In a landmark decision and by a large vote, the United Nations General Assembly adopted a resolution which contains nine core principles that should be respected when a country undertakes the restructuring of sovereign debt.  The resolution is a significant step forward in supporting countries that have to restructure their debt and face creditors as well as “vulture funds.”

The United Nations General Assembly adopted a resolution on principles to guide sovereign debt restructuring processes on the afternoon of 10 September.

This landmark resolution was submitted to the General Assembly by South Africa (current chair of the Group of 77 and China developing countries). It was initiated by Argentina in the wake of the vulture funds lawsuit by an international hedge fund against the country.

The resolution yielded a ‘yes’ vote from 136 countries from Latin America, Asia, Africa and the Caribbean. A ‘no’ vote was registered by 6 countries: the United States, Germany, the United Kingdom, Japan, Canada and Israel. An ‘abstain’ vote, meaning that these countries abstained from voting either yes or no, was registered by 41 countries.

The votes reflect the geo-political pattern in the UN where developing countries vote in favour of measures to increase the stability and fairness of the international financial system, while the most powerful developed countries often block such measures, arguing that such discussions must only take place within international financial institutions and not the UN.

The vote means that the UN General Assembly has declared that sovereign debt restructuring processes should be guided by nine basic principles. Unlike the Security Council, which has the power to issue legally binding resolutions, General Assembly resolutions are non-binding. But they carry political weight.

While the resolution does not reflect the original subject of establishing a multilateral legal mechanism for sovereign debt restructuring, the nine principles that have been adopted have been called a historical breakthrough because the vast majority of nations in the world have spoken out for a change to the current creditor-led debt system that has repeatedly failed numerous countries.

The resolution outlines nine core principles that should be respected when restructuring sovereign debt: sovereignty, good faith, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy, sustainability and majority restructuring.

The principle of sovereignty is encapsulated by the following language in the resolution, “A sovereign state has the right … to design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures.”

The principle of sustainability 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.

The principle of 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.

Transparency focuses on the need to enhance the accountability of the actors concerned.

Equitable treatment refers to the equitable treatment of creditors and debtors, and impartiality refers to the impartial conduct and decisions of all institutions and actors involved in sovereign debt restructuring workouts.

The principle of legitimacy entails respect for the requirements of inclusiveness and the rule of law.

Majority restructuring 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.

The vote comes one year and a day after the General Assembly first agreed to negotiate and adopt a multilateral legal framework for sovereign debt restructuring processes on 9 September 2014. Following the September 2014 vote, an Ad Hoc Committee was established on 29 December 2014, with the mandate to elaborate a multilateral legal framework for sovereign debt restructuring processes. Bolivia chaired the Committee.

The current vote results, when compared to last year’s vote results, reflect an increase of 12 countries for the ‘yes’ vote and a decrease of 5 countries for the ‘no’ vote. The overall movement is that of increased support for the momentum on debt restructuring. The same number of 41 countries abstained from a vote in both years.

The countries whose votes changed from an abstaining vote to a ‘yes’ vote are Iceland, Ukraine, Armenia, Serbia, Papua New Guinea and Montenegro. The countries whose votes turned from a ‘no’ vote in 2014 to an abstaining vote this year are Australia, Czech Republic, Finland, Hungary and Ireland.

With the exception of the six countries that voted against the principles, all other developed countries abstained from a vote. Southern countries that also abstained from a vote included Mexico, Colombia and Gabon.

Debt-stricken Greece abstained from voting. However, Greece made a significant break from the European Union’s collective boycott of the entire process by participating in the final negotiation session of the Ad Hoc Committee at the UN headquarters in New York.

Other developed countries, most notably the US, Japan and Canada, as well as the International Monetary Fund (IMF) also refused to participate in the three week-long negotiation sessions of the Ad Hoc Committee over the last one year.

Highlights of group/country statements during the vote

The G77 and China group of 134 developing countries said that the text provided a good basis for future discussions. The principles had been drafted in a way that brought a “win-win” situation for debtors and creditors. The issue of debt sustainability was central to achieving national and international development goals. The international community needs to now march with vigour to achieve the post-2015 development agenda and to ensure that no one is left behind.

Bolivia, who chaired the Ad Hoc Committee, said the adoption of the principles to guide debt restructuring validates a process that saw tireless efforts of several delegations and the support of the Secretary-General and the President of the 69^th General Assembly. This collective endeavour has the potential for creating long-term positive economic outcomes for developing countries.

In direct opposition, the European Union (EU) stated that the resolution’s text contained a number of statements that did not accurately reflect international law or treaties. The EU stressed that the IMF is the appropriate institution to host global discussions on the subject.

The United States said the resolution was deficient on several counts, including the implication of a right of a State to debt restructuring and the threat to contractual obligations. A statutory mechanism for debt restructurings would sow uncertainty in financial markets. The US supported the EU saying that the United Nations was not the appropriate venue for such issues.

The Caribbean Community stated that the matter of a multilateral framework for sovereign debt restructuring is of great interest to the group because unsustainably high debt burdens remain a major challenge to the economic development of the region. Debt servicing has far exceeded expenditure on social services, including health and education, which has adversely affected overall socioeconomic development. Therefore, countries must be given an opportunity to undertake orderly debt arrangements as a means of stabilizing their economies.

The Alliance of Small Island States said debt sustainability poses a serious challenge to the group, which suffers disproportionately high debt-to-gross domestic product (GDP) ratio.

Australia said it did not support any unilateral right to debt restructuring. However, they expressed a commitment to work towards achieving a solution.

Russia, voting in favour of the principles, said they have always supported improvement in the sovereign debt restructuring process within the context of the UN, and that the principles adopted provide the basis for a fair, balanced and effective process for sovereign debt restructuring through a universal legal mechanism that could apply to all forms of external debt.

Also voting in favour, Iceland said that the resolution was a balanced text, and that ad hoc arrangements had created incoherence and unpredictability.

Argentina said the adopted resolution is a text in favour of stability. Debt is responsible for inequality and takes advantage of less developed countries. As a democratic forum where all sovereign countries have a voice, it is wrong to say that the UN is not the right forum for debt discussions. Countries have a right to restructure debt and it is crucial to put an end to the power of vulture funds that feed on the lack of global legislation to take advantage of many poor countries.

Argentina stressed that the current economic crisis highlights how foreign debt has become for many countries a heavy burden that endangers growth and employment. It is necessary to change the international financial architecture so that no one will suffer from the exploitation of vulture funds.

Cuba said countries that are held back economically because of punitive debt repayment conditions can now look forward to better days. However, the resolution only represents the first step of a process to address external debt in all its manifestations.

India said the issue of debt restructuring was not just a problem for developing countries. Debt affects inclusive development and political stability globally. By adopting the resolution, the UN is formalizing a set of basic principles for restructuring debt and thereby laying down powerful markers for dealing with sovereign debt. The principles themselves are non-binding in nature and India called for voluntary adherence to them.

Singapore said they voted in favour of the resolution because the non-binding principles on debt restructuring are a practical outcome of the Ad-Hoc Committee on that matter. However, the contractual rights of all creditors must be taken into account. Any further consideration of the issue must secure the active and inclusive participation of debtor and creditor countries, the IMF and other financial institutions.

The Union of South American Nations (UNASUR) said an important step had been taken today at the United Nations, which has the legitimacy to deal with challenges that affect the international community as a whole. The resolution provides a fair basis for debt restructuring in the interest of all parties concerned. Debt crises are costly and lead to cuts in spending on health and education, undermining overall economic health. The adoption of the text, following open and transparent negotiations, has provided a set of principles towards establishing a multilateral framework on sovereign debt restructuring.

Nicaragua said it is important to put into practice mechanisms that can prevent and resolve economic crises. The basic principles put forth in the resolution must be the basis of a legal framework for any future agreement. Nicaragua reaffirmed the role of the General Assembly as a universal and equitable forum on matters of economic nature.

Chile said the matter of sovereign debt restructuring was a global challenge that is best suited on the agenda of the United Nations. As long-term debt sustainability is central to sustainable development, the resolution opens the door for further discussions on all forms of external debt.

Brazil said the current international financial architecture is not conducive to the achievement of the UN’s Sustainable Development Goals (SDGs). Brazil also expressed regret that not all international financial mechanisms had participated in the discussions.

During the concluding negotiations of the debt committee in July, 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 development.

The United Nations Conference on Trade and Development (UNCTAD), which has long been developing a roadmap and guide to sovereign debt workouts, said that the UN committee’s decision is an important step that UNCTAD has been advocating for the past 30 years. It is a movement towards a more rational way of handling sovereign debt crises from the very fragmented and unfair system currently in place.

UNCTAD also stated that it is problematic how the same rules and practices that have been created at national levels to manage debts do not exist at the international level. This absence of international bankruptcy laws is a major gap in the international system.

At the same July session, Nobel prize economist Joseph Stiglitz, currently Professor of Columbia University and former Chief Economist and Senior Vice President at the World Bank, had also delivered a keynote speech, where he congratulated the committee for establishing the set of principles on which to build such a framework.

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.

He especially welcomed the UN as the right place for discussing these issues, instead of the 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.

Stiglitz also identified five reasons why sovereign debt 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. Greece, Puerto Rico and several Caribbean countries are in the throes of worrying debt crises. There are potential crises waiting to erupt in many countries around the world.

Second, 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. One jurisdiction makes one ruling and another jurisdiction makes a different ruling, resulting in no place where these different rulings can be reconciled.

Capitalism could not work without a framework for debt restructuring, and this is why every country has a bankruptcy law, he said. Unfortunately there is no international framework and no international law for sovereign bankruptcy, and this absence is why UN principles that can guide the creation of much needed international law are critical.

Third, there has been a movement of debt from banks to capital markets and this has significantly increased the difficulties of debt renegotiations. There are so many more creditors with often conflicting interests at the table.

Fourth, the development of credit default swaps, which are financial instruments whose objective is to shift risk, is not as recognized as it should be. 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 settlements and non-cooperation 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.

Meanwhile, Pope Francis has also endorsed the UN principles amidst Greece’s ongoing debt crisis.

The UN’s Independent Expert on the effects of foreign debt and human rights, Juan Pablo Bohoslavsky, released a statement saying that the resolution is a positive step towards clarifying which existing rules and principles of international law apply to sovereign debt issues, and will provide legal guidance on how to prevent and deal with vulture credits.

He stressed that sovereign debts should be geared towards implementing economic and social policies, with a view to achieving growth and development in the concerned countries. Unfortunately, as it is too often the case, sovereign debts can also throw millions of people into poverty, in particular when resulting in a debt crisis.

The UK’s Jubilee Debt Coalition reacted to the vote positively, saying that it could prove to be a historic breakthrough because the vast majority of nations have spoken out for a change to the broken debt system. From the Greek debt debacle, to Argentina being held to ransom by vulture funds, to decades-old debt crises in Jamaica and El Salvador the need for change has never been clearer.

The UK-based organization also critiqued the UK government, saying it is outrageous that the UK has chosen to put reckless lenders ahead of people around the world by voting against these principles.

The press release of Jubilee USA similarly expressed disappointment that the US voted against the UN’s important efforts to limit repeat financial crises. They stressed that because inequality is directly connected to a country’s debt, the principles to guide sovereign debt restructuring are critical to create inclusive societies.

The next steps will include a follow-up process to this landmark vote, which will ensure that the further development of the UN principles on sovereign debt restructuring processes will stay alive within the General Assembly in the immediate future.

- Bhumika Muchhala is a Senior Researcher with the Third World Network.

Source: South Bulletin 86, 9 October 2015, South Centre, www.southcentre.int