Sovereign Debt Workouts - Roadmap and Guide published by UNCTAD

28 April 2015

In an effort to help to resolve future sovereign debt crises of the sort that have tested governments from Iceland to Argentina to Greece since the global financial meltdown of 2008, UNCTAD has published a "roadmap" of steps that countries can take before and during debt restructuring.

UNCTAD debt experts say that it is "prudent" to expect more sovereign debt crises in the future given existing debt levels, the fragility of the global recovery, and the eventual return of more normal monetary policy in advanced market economies.

The Roadmap and Guide for Sovereign Debt Workouts includes recommendations to improve the coherence, fairness and efficiency of current sovereign debt restructuring processes. In order to do this, five principles for sovereign debt workouts have been identified: legitimacy, impartiality, transparency, good faith and sustainability.

The roadmap guides states that are suffering from acute sovereign debt problems, or uncertainty about the sustainability of their debts, through a "stylized" debt workout process. This has been designed to be sufficiently general to include many ways of restructuring debts in accordance with the type of debt and other specific conditions.

This process calls for impartial institutions to deal promptly with liquidity problems, mediate good faith efforts to negotiate with creditors, and assess the full involvement of domestic stakeholders in economic and social recovery programmes.

The immediate causes of sovereign debt crises vary, as do their intensity and duration. However, the economic and social damage can be significant. And with markets ever more closely integrated, contagion from one crisis-hit country can quickly escalate in to a regional or even global problem.

"UNCTAD has been calling for fairer and more efficient measures to deal with sovereign debt problems since the late 1970s when it pushed for explicit principles for debt rescheduling (TD/AC2/9) and subsequently, following the Latin American debt crisis, promoted the idea of international bankruptcy rules to match those in Chapters 9 and 11 of the US Bankruptcy Code;" UNCTAD's Director of the Division of Globalization and Development Richard Kozul-Wright said. "Numerous United Nations General Assembly resolutions have subsequently highlighted the importance of working towards an internationally agreed approach for sovereign debt workouts."

quoteThe roadmap also considers possible institutional reforms that would bring current procedures in line with the five principles, including an option to establish a multilateral Sovereign Debt Workout Institution (SDWI) to better implement the restructuring steps [...]
The document suggests that such an institution could, on demand, organize the mediation and/or arbitration of disputes with greater transparency.quote
Richard Kozul-Wright
Director of the Division of Globalization and Development, UNCTAD

In the absence of an international debt workout mechanism, the fragmented landscape of sovereign debt restructuring creates inconsistency, inefficiency and unpredictability.

UNCTAD noted last year that two United States Supreme Court rulings in favour of hedge funds against Argentina, over defaulted 2001 bonds, would make future debt restructuring even more difficult.

A workout mechanism that can resolve different types of debt crises promptly is needed: some debt crises begin as preventable liquidity crises, while others are caused by excessive private, rather than public external borrowing, which moves onto the governments books when repayment falters.

Regardless of their origins, delays in debt workouts often cause repeated restructuring episodes that are costly to both debtors and creditors.

The roadmap is the result of an expert consultation that UNCTAD launched in 2013. More than 20 experts including leading legal scholars, investors, policymakers and representatives of civil society, participated in the design of the roadmap as members and observers of an ad-hoc Working Group on a Debt Workout Mechanism.

In December 2014, the UN General Assembly passed a resolution to establish an Ad Hoc Committee on sovereign debt restructuring. The first working session of the Committee took place from 3 to 5 February 2015. The Roadmap and Guide will be discussed during the second session, from the 28 to 30 April.

UNCTAD takes the lead within the UN system on analysis and technical assistance on sovereign debt issues, and is mandated to provide technical support to the Bureau of the Ad Hoc Committee on a Multilateral Legal Framework for Sovereign Debt Restructuring Processes, established last year by the UN General Assembly.