Legitimacy and Impartiality in a Sovereign Debt Workout Mechanism

07 July 2014

The fourth session of the UNCTAD Working Group on a Debt Workout Mechanism was held in New York 07 July 2014. The discussions focused on identifying the best ways of making the Debt Workout Mechanism legitimate and impartial.

Yuefen Li, Head of the Debt and Development Finance Branch of UNCTAD opened the meeting by emphasizing, among other issues, the urgency of the need of a Debt Workout Mechanism (DWM) in view of the latest developments of the litigation case of NML vs Argentina.

Yilmaz Akyüz (South Center) made a presentation on the economic context of the DWM highlighting the changing debt profile of some countries tending to shift towards private domestic debt.

Discussions among the members of the Working Group began in response to the presentation of the background paper prepared by Odette Lienau (Cornell Law) on legitimacy and impartiality of a debt workout mechanism.

Robert Howse (New York University) facilitated the morning’s discussions focusing on the various aspects of legitimacy (source, process and substantive outcome) and their interplay within the context of sovereign debt restructuring. Questions revolved around the choice of elements that would make the Debt Workout Mechanism most legitimate and the trade-offs that such choices would imply (e.g. efficiency vs. impartiality). It was noted that legitimacy and impartiality are not to be considered as binary concepts but rather as involving nuances and various degrees of acceptability upon consensus.

The second session, facilitated by Michael Waibel (Cambridge University), introduced practical concerns associated with past and current sovereign debt restructurings. Debates entailed the need to handle and balance the competing interests of the stakeholders participating in such restructurings as well as the importance of conveying the message that legitimacy and impartiality should not be overlooked even in times of urgency. The Working Group agreed that the costs of disregarding these were high although the difficulty to produce tangible estimates of these costs was expressed as a shared concern. The question of legitimacy and its relationship with legality at the international level was also discussed as a means of making a DWM’s legitimacy and impartiality more concrete. Attention to the accountability of the stakeholders involved in the restructuring process was also paid as a way of enhancing legitimac


In the last session, Matthias Goldmann (Max Planck Institute) planted the legitimacy and impartiality principles in the context of the recent rulings of the US Supreme Court (16 July 2014) about Argentina and its legal battle against holdout creditors. The Group discussed the principles with respect to the question of asset recovery highlighting that the overall assessment on the legitimacy and impartiality of a DWM should not be limited to the negotiation process between debtor and creditors. The Group also noted the fragmented institutional (and legal) setting in which sovereign debt restructurings happen and reiterated the need to produce a set of legitimate and impartial norms and principles applicable to all decision making processes.

The meeting concluded with the review of the relationship of legitimacy and impartiality with other principles and rules considered in the last three Working Group meetings. On such basis, the Group agreed on actions to be taken for the next stage.