South reiterates need for debt workout, human rights approach

The importance of debt restructuring processes was highlighted at a recent UN meeting on external debt sustainability and development.

by Bhumika Muchhala

NEW YORK: 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 agencies.

This was contained in the statement of the Group of 77 and China, represented by the Prime Minster of Fiji, JV Bainimarama, made at the United Nations Economic and Social Council (ECOSOC) special event on external debt sustainability and development on 23 April.

The meeting was a follow-up to the UN 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 Bainimarama, 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 2010-11.

The importance of the ongoing debate within the UN 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 on development.

Clearly, the crisis highlights longstanding 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 realize 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.

The G77 and China also 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 paralyze 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 fulfil  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, underscore the importance of states, international financial institutions and private companies honouring 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 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 G77 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 procedures.

Credit rating dysfunctions once again ignored

Bainimarama further stated that the G77 and China regrets to see that once again the mandate agreed upon by member states, which called for the organization of a General Assembly thematic debate on the role of credit rating agencies, has been ignored, while non-mandated debates have been organized.

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 expressed serious concern over the substantial increase in the financial stability risks of many developed economies, 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. (SUNS7576)                                   

Third World Economics, Issue No. 544/545, 1-31 May 2013, pp 19-20