Civil society experts make recommendations for a sovereign debt restructuring framework

06 March 2015

United Nations member States and experts from civil society, academia and the legal profession made recommendations on a framework for sovereign debt restructuring to the General Assembly in New York.

The first working session of the General Assembly ad hoc committee on sovereign debt restructuring processes took place from 3 to 5 February.

The Committee was established by a General Assembly resolution in December 2014, to elaborate a multilateral legal framework for sovereign debt restructuring processes.

UNCTAD takes the lead within the UN system on analysis and technical assistance on sovereign debt issues, and was mandated to organise the work of the Ad Hoc Committee.

Sovereign debt crises have historically affected both developed and developing countries. In June 2014 UNCTAD commented on the systemic implications of two United States Supreme Court rulings in favour of so-called "holdout" bondholders against Argentina, over defaulted 2001 bonds. The absence of an international debt workout mechanism had given way to fragmentation of legal forums, creating inconsistency and unpredictability, and making future debt restructuring even more difficult, UNCTAD noted.

Over three days, the Ad Hoc Committee heard from 14 experts, including legal scholars, investors, and policymakers on topics including the gaps in the current restructuring system, the political economy of debt restructuring, and economic perspectives related to debt standstills, rollovers and write-offs.

Keynote speaker Jose Antonio Ocampo, Professor at Columbia University and former finance minister of Colombia, emphasized that debt restructuring is an efficient mechanism of market economies. It has been recognized at the domestic level in bankruptcy procedures, and the basic principle of offering a "fresh start" was good for debtors and creditors. Ocampo described two approaches for a debt workout mechanism: contractual and statutory. Under the contractual approach, debtors and creditors negotiate under the conditions established in debt contracts. The problem of holdouts has been partly resolved by collective action clauses, but this approach still creates bias in favour of creditors, and often results in agreements that are "too little, too late".

Ocampo recommended a statutory approach: a mechanism similar to WTO dispute settlement, with voluntary negotiations, mediation and arbitration with clear deadlines. He stressed that private external debt needs to be part of any restructuring, when it is owed to foreign lenders, and that a sovereign debt registry was a prerequisite for a meaningful restructuring process. Either the UN or the IMF could be appropriate institutions to implement such a process, he said.

Eric LeCompte, Executive Director of Jubilee USA Network, said that a debt restructuring process would reduce predatory behavior by lenders and allow equitable settlement of disputes. A legal framework, similar to US Chapter 11 bankruptcy for businesses, could allow a significant percentage of debt stock to be dealt with as a block. It should also allow for automatic stays of payments once a claim is filed: for some countries in financial distress, even easing a percentage of debt could prevent a country from default or needing to restructure.

Several civil society organisations submitted proposals, including Centre Europe Tiers Monde (CETIM), Dialogo 2000 and the Sisters of Notre Dame de Namur. A coalition of 27 NGOs called for an international mechanism that is independent of creditors in analysis and decision making, and situated in a neutral forum. Creditors need to be held accountable for irresponsible lending to ensure fair burden sharing, their statement stressed.

Bodo Ellmers, Senior Policy and Advocacy Advisor at Eurodad, argued that debt sustainability analyses should take into account human rights as well as financial considerations, and government should not be left unable to provide basic services for their populations.

Statements by member States revealed diverging positions regarding the categories of debt to be covered by a debt restructuring mechanism, the approach to be adopted and the appropriate institution to implement restructuring processes. However member States agreed on the need to include all stakeholders in a comprehensive debate on this issue.

No official conclusions were drawn from this first working session. The Chair of the Committee, H.E. Mr. Sacha Sergio Llorentty, Ambassador of Bolivia to the United Nations, said that consultations with stakeholders would be organized ahead of the next two sessions, which take place in May and June 2015.

UNCTAD will also organize an informal session with the Initiative for Policy Dialogue at Columbia University at the end of March 2015 to elaborate different options available for creating a multilateral framework on sovereign debt restructuring processes.