Historic UN vote on a multilateral sovereign debt mechanism

Bhumika Muchhala provides a detailed analysis of the landmark United Nations vote on the establishment of a legal framework for sovereign debt restructuring and highlights the active role played by civil society groups campaigning for such a reform.

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THE United Nations General Assembly on 9 September adopted by vote the crucial draft resolution of the Group of 77 and China, 'Towards the establishment of a multilateral legal framework for sovereign debt restructuring processes'.

A majority of 124 countries voted for the resolution, 11 countries voted against it, while 41 countries abstained from a vote. A total of 176 countries out of the UN membership of 193 were present.

The central action of the draft resolution is to: 'Decide to elaborate and adopt through a process of inter-governmental negotiations, as a matter of priority during [the General Assembly's] 69th Session, a multilateral legal framework for sovereign debt restructuring processes with a view to, inter alia, increasing efficiency, stability and predictability of the international financial system as well as achieving sustained, inclusive and equitable economic growth and sustainable development, in accordance with national circumstances and priorities.'

The adoption of this resolution is historic due to several key reasons. Firstly, a majority of member states in the General Assembly have voted in the affirmative on one of the most fundamental and longstanding gaps in the international financial architecture, that of a sovereign debt workout framework that is multilateral and that has legal force. The text of the resolution may be read as a proposal that the General Assembly adopt a set of legal principles that should govern all sovereign debt workouts.

The resolution commits the General Assembly to agree on modalities, or the terms and logistics, for commencing open, intergovernmental negotiations on a sovereign debt restructuring framework by the end of 2014.

Subsequently, the resolution commits governments to adopt an outcome on a 'multilateral legal framework for sovereign debt restructuring processes' by the end of the 69th session of the General Assembly (by about September 2015).

The resolution was spearheaded by Argentina in the wake of the now well-known litigation launched by 'vulture fund' holdout creditors which had bought Argentina's debt at a significant discount during the nation's debt restructuring almost a decade ago and are now demanding the full value and interest of the bonds acquired by them.

Vulture fund litigation not only threatens to sabotage the entire sovereign debt restructuring process, but also prevents indebted countries from using precious foreign exchange resources freed up by debt relief for domestic development needs.

As UN human rights expert on foreign debt Juan Pablo Bohoslavsky stated, 'Those who do not participate in a debt restructuring and litigate against the sovereign debtor might get fully repaid, while creditors who accept a "haircut" will see the value of their bonds significantly reduced. Creditors will thus probably be much more reluctant to conclude debt restructuring agreements with sovereign debtors, meaning that debt crises will last longer and become more difficult to resolve, with less predictable outcomes.'

Secondly, the European Union (EU), which usually votes as a bloc, voted on this occasion as separate member states and in sharp division. As had been expected, the United Kingdom and Germany voted against the resolution, as did Ireland, Finland, Hungary and the Czech Republic.

The vast majority of EU member states abstained from voting, which leaves the door open in terms of their national decision to participate in negotiations and discussions with regard to both process and substance. The European countries that abstained were: Italy, France, Sweden, Switzerland, the Netherlands, Spain, Greece, Norway, Portugal, Denmark, Austria, Bosnia and Herzegovina, Bulgaria, Cyprus, Latvia, Lithuania, Luxembourg, Malta, Monaco, Montenegro, Serbia, Slovakia, Slovenia and Ukraine.

Such an explicit division within the EU vote is a unique and significant occurrence, revealing a more complex and fissured political portrait than that presented by the EU in other development finance and global institutions or within the European media itself.

Thirdly, the country grouping JUSCANZ (Japan, the United States, Canada, Australia and New Zealand), which is led by the United States, was also divided. New Zealand abstained from a vote while all the other countries voted against the draft resolution. (Incidentally, New Zealand is running for a seat on the UN Security Council.)

The United States is the only country in the group that explicitly rejected the very prospect of negotiating for a multilateral legal framework. Even Canada and the other states did not explicitly reject intergovernmental negotiations. This reality isolates the United States as the most serious obstacle to ensuring the minimum political space that would allow for intergovernmental discussions to actually take place within the UN.

Almost all developing countries, including the Africa Group countries and the Small Island Developing States (SIDS), voted in favour of the resolution. Countries that were not present included: Ghana, Somalia, Mali, Cameroon, Liberia, Lesotho, Central African Republic, Cambodia, Republic of Macedonia, Micronesia, Marshall Islands, Nauru, Tuvalu and Timor-Leste.

Russia and Azerbaijan voted 'yes' on the resolution.

Out of 193 countries in the UN, 176 showed up and 17 were absent. Several absences, particularly in the case of the SIDS, were due to the SIDS conference in Samoa having concluded just the day before on 8 September.

The strong majority vote implies that a very large number of member states at the UN have agreed to embark on a more ambitious track towards sovereign debt workouts than has previously been taken on by the UN. The very optimal scenario is that the General Assembly will eventually adopt a set of legal principles that should govern any and all sovereign debt workouts.

While a General Assembly resolution is not binding, it is a normative statement to which governments ascribe political priority. The theme of debt restructuring stretches back to the Monterrey Consensus, produced in 2002, which called for exactly such a resolution.

Twelve years later, although wheels are finally in motion in the UN on this significant topic of sovereign debt workouts, the primary challenge will be to ensure that negotiations actually take place to establish a multilateral legal framework.

Debate over UN mandate and procedure

There were two key lines of argument by countries that either voted against the resolution or abstained from the vote.

Firstly, they argued that the very subject of sovereign debt restructuring and sustainability is not within the expertise and purview of the United Nations system. Secondly, a procedural argument, or rather complaint, arose regarding the lack of preparatory and discussion time (and the overall 'mistiming') surrounding the proposal of the draft resolution by Argentina and the Group of 77 chair (Bolivia).

With regard to the first line of offence that the UN is not the appropriate forum for discussions pertaining to the international financial architecture, and that the International Monetary Fund (IMF) or the Group of 20 (G20) bodies are much better suited, this has been the knee-jerk position taken by most developed countries across various discussions in the UN, including that of the General Assembly Second Committee on macro-policy issues as well as within the sustainable development and post-2015 development agenda contexts.

It reflects developed countries' preference for a course of passive discussion and operational inaction in the UN by handing over all authority and mandate to the IMF-World Bank and G20 nexus.

The EU in particular said that its member states have serious concerns on whether a legally binding convention for debt resolution is the best way to deal with the problem. The EU also reasserted its view that the UN General Assembly is not the best forum for dealing with such a 'complicated matter, taking into account, for example, the ongoing work of the IMF, to which the EU is actively contributing'.

However, the Group of 77 and China as a whole, Argentina, Brazil, India, China, Egypt, Indonesia, Jamaica and several other countries in the Africa Group and SIDS group made powerful statements defending the legitimacy and mandate of the UN to act on structural and systemic issues.

These countries stressed that the UN's very charter mandates the institution to discuss and act on all issues pertinent to international cooperation, which include finance and trade.

Furthermore, it is the UN that has the balanced and representative, deliberative body that can advance from broad principles on sovereign debt workouts to a proposed mechanism or process.

Financial system issues such as financial regulation, the international monetary system and, in particular, sovereign debt are at the very centre of various UN conferences, such as the 2002 International Conference on Financing for Development which adopted the Monterrey Consensus, the Doha Conference on the follow-up to the Financing for Development agenda in 2008, and the Conference on the World Financial and Economic Crisis and Its Impact on Development in 2009, to name a few.

The General Assembly's Second Committee negotiates a resolution on debt sustainability which is adopted by the Assembly every year; and the UN Economic and Social Council (ECOSOC) holds an annual conference with the Bretton Woods institutions (viz., the IMF and World Bank) in which sovereign debt is prioritised through the HIPC and MDRI debt relief initiatives.

Various UN documents, such as the Rio+20 outcome document 'The Future We Want' as well as the recently produced outcome on the Sustainable Development Goals, explicitly mention debt restructuring.

The UN has also produced several proposals for effective and fair debt workout mechanisms, most notably in the UN Conference on Trade and Development (UNCTAD) expert group which has been working on principles for a debt workout mechanism (such as legitimacy and impartiality) as well as guidelines for responsible sovereign lending and borrowing.

In addition to UNCTAD, the UN Commission on International Trade Law (UNCITRAL) also has expertise in international insolvency. While it does not currently deal with sovereign insolvencies, it could do so if requested by the General Assembly. UNCITRAL could also make concrete recommendations to the General Assembly, which could be debated in the context of the imminent Financing for Development discussions, at which all relevant stakeholders would be represented and at which governments could be jointly represented by their finance and foreign ministries.

The UN indeed has the expertise, agencies and mandate; it only requires the political will to set the wheels in motion for the formulation and operationalisation of a set of legal principles that could govern all sovereign debt workouts.

On the procedural issue, the narrative of developed countries was that the timeframe for the draft resolution was 'artificial' and 'rushed', with 'not enough time to discuss'.

Norway, which abstained from a vote, said that despite their support for UNCTAD on the work towards a debt restructuring mechanism, the lack of consensus on this resolution ascribed limited value to it.

However, this narrative should be countered by that of the vast majority of countries in the General Assembly, which point out that five informal discussions were held on the draft resolution, during which most developed countries refused to contribute to the talks in a substantive manner.

In the five informal negotiation sessions (that took place in August 2014), several ambassadors from Group of 77 member states made presentations on the resolution, explaining the purpose and objective of their resolution. The developed countries responded with complete silence, explaining only that they did not have a mandate or directions from their capitals to participate in the discussions.

According to some observers, perhaps the developed countries thought that theGroup of 77 was bluffing, just 'making noise' as a political move.

At the very last session, the US said that they did not believe in a statutory approach to sovereign debt restructuring, only a market-led approach. The US elaborated that there was no need for regulation on a statutory level, because collective action clauses and a contractual approach to debt disputes settled in the courts of the country whose laws govern the contract, were enough.

However, it is to be noted that there is no explicit wording for a statutory approach in the resolution.

The said lack of consensus can be countered by the fact that the vast majority of countries, 124 countries out of a total of 193 in the General Assembly, voted for the resolution. While this admittedly does not constitute a consensus, and while countries such as the US, Germany and Japan that voted against the resolution are a significant obstacle, there is some bearing given to the fact that in terms of one nation, one vote, the resolution passed.

Indeed, the fact that only the US explicitly rejected an intergovernmental negotiation on the draft resolution bears repeating, as even the other 10 countries that voted against the resolution seem willing to engage in some type of intergovernmental process going forward.

UN member states speak out

At the General Assembly, the Group of 77 and China delivered a strong statement that asserted full support for their draft resolution, which they said demonstrated their true commitment to build an international financial system where the rules are fair and pro-development, as well as a genuine global partnership to enable developing countries to achieve sustainable development.

They stressed that the lack of a structured mechanism is a major failure of the current international financial architecture, which leads, among others, to long delays in debt restructuring, unfair outcomes and loss of value for both debtors and creditors.

The G77 said that today it is Argentina that is suffering from protracted holdout bondholder litigations, but many developing and developed countries have suffered before from the exact same predatory behaviour, and others will follow if there is no action.

The G77 reminded the General Assembly that for the last decade the Group has been calling for and presenting proposals towards establishing a legal framework for sovereign debt restructuring processes.

The G77 also reinforced, in alignment with their official stance across all UN processes, that the United Nations is the organisation with the central role and legitimacy to deal with development and related issues, including economic and financial affairs, and to decide on the best follow-up and alternatives to meet the needs and challenges of the 21st century.

Brazil, along with several other developing countries, also stressed that development and finance issues have never been taboo for the General Assembly. The resolution adopted builds on the treatment given to debt issues in annual resolutions within the Second Committee and at the ECOSOC meetings with the Bretton Woods institutions and UNCTAD.

Brazil stressed that as the world's first universal development agenda is being launched, the linkage between debt sustainability and sustainable development becomes increasingly clear. This is precisely why sovereign debt sustainability and restructuring has played a critical role in the means of implementation of the outcome document on Sustainable Development Goals produced by the Open Working Group (and adopted by the General Assembly on 10 September 2014).

Brazil further said that the report of the intergovernmental committee of experts on sustainable development financing also refers to debt restructuring, and stresses the fact that collective action clauses are perceived by many in the international community as insufficient to deal with all sovereign debt restructuring cases.

This process, Brazil highlighted, will hopefully address this gap, with timely support and technical expertise from all organisations within the UN system, especially the IMF, UNCTAD and the UN Department of Economic and Social Affairs (DESA).

Brazil also stressed that they would have liked for this resolution to be adopted by consensus and made a reference to the lack of constructive engagement on the part of the member states that voted against the resolution. In closing, Brazil urged these member states to reconsider their positions during the next General Assembly year.

Academics call for action

Ahead of the General Assembly vote, a letter sent on 25 August by several noted economists, including Nobel laureates Joseph Stiglitz and Robert Solow, to UN Secretary-General Ban Ki-moon encouraged him to support the convening of a meeting to launch a process within the United Nations in order to draft a convention among nations for the restructuring of sovereign debt.

The letter stressed that sovereign debt crises can disrupt development processes in significant ways, and it is widely recognised that there has to be an orderly way of restructuring debts. The letter elaborated that within virtually all countries, mechanisms have been developed for doing this for private debts through bankruptcy laws, which are now seen as a vital part of a market economy. But unfortunately, there is no comparable mechanism for the debts of sovereigns.

Its absence has, for instance, led to the emergence of destabilising speculative behaviour in international debt markets, said the economists in their letter. The consequence is that the ability of countries in distress to resolve debt problems in a timely manner has been seriously compromised.

According to the letter, the importance of this lacuna, with its serious repercussions, has repeatedly been recognised, for instance, by the IMF and by the International Commission of Experts on Reforms of the International Monetary and Financial System appointed by the President of the UN General Assembly. The 2009 report of that Commission (in particular Chapter 4), which was endorsed by the UN Conference on the World Financial and Economic Crisis and Its Impact on Development, called upon states to 'explore enhanced approaches to the restructuring of sovereign debt ...'.

The report was also taken up by Resolution 65/143 adopted by the 65th session of the General Assembly on 20 December 2010. The resolution recognised the 'urgent need to enhance the coherence, governance and consistency of the international monetary and financial systems' and reaffirmed 'that the United Nations is well positioned to participate in various reform processes aimed at improving and strengthening the effective functioning of the international financial system and architecture'.

Another letter from a wider coalition of progressive economists and academics called for the creation of a sovereign debt workout mechanism.

The letter, sent to EU policymakers, stated that proposals for a sovereign debt workout mechanism have been around for more than a century, with renewed emphasis since the beginning of the 'third world debt crisis' in 1982.

Throughout this history, the letter said, governments have repeated that it is not the right moment for a reform. However, it has become clear that cyclical debt crises will continue, for which the world will pay a high price in terms of deepening social and economic polarisation through adjustment matters and unnecessarily high losses to investors, which are the unavoidable consequence of a delayed insolvency filing.

The academics made an explicit call for decision-makers to create a reliable, rule-of-law-based mechanism for sovereign insolvency under the auspices of an institution that is neither debtor nor creditor. They also offered their support in the design of such a mechanism.

Civil society mobilises pressure and UN rights expert weighs in

In the run-up to the General Assembly vote, the civil society organisations of the European Network on Debt and Development (Eurodad) sent a joint letter to the EU missions to the UN in New York as well as to each member state's ministries of finance and foreign affairs.

The letter stated that European civil society expected European governments to contribute constructively to promoting the necessary reforms and vote in favour of the draft UN resolution on debt restructuring. With several decades of experience in promoting just solutions for debt crises, European civil society also stood ready to continue a dialogue with governments and international organisations, and contribute constructively to the modelling of a convention on sovereign debt restructuring.

Eurodad's letter further elaborated that when endorsing the Monterrey Consensus more than 10 years ago, all European nations committed 'to consider an international debt workout mechanism ... to restructure unsustainable debts in a timely and efficient manner'. The failure to implement this commitment had caused or aggravated many avoidable debt crises over the past decade and led to unnecessary economic costs, welfare losses and human suffering. In the wake of the recent financial and economic crisis of 2007, European nations had also borne these costs of debt crises. 'Implementation is overdue. It is time for the international community to move from rhetoric to reality.'

On 4 September, the Jubilee USA network on sovereign debt issues also sent a letter to the US Ambassador to the United Nations, Samantha Power, urging the US to vote in favour of the resolution.

The letter noted that the draft resolution was supported by a number of countries that traditionally failed to caucus in debt negotiations or utilise transparent lending and borrowing practices. With passage of the resolution, the intergovernmental process in the UN had the ability to bring these countries to the table to discuss responsible lending and borrowing.

The Jubilee USA network expressed awareness of the concerns of the US as to which forum such a process should operate within, and believed the favourable vote and active participation of the US would serve to help resolve these concerns.

Meanwhile, UN human rights expert on foreign debt, Juan Pablo Bohoslavsky, has said that international human rights law should inform discussions about a multilateral legal framework on sovereign debt restructuring from its inception.

Bohoslavsky was appointed by the UN Human Rights Council in May as Independent Expert on the effects of foreign debt and other related international financial obligations of states on the full enjoyment of all human rights, particularly economic, social and cultural rights.

He stated that an international legal framework should be seen as complementary to existing UN Guiding Principles on Foreign Debt and Human Rights and on Business and Human Rights, to national legislation limiting vulture fund litigation, and to collective action clauses in sovereign bonds. It would promote more responsible financial behaviour and more orderly, timely and speedy debt restructuring processes.

Bohoslavsky underlined that building broad international consensus around this initiative is crucial and should include all relevant stakeholders, sovereign debtors, multilateral lenders, private financial business and civil society organisations.

Argentina passes important new law

Meanwhile, Argentina continues to persist onward in the now landmark lawsuit against it by the vulture funds, the outcome of which has profound systemic implications for the international financial system.

The US Supreme Court issued a ruling in June declining to hear Argentina's appeal - which was supported by global financial institutions, the UN, various sovereign states and the US Executive itself - and ordering instead that Argentina pay the suing hedge funds $1.33 billion (constituting principal plus interest for holdout bonds).

This was followed by another Supreme Court decision to order the relevant financial institutions, primarily banks, in the US to turn over information to these hedge funds about assets that Argentina holds worldwide, including accounts held by entities of the Government of Argentina and by individual officials.

These rulings resonate well beyond the borders of Argentina and the US. They are in effect a resounding victory for hedge funds to encroach on indebted countries and deepen their financial distress to breaking point. Most critically, the rulings set legal precedents that explicitly favour the predatory and destructive behaviour of vulture funds.

However, on 11 September, the Argentine media reported that the country's lower house of Congress passed a new law that allows for a change in the payment jurisdiction for the nation's bondholders (a majority 93%) who had agreed to the debt swaps of 2005 and 2010, and creates a separate account where payment will be deposited for the 7% of bondholders who did not agree to the swaps. The law also creates a parliamentary commission to investigate and audit the origins of Argentina's foreign debt.

The law, which was passed with 134 votes for, 99 against and 5 abstentions, is explained by the nation's economic experts as an alternative mechanism to open new channels of payment. It is also a response to the situation in which Argentina has found itself, where its agreed-upon debt restructuring was disrupted by the US court ruling, which has prevented the nation from processing the repayments to creditors that it is obliged to undertake and is fiscally able to undertake as well.

With broad support from both government representatives and allies in Buenos Aires, this new law appears to have the potential to improve the rather dire state of affairs in the nation's sovereign debt saga. Furthermore, sovereign debt audits have the potential to identify illegitimate and odious debt, as opposed to legitimate debt.

As for the next steps forward within the United Nations, the real work will start when the intergovernmental negotiations begin. The constructive and active participation of the developed countries, specifically those 11 countries that voted against the resolution, in particular the United States, will be the ultimate challenge.                                             

Bhumika Muchhala is a researcher with the Third World Network in the area of finance and development. This article is reproduced from the South-North Development Monitor (SUNS, No. 7879, 23 September 2014) published by TWN.

*Third World Resurgence No. 289, September 2014, pp 15-19