The work of the Ad hoc Committee on sovereign debt restructuring processes was met with strong resistance from developed countries. How to break the political impasse in New York to establish a multilateral legal framework for sovereign debt restructuring processes was a question that the Committee tried to answer throughout its work.

On 9 September 2014, a vote took place at the 68^th session of the United Nations General Assembly (GA) in New York on a draft GA resolution tabled by the G77 and China entitled “Towards the establishment of a multilateral legal framework for sovereign debt restructuring processes”. The resolution (A/68/304) was passed with 124 votes in favour, 11 votes against and 41 abstentions. Most of the developed countries either voted against or abstained. The resolution requests the establishment of an Ad hoc Committee to “elaborate and adopt through intergovernmental negotiations a multilateral legal framework for sovereign debt restructuring processes with a view, inter alia, to increasing the efficiency, stability and predictability of the international financial system and achieving sustained, inclusive and equitable economic growth and sustainable development, in accordance with national circumstances and priorities.”

This is a very encouraging development, yet the given timeframe is extremely ambitious. Even though the international debates on the topic have been going on for decades, heating up each time with the onset of a debt crisis and cooling down when the crisis was contained, up to now such debates have not yet come to fruition. Despite the lack of a formal sovereign debt restructuring mechanism which has been considered by many as a serious deficit or missing link in the international financial architecture, the reignited international debate since the global financial crisis has resulted in only less painful yet welcomed measures for improving debt contracts, which have been viewed as insufficient.

The Ad hoc Committee was mandated by GA resolution A/69/247 to organize three working sessions and adopt a proposed legal framework through intergovernmental negotiations. The first working session took place on 3-5 February 2015 while the second session was held on 28-30 April 2015 and the third session took place on 27-28 July 2015. The first two sessions discussed the gaps in the current sovereign debt restructuring processes, the options for moving forward, the political economy of debt restructuring, different elements/stages of a debt restructuring process, and potential guiding principles for debt restructuring. At the second working session, the Chairman of the Ad hoc Committee presented his own elements paper which includes his proposed guiding principles for sovereign debt restructuring.

The work of the Ad hoc Committee met with strong resistance from developed countries. Only several developed countries showed up at the two working sessions of the Ad hoc Committee. The rest of them pursued a non-engagement policy even though most followed the meetings via UN webcast. The Chairman of the Ad hoc Committee actively reached out to UN Member States, in particular the developed ones, as well as multilateral and regional institutions. However, there was no loosening up from the developed countries. On 19 May 2015, the European Parliament in Strasbourg voted Resolution on Financing for Development A-143/2015 calling for EU participation in the UN General Assembly process. It did not seem to have brought changes to the non-engagement approach pursued by the EU.

Time and again major developed countries have emphasized that the United Nations should leave the sovereign debt restructuring issue to the IMF, citing reasons that the IMF has mandates and expertise in this area of work. Developing countries, on the other hand, argued that quite a number of GA resolutions endorsed by consensus have requested the United Nations to work on the topic. The Second Committee of the UN General Assembly has an annual agenda item on debt issues and development. The United Nations Conference on Trade and Development (UNCTAD), the focal point on the debt issues within the UN system, has provided technical support to the GA discussion on debt issues for decades and also has specific mandates given by each UNCTAD ministerial conference to undertake both analytical work and technical assistance projects on debt issues including capacity building on debt management. As a matter of fact, UNCTAD published studies on debt restructuring long before the IMF started to work on a sovereign debt restructuring mechanism (SDRM). UNCTAD had also invited the IMF, the World Bank, regional development banks and other stakeholders to work together to formulate the Principles on Promoting Responsible Sovereign Lending and Borrowing. The G77 and China asked the question of why with such mandates and expertise, the United Nations, the most democratic and representative international institution in the world, should not discuss the issue of sovereign debt restructuring.

As the New York based diplomats had been overwhelmed with the preparation for several major UN high level conferences to be held in 2015, the time for serious and detailed negotiation of the sovereign debt restructuring legal framework was very limited. Therefore, the Chair of the Ad hoc Committee had focused the discussions on a set of principles for sovereign debt restructuring. It is hoped that the ambitious tasks mandated by resolution A/68/304 could be undertaken in a phased manner. However, how to break the New York political impasse is still a question waiting for an answer. At a time when old challenges for debt restructuring are still as persistent as ever and the new developments are making future sovereign debt restructuring even more difficult, to pray for a miracle to happen does not seem to be an option.

- Yuefen Li is the Special Advisor on Economics and Development Finance of the South Centre.

Source: South Bulletin 86, 9 October 2015

South Centre: www.southcentre.int