechanisms and a human rights
approach to debt as well as called for remedial action on credit rating
This was contained in the statement of the Group of 77 and China,
represented by the Prime Minster of Fiji, J. V. Bainimarama, made
at the United Nations Economic and Social Council (ECOSOC) special
event on external debt sustainability and development on 23 April.
This is a follow-up to the General Assembly special event in October
2012 on sovereign debt resolution mechanisms.
The 23 April special event was to consider lessons learned from debt
crises and the ongoing work on sovereign debt restructuring and debt
resolution mechanisms, with the participation of all relevant stakeholders.
REITERATING THE NEED FOR DEBT RESTRUCTURING AND RESOLUTION MECHANISMS
The G77 and China, represented by Prime Minster J. V. Bainimarama
of Fiji, said that the report of the UN Secretary-General to the 67th
session of the General Assembly highlights that the total external
debt of developing countries reached $4.5 trillion between 2010-2011.
The importance of the ongoing debate within the United Nations and
other relevant forums, on the need for new sovereign debt restructuring
and debt resolution mechanisms, was underscored. These debates should
take into account the multiple dimensions of debt sustainability and
its role in the achievement of the internationally agreed development
goals, including the Millennium Development Goals.
The Fijian Prime Minister stressed that the continuing financial and
economic crisis is negatively affecting the growth prospects of many
developing countries, reversing the development trends of the recent
past, and leading to increased poverty. Because of the limited scope
of their economies, many developing countries are unable to enact
the appropriate fiscal measures to mitigate the impacts of the crisis
Clearly, the crisis highlights long-standing systemic fragilities
and inequalities. The promise of a recovery is being threatened by
new adverse circumstances, including turbulence in the global financial
markets and widespread fiscal strains.
Furthermore, said the Fijian Prime Minister, the crisis has revealed
the vulnerability of developing countries to exogenous shocks. It
is now evident that these exogenous shocks are affecting their capacity
to continue servicing their debt obligations, regardless of their
good practices in the past.
The international community must realise that no path to growth can
be construed or fostered with an unsustainable debt overhang, he stressed.
As such, any debt restructuring exercise should have as its core element
a determination of real repayment capacity. If the real repayment
capacity of any country is not properly addressed, the original restructuring
may require more time for further restructuring. Such an outcome would
further affect growth and good faith creditors.
DEEP CONCERN OVER VULTURE FUND LITIGATIONS
The G77 and China expressed deep concern about vulture fund litigations.
Recent examples of vulture funds' actions in international courts
have revealed their speculative and profit-seeking nature. These vulture
funds pose a risk for all future debt restructuring processes, both
for developing and developed countries.
The Group believes that vulture funds must not be allowed to paralyse
the debt restructuring efforts of developing countries, and that these
funds should not supersede a State's right to protect its people under
international law. Debt restructuring processes and debt sustainability
face serious risks when countries facing debt obligations and repayment
processes are placed in such vulnerable situations by vulture funds.
A HUMAN RIGHTS APPROACH TO DEBT
The Fijian Prime Minister said that when the market-based, ad hoc
contractual approach to debt workouts is insufficient to deal with
debt crises, thereby leading to cascades of litigation and causing
ripple effects throughout the debt market, the preferred option should
be a human rights approach. A fair, human-centred and development-oriented
mechanism enshrining the legal principle of ‘odious debt', should
assist to ensure that a government strives to fulfill its sovereign
duty to respect its people's right to development.
The UN Guiding Principles on Foreign Debt and Human Rights, which
were adopted by the UN Human Rights Council in June 2012, underscores
the importance of States, international financial institutions and
private companies to honour the obligation to respect human rights.
According to these principles, all efforts must be directed towards
achieving a negotiated settlement between the creditor and debtor
and that loan agents have a responsibility to impose restrictions
on the sale and assignment of debts to third parties without prior
consent of the borrower state.
The Group of 77 and China called on countries to adopt legislation
consistent with these guiding principles to prevent vulture funds
from pursuing excessive claims against heavily indebted countries
before their national courts.
The Prime Minister of Fiji expressed support for the establishment
of an independent international system of debt arbitration, in which
countries facing risks of debt distress can have recourse to a debt
standstill. Such a system would facilitate debt workouts with burden-sharing
CREDIT RATING DYSFUNCTIONS ONCE AGAIN IGNORED
The Prime Minister of Fiji further stated that the G77 and China regrets
to see that once again the mandate agreed upon by Member States, which
called for the organisation of a General Assembly thematic debate
on the role of credit rating agencies, has been ignored, while non-mandated
debates have been organised.
The G77 and China has repeatedly highlighted dysfunctions in the rating
methodology used by the major credit rating agencies. Since credit
rating agencies usually do not adequately reflect the solvency of
the debtor, the Group believes that it is necessary to continue the
discussions on the role of credit rating agencies, with a view to
proposing concrete policies aimed at reducing dependency on them and
enhancing their supervision.
It is evident that credit rating agencies have inherent conflict-of-interest
problems. They lack transparency and objective criteria and a very
small number of firms control a large majority of the market. In order
to set this right, it is important that not only should countries
adapt their legislation, but the standard-setting bodies themselves
should also reduce reliance on credit ratings, and start pursuing
objective criteria to assess credit, solvency and liquidity risks.
The G77 and China also stated serious concern over the substantial
increase in the financial stability risks of many developed economies
and in particular, their high structural fragilities in financing
sovereign debt created as a result of transferring private risk to
the public sector. In this regard, it said, urgent and coherent solutions
to reduce sovereign risk in developed economies are necessary in order
to prevent contagion and mitigate its impact on the international
financial system. +