United Nations responds to sovereign debt crises by adopting principles, with UNCTAD support, that could underlie a new legal framework and regulatory mechanisms.
In what was hailed as a historic breakthrough in international law, a United Nations (UN) committee has unanimously adopted nine principles upon which new regulatory mechanisms could be built to tackle sovereign debt crises.
UNCTAD, as the focal point for debt issues in the UN, has long advocated for international rules and mechanisms to better manage sovereign debt problems along the lines commonly found at the national level. UNCTAD was entrusted by the UN General Assembly with the task of sharing its expertise with the committee.
The principles will form a resolution to be put to the vote at the United Nations General Assembly at its upcoming session and it is expected to pass, Sacha Llorenti, committee chair and Permanent Representative of the Plurinational State of Bolivia to the UN, told a press conference at the UN in New York on 28 July.
Mr. Llorenti said the move on the part of the General Assembly to tackle sovereign debt crises, such as those that have hit Argentina, Greece, Ukraine and Puerto Rico, was "unprecedented" and "historic".
Carlos Alberto Bianco, Secretary of International Economic Relations at Argentina's foreign ministry, said that he envisaged the principles as the basis for regulation of "vulture funds" with which his country is still in conflict.
Richard Kozul-Wright, UNCTAD's Director of the Division on Globalization and Development Strategies, said that by adopting principles such as sovereign immunity and equitable treatment, the UN was the taking the first step toward plugging a "major gap in the international system".
"UNCTAD, ever since the Latin American debt crisis of the early 1980s, has been advocating very strongly for an equivalent at the international level [to national bankruptcy rules] … and for clear, consistent and fair rules that allow countries that find themselves with problems of excessive debt to work through that problem in a way that does not excessively damage their people and prospects for future growth," Mr. Kozul-Wright said.
"What has been achieved … marks a very important first stage in moving towards a more rational way of handling sovereign debt crises, from the very fragmented, unfair system that we have," he added.
Denis G. Antoine, Permanent Representative Of Grenada, speaking on behalf of the President of the General Assembly, said: "The adoption of the report of the Ad Hoc Committee today at the conclusion of its work, for submission to the General Assembly, including the Chairs' summary and its principles on sovereign debt restructuring, reaffirms the central role of the United Nations General Assembly in contributing to the review of the international financial and economic architecture. I convey my appreciation to the Secretariat, particularly UNCTAD, for supporting the Ad hoc Committee in its work."
A Sovereign State has the right, in the exercise of its discretion, to design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures. Restructuring should be done as the last resort and preserving at the outset creditors' rights.
Good faith by both the sovereign debtor and all its creditors would entail their engagement in constructive sovereign debt restructuring workout negotiations and other stages of the process with the aim of a prompt and durable reestablishment of debt sustainability and debt servicing, as well as achieving the support of a critical mass of creditors through a constructive dialogue regarding the restructuring terms.
Transparency should be promoted in order to enhance the accountability of the actors concerned, which can be achieved through the timely sharing of both data and processes related to sovereign debt workouts.
Impartiality requires that all institutions and actors involved in sovereign debt restructuring workouts, including at the regional level, in accordance with their respective mandates, enjoy independence and refrain from exercising any undue influence over the process and other stakeholders or engaging in actions that would give rise to conflicts of interest or corruption or both.
Equitable treatment imposes on States the duty to refrain from arbitrarily discriminating among creditors, unless a different treatment is justified under the law, is reasonable, and is correlated to the characteristics of the credit, guaranteeing inter-creditor equality, discussed among all creditors. Creditors have the right to receive the same proportionate treatment in accordance with their credit and its characteristics. No creditors or creditor groups should be excluded ex ante from the sovereign debt restructuring process.
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.
Legitimacy entails that the establishment of institutions and the operations related to sovereign debt restructuring workouts respect requirements of inclusiveness and the rule of law, at all levels. The terms and conditions of the original contracts should remain valid until such time as they are modified by a restructuring agreement.
Sustainability implies that sovereign debt restructuring workouts are completed in a timely and efficient manner and lead to a stable debt situation in the debtor State, preserving at the outset creditors' rights while promoting sustained and inclusive economic growth and sustainable development, minimizing economic and social costs, warranting the stability of the international financial system and respecting human rights.
Majority restructuring implies that sovereign debt restructuring agreements that are approved by a qualified majority of the creditors of a State are not to be affected, jeopardized or otherwise impeded by other States or a non-representative minority of creditors, who must respect the decisions adopted by the majority of the creditors. States should be encouraged to include collective action clauses in their sovereign debt to be issued.