Service on Finance and Development (Aug15/02)
95, 7 August 2015
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Committee adopts principles for sovereign debt restructuring
By Adriano José Timossi and Manuel F. Montes
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.
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.
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
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.
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
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
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
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 theincoherence 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.Top of Form
The nine principles adopted by the Ad Hoc Committee to guide sovereign
debt restructuring processes are as follows:
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.
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
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
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.
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.
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.
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
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.
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.
webcast of the 3rd working session of the Ad Hoc Committee on Sovereign
Debt Restructuring Processes - General Assembly is available here
Centre work on Debt Restructuring is available here
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
José Timossi is a Senior Programme Officer of the Global Governance
for Development Programme of the South Centre.
F. Montes is the Senior Advisor on Finance and Development of the
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