Barry Herman
From time to time, sovereign governments find themselves in a situation in which the repayment terms on at least some of their external debt must be eased or cancelled. Creditors cannot force repayment, whether from an impoverished sovereign or an irresponsible one. However strong the presumed contractual and moral obligation to repay, it cannot or will not be fully done in some cases. Instead, distressed or even recalcitrant sovereigns almost always restructure their debt, albeit in ad hoc negotiations that mainly reflect power differences at the time of negotiation. The world should do better. There ought to be some principled way to restructure sovereign debt repayment obligations. The process should function independently of judgments by creditors about what the leaders of the defaulting government “deserve.” It should be especially mindful of the heavy harm debt crises impose on the people of the indebted country. As agreed by all the world’s governments in the “Monterrey Consensus,” it should “provide for fair burden-sharing between public and private sectors and between debtors, creditors and investors” (UN, 2002: para. 51).
In other words, sovereign debt restructuring is a fully political process. Some internationally agreed principles should govern how it works. In fact, some principles have regularly been invoked as accepted international law, such as “creditor rights” to enforce contracts that borrowing governments have signed, or more generally,
pacta sunt servanda (agreements must be honored). But who should enforce this principle? Once upon a time, governments threatened to send warships on behalf of their bankers and investors to collect debt servicing owed by bankrupt governments. This practice is no longer deemed acceptable; nor is it deemed necessary. Creditors instead mainly rely for repayment on the appreciation that the indebted government will want to borrow again, which is generally sufficient incentive. Similarly, regaining access to financial markets is assumed to be the operative incentive for a bankrupt sovereign to reach agreement with its creditors to restructure repayment of the debt.
In this regard, enforcement of “creditors’ rights” is driven by creditors withholding new loans, something the market usually does quickly when it realizes the debtor is in difficulty and something that official creditors may threaten. As the debtor government is usually desperate for some form of external finance, pacta sunt servanda operates today by creating the strong debtor incentive to try to delay acknowledging that it cannot pay as long as possible and then, when insolvency leaves creditors no option but to reduce their claims somewhat, accepting the generally insufficient debt relief offered so as to regain market approval and resume access to market finance. The debtor government’s only countervailing power is to survive without new external credits for some period of time or to mortgage future export revenues for cash or essential imports (a kind of barter trade) or to mobilize support from an official lender that is not cooperating with the private and mainstream official lenders.
It is possible that the sovereign debtor and its creditors reach no restructuring agreement and arrears accumulate, possibly leading to formal repudiation of the debt. In fact, little sovereign debt, if any, has been repudiated in recent decades, and so it may be inferred that the debtors and creditors find the current processes for sovereign debt restructuring to have been a tolerable or unavoidable way out of a debt crisis. Losses are taken by one group or another according to their respective negotiating prowess and power, and the parties move on. That, however, is a very low normative standard and one generally not accepted as sufficient by national legislatures when they write laws to cover bankruptcies of companies, households, or subnational public entities. They want to ensure that the workout from insolvency is economically efficient (e.g., maintaining operation of some of the physical plant, equipment, and employees of bankrupt companies when economically possible, instead of fully closing them down and selling off the assets); timely (i.e., ensuring that decisions are not unnecessarily postponed by one party or another); and fair to the relevant stakeholders (i.e., that the burden is appropriately shared among creditors and the debtor). Could we not ask that the sovereign debt workout also aim to be effective, timely, and fair?
1Governments or private creditors have at various times sought to define principles to govern sovereign debt restructuring, and the UN General Assembly has recently adopted such a set, albeit without the participation or agreement of the developed countries (Muchhala, 2015). Those principles thus need to be considered a work in progress, an invitation to global dialogue. This paper suggests how that dialogue might proceed.
In addition, the usual proposal to reform how sovereign debt is restructured imagines establishment of an international authority that would apply the agreed principles in a proceeding that would emulate how national bankruptcy laws and courts bring all the parties together to resolve the debt distress of the covered entity. And yet governments are rarely willing to cede sovereignty to an international authority, except perhaps as a last resort. It should not surprise us that borrowing governments, let alone creditors, have not supported such proposals. This chapter instead proposes a better way to carry out the decentralized approach.
The rest of the chapter first reviews the complex organization of sovereign debt workouts to offer a perspective on the political and legal frameworks in which those processes are embedded.
2 This is intended to set the stage for a mental exercise on what an ideal political/legal framework might look like, leading to a reform proposal. The main innovation is not my own but one suggested more than a decade ago by Christoph Paulus of the law faculty of Humboldt University in Berlin.
3 I think it might be time to look again at that idea, which I try to fit into an international political framework.
THE DECENTRALIZED AND COMPLEX REALITY
As other chapters in this book have also noted, an insolvent sovereign usually owes money in a variety of currencies, including its own, and it owes it to a variety of lenders, usually including commercial banks, investors in bonds, other sovereign governments, and various international financial institutions (IFIs), almost always including the International Monetary Fund (IMF).
It is useful to focus for a moment on the IMF role. Most debtor governments will work with the IMF on the design of an economic recovery program for the country meant to bring about a sustainable fiscal situation. The IMF will also help formulate a financing plan for the duration of the adjustment program, including giving an indication of the overall amount of temporary relief needed from debt servicing and whether and how much permanent relief is needed for the country to reach a sustainable debt scenario over the medium term. The IMF operates under guidance of its boards of governors and executive directors, whose views most heavily reflect the views of the Fund’s own main creditors, an approach that is widely and justly criticized (IMF, 2014). The debtor government is then formally on its own to negotiate the restructuring of its debt-servicing obligations or obtain outright debt reduction with each of its creditor classes. However, political pressure may be put on different official and private groups of creditors so the overall anticipated level of relief is attained, although not all creditors need be accommodating. At the same time, the recommended IMF target level of relief may reflect the Fund’s judgment of what the different classes of creditors are willing to give, which may be insufficient to give the debtor a “fresh start.”
The debtor thus opens negotiations with its external creditor banks (usually in an informal arrangement called a London Club), also with the holders of the various series of its foreign currency bonds (some of whom sometimes organize themselves into creditor committees), perhaps as well with its domestic banks and bondholders, and with its foreign government creditors (most of which will come together in the informal Paris Club). Although restructuring of obligations to IFIs is unusual, it has been essential over the past two decades for the debt restructuring of a group of thirty-nine heavily indebted poor countries (HIPCs). Such a process could again become necessary for poor and vulnerable countries that owe a large share of their debt to those institutions. Each of the restructuring bodies works under a largely ad hoc and uncoordinated set of procedures. Not surprisingly, outcomes of the different processes need not amount to appropriate burden sharing between the debtor and its creditors or among the creditor classes. This is not satisfactory.
In sum, each debt crisis country arranges a workout program containing some combination of government-spending austerity, tax reform to raise public revenues, additional loans from IFIs or governments, and restructuring of one or more classes of debt obligations. Citizens may also replace the government that was in charge during the descent into crisis, as also happens in corporate restructuring, where the defaulting management may be fired. But sometimes official creditors prefer for geostrategic reasons that governments remain in power despite being responsible for a debt crisis, and the key officials may survive—indeed, have survived—many a financial crisis.
4 The proportions between economic adjustment, new financing, and debt relief will differ among country cases, depending on the size of the debt “overhang,” the political importance of the indebted sovereign to the global powers, and the skill of the sovereign’s negotiators relative to that of its creditors.
THE POLITICAL FRAMEWORK
One may see that there is a political framework among states and IFIs within which the debt workout takes place. There is also a legal framework, which largely pertains to the contractual relations between the indebted state and its private creditors. We return to that below. Here it is sufficient to say that every effort is made to voluntarily resolve unpaid sovereign debt obligations to private creditors. The courts may get involved in aspects of difficult cases, and creditor governments will involve themselves when there is a pressing policy concern.
Consider, for example, the sovereign debt crises of the early 1980s, which mainly involved syndicated loans to middle-income countries from commercial banks, especially the “money center banks” that operated the international currency markets. The governments of the world’s major economies feared the consequences that recognizing sovereign debtor insolvency would have had on the balance sheets of the money center banks and thus pushed them to make “concerted” loans to the otherwise-defaulting sovereigns. The debtor countries thus met their debt-servicing obligations with these forced loans, at least for a time, while the financial regulators applied “forbearance” in their supervision of the banks. The feared collapse of the international currency markets appears to have been a good enough reason for the governments to intervene at the time (Devlin, 1993). It took the rest of the decade and considerable policy intervention to arrange the final workout. That is, ending the sovereign debt crisis of the 1980s involved a political deal (the Brady Plan), not a market-led process (Garay Salamanca, 2010).
Government intervention in the workouts from excessive sovereign obligations to private creditors continues to the present day, with borrowing from the private sector mainly taking place through bond issuance. Initially, governments—but especially the IFIs—involved themselves in “important” cases by lending to the overindebted sovereigns, as during the Asian financial crisis of the 1990s. This bailout strategy generally prevented outright default, although it happened anyway in the case of Russia in 1998. Private creditors did not object to these bailouts, although voters in creditor countries frowned on the practice. The creditor governments, acting through the IMF, thus revised their approach by the end of the 1990s to give more emphasis to “private sector participation” or “bail-ins” in workouts from excessive obligations to private creditors (IMF, 2002). As has been clear in the recent series of Greek restructurings, this sets up a three-way struggle between the debtor government (wanting the least austerity), the private lenders (wanting their money back), and the official international community (wanting the least threat to its bondholding banks, the least voter criticism, and the least threat to its own bailout loans).
5If there have been greater and smaller political interventions in resolving distressed sovereign debt obligations owed to private creditors, the restructuring of sovereign debts owed to official creditors has been entirely political. Although interofficial loans are formalized in contracts, the decisions to alter the repayment obligations in those cases are in practice taken politically. The bilateral official creditors that meet in the Paris Club agree to bind themselves a priori to specific norms for the relief that they offer to countries in different income groups, revising the relief standards from time to time as deemed warranted. However, they actually accord relief on a case-by-case basis, as they have some flexibility in how much relief they give any specific country. For example, within an agreed framework for relief, the Paris Club can reduce current and future debt servicing by more or less by deciding where to position the “cutoff point” after which date obligations are not restructured. Also, after the Paris Club reaches its joint creditor decision on these terms of relief, called the Agreed Minute, the debtor needs to renegotiate each specific loan with each member country of the club, allowing further differences in treatment to creep into the final detailed arrangement. Moreover, from time to time the Paris Club substantially departs from its standards for politically strategic cases, as for Egypt, Indonesia, Poland, and Turkey at one time or another (Cosío-Pascal, 2010). Finally, the club has also offered to unilaterally delay debt repayments to countries harmed by disasters, including the tsunami of December 2004 and the internal conflict that wracked Liberia.
6The 1996 initiative to reduce the debt of the HIPCs was a uniquely comprehensive set of political arrangements for debt restructuring. To begin it, an eligible debtor government had to approach IMF and indicate a willingness to undertake macroeconomic and structural policy reforms, and since 1999 it has had to draft a standardized “Poverty Reduction Strategy Paper.” Typically the government would adopt an austerity and policy liberalization program that would be supported by new loans on concessional terms from IMF, other IFIs, and bilateral donors, along with cancellation of 67 percent of Paris Club debt servicing falling due during the adjustment period and long-term rescheduling of the rest. Typically, after three years of a country staying “on track” with its adjustment commitments, the IMF and World Bank executive boards would jointly graduate the country to its “decision point,” when additional policy reform commitments would be made by the debtor, including to start implementing its poverty reduction strategy; in addition, a plan for permanent debt relief would be prepared, including reduction of obligations to the IFIs. An “interim phase” then ensued in which the Paris Club would cancel 90 percent of the debt servicing falling due to its member governments and reschedule the rest, while other official and commercial creditors would be asked to provide comparable relief. The IFIs would start giving annual relief of debt servicing, which would be made permanent at the next stage.
When the adjusting poor country earned sufficient creditor confidence (originally only after another three years), the IMF and the World Bank would graduate the country to the “completion point,” when the Paris Club and multilateral creditors would agree to reduce the stock of debt and when other official and private creditors would again be asked to grant comparable treatment. The final amount of HIPC relief was intended to put the country on a path to fiscal sustainability, but that was often based on optimistic projections. A further step was thus added to the HIPC Initiative in 2005, when major IFIs adopted the Multilateral Debt Relief Initiative (MDRI), agreeing to essentially wipe out all remaining obligations to the IFIs of each completion-point HIPC on condition that the additional savings in debt servicing would be applied to antipoverty programs meant to help the country achieve the UN’s Millennium Development Goals.
As HIPCs have borrowed anew after receiving their HIPC and MDRI writedowns, their debt-servicing obligations have begun to grow again and have become a significant burden for some of them. IMF reflected this concern when it announced in February 2015 that it was giving special relief from debt servicing owed to the Fund to the three West African countries hit by the Ebola outbreak. It will not actually reduce the repayments but will draw grant monies to cover the debt-servicing obligations from a new Catastrophe Containment and Relief Trust at IMF (IMF, 2015).
THE LEGAL FRAMEWORK FOR PRIVATE CREDIT
As noted already, private lending to a sovereign today usually takes the form of a bond issued by the government and sold on a particular financial market. The bond contract specifies the country whose laws will govern the bond, typically the country in which the market is situated. The contracts also specify the possibilities and limitations for changing the repayment terms. Purchasers of the bonds are thus relatively confident that if a repayment problem arises, the contractual clauses of the bonds will win them sympathetic treatment in the relevant courts if litigation becomes necessary.
Pension funds, insurance companies, banks, and other lenders prefer to buy bonds in markets having creditor-friendly legal and regulatory systems, for example, where standardized and reliable information on the borrower is filed with the market oversight authority and the depth of the market makes the purchased bond liquid. In addition, economies of scale and competition in large markets hold down the cost of raising funds in those centers. Borrowing countries will thus prefer to issue their bonds in such jurisdictions to minimize the interest rates they have to pay and to be able to issue bonds with longer maturities. On the other hand, countries will likely want to diversify their obligations and so might issue in multiple currencies on multiple markets, including the domestic market, where there would be no exchange-rate risk but a possible rollover risk if the market were not very deep.
Thus the world has and will continue to have multiple financial markets that trade the bonds of different sovereigns, each market governed by its own domestic laws. The desirability of issuing in a particular financial market can change with changes in its laws or in how they are interpreted by their courts. A case in point is the United States, where the attraction of being able to issue in its deep markets has even led governments to waive their sovereign immunity from being sued in U.S. courts by their bondholders. However, the attractiveness of the New York market may have fallen somewhat owing to the strange treatment of Argentina in the U.S. courts. As noted elsewhere in this volume, the courts privileged the claims of a small group of uncooperative bondholders—aptly named “vulture funds”—against those of the overwhelming majority of Argentina’s other bondholders, including those holding bonds issued under the laws of the United Kingdom, Japan, and Argentina itself. Not surprisingly, this has been highly controversial.
The evolution of the legal treatment of sovereign bonds in the U.S. market also highlights how the courts in interpreting the law can make policy independent of the foreign policy priorities of the government. In the case of Argentina’s bonds, the U.S. government submitted a number of amicus briefs in support of Argentina’s position against the vulture funds as the case percolated up from the district court to the Supreme Court.
7 This was to no avail. In other words, there seems to be a measure of separation between the legal regime in the United States governing the sovereign debtor’s relationship with its private creditors and the policy regime of the United States regarding its priorities in sovereign debt restructuring. Still, the U.S. government has the power to change the law that its courts apply in their decisions, and thus the political framework can trump the legal one in the end.
All in all, one may see that the system works in a fashion, in that it produces debt workouts. However, this is hardly a satisfying criterion. In fact, if the debt restructuring produced by this system worked well, then Greece would not have sought another restructuring in 2015 after having restructured its privately held bond debt in 2012. Jamaica would not have had to restructure its obligations to domestic banks again in 2013 after having restructured them in 2010. Gabon would not have defaulted in 2002 on the external bank debt that had been restructured in 1994. And so on.
AN IDEAL FRAMEWORK
Let us now try to imagine an ideal system. To begin, one might want to see a system in which some respected neutral global authority—a philosopher king, as Plato would have it—was responsible for oversight and coordination of the overall restructuring of the obligations to private and public creditors of all indebted states. It would ensure that the end point of the debt restructuring was a fresh start, a situation in which no further debt restructuring would be expected for many, many years (natural or economic catastrophes aside). It is also necessary that essential social services are maintained during the crisis period. In particular, the philosopher king would make sure that the “social protection floor” was maintained in each country and that economic recovery was possible. The king would also entertain complaints from insolvent states or the creditors that believed they were not being treated according to the king’s principles of effective, timely, and fair restructuring.
However, the king would not need to intervene directly with each of the public and private classes of creditors in most instances. A principle of subsidiarity could apply. The philosopher king in considering the overall amount of needed relief could set the target for the degree of restructuring of the official and private claims of any state. Official creditors could then decide among themselves how to offer the specific terms of relief to meet the king’s target. Moreover, a judge from a national bankruptcy court could oversee the workout with the private creditors, guided by the king’s principles and rules. As the king appreciates that there will be multiple financial markets in which sovereign bonds would be issued, he could mandate that essentially the same law governs the relations with the private creditors in each state, including that of the borrowing government. Moreover, in this ideal world, the courts would perform competently, independently, and honestly in each jurisdiction. In this way, domestic investors and banks purchasing domestic currency issues of the government’s securities would face the same legal protections as purchasers of its bonds issued in foreign markets. Similarly, foreign investors in the bonds issued under domestic law could also settle any claims in the domestic court.
Still at the level of the ideal, we can imagine that the foreign and domestic creditors would find the resulting sovereign insolvency regime attractive. Creditors would feel that their property rights were protected fairly, that is, that they would recover the maximum possible amount of their investments, including interest, and that there was a reasonable way to reach decisions that were enforceable on all creditors in their class (e.g., no more “vultures” to destabilize an otherwise agreed restructuring). Nevertheless, unhappy creditor groups could appeal to the king for review.
A PATH TO REFORM
We have no philosopher king to set guidelines, but we have an international political process in the United Nations, whose member states have agreed in the General Assembly to various guidelines for international political and economic behavior that are widely accepted (admittedly with sometimes distressingly common violations). Examples of already existing guidelines include those on business and human rights, gender equality, peaceful settlement of disputes, and sustainable development.
As
noted at the outset, the General Assembly undertook another such exercise in 2015 when it drafted a set of “basic principles” on how sovereign debt crises should be addressed. The principles address relations between the sovereign debtor and its creditors, stating that the sovereign has a right to restructure its debt, although it should do so only as a last resort in view of creditors’ rights. The principles also call for “good faith” negotiation by the debtor and its creditors, transparency of negotiating partners, impartiality of involved international and regional institutions, equitable treatment of different classes of creditors, and limited exceptions to sovereign immunity before foreign courts. They also specify very general requirements for considering the institutions that facilitate debt workouts as internationally legitimate. They further stipulate that debt workouts should be completed in a timely and efficient manner and lead to a stable debt situation that promotes sustained growth and sustainable development, and that agreements that are reached by qualified majorities should be protected from disruption by minority creditors or other states (UN, 2015).
Unfortunately, not only were these basic principles not discussed or approved by the creditor countries, but they lack precision and in some cases ambition. For example, while principle 8 says that the debt workout should minimize economic and social costs and respect human rights, it could more specifically have called for protecting the social protection floor of the indebted country. In other words, it is not enough to minimize the cost, as the imposed cost could still be substantial. Calling for respect for human rights is correct but too vague in this context. No one should be made hungry by a debt workout, nor should a child be deprived of quality schooling, nor should people be left vulnerable to disease because health clinics had to close. Owing to this and many other shortcomings in the drafting, further work is needed to devise an adequate set of principles that might actually serve as guidelines for sovereign debt workouts.
To this end, the General Assembly could start a new intergovernmental deliberation and invite all classes of stakeholders to contribute their views on a strengthened set of principles for sovereign debt workouts. It could invite legal scholars to help draft the text; indeed, it could request drafting assistance from the highly respected and long-established intergovernmental body on commercial law, the UN Commission on International Trade Law (UNCITRAL). On the basis of such deliberations, the General Assembly could then reach global consensus on a set of principles it would adopt, with those principles becoming a part of what legal scholars call “soft law.”
The key point is that the formal step of adoption would reflect an actual political consensus that had grown during the deliberative discussion stages. Governments and international institutions should then agree, ipso facto, to apply the principles when they undertake workouts from sovereign insolvencies. In other words, adoption of the principles should reflect actual political commitments to employ them.
The IMF, in particular, as the already designated international intermediary on sovereign debt crisis workouts, should agree to be guided by them. This would not represent an instruction from the United Nations to the IMF, which is not allowed by mutual agreement of the two institutions, but rather would reflect an actual consensus among all UN and thus IMF member governments. However, the IMF executive board should formally adopt the principles for the sake of clarity.
8Henceforth, there would thus be an international standard against which to assess sovereign debt workouts. It would also create opportunities through public or peer pressure (as there is no philosopher king) to draw back relevant actors that depart from the guidelines. The essence of the proposal is that because workouts from sovereign debt crises are political in nature, involving relations between states and with IFIs, the guidance for appropriate functioning needs to be governed politically.
As with the philosopher king, the world’s governments should also want their agreed principles to govern the relations of the sovereign debtor with its private creditors. One of the principles could thus specify the priority for repayment of obligations. The principle might be stated as repayment of IFI obligations first (as is the current practice), then repayment to government creditors, and finally repayment to private creditors. This would subordinate the standing of private claims and might raise the risk premium embedded in the interest rates of these instruments. But that seems a fair deal, as taxpayers in lending countries must cover losses on official loans. On the other hand, private creditors might propose a different order of priority, with government creditors having lower priority on the argument that private creditors lend on the firm expectation of repayment whereas government lenders are undertaking a public policy action that more easily accommodates the risk of nonpayment. The point here is not that one is a priori right and the other wrong. The point is that this is something to discuss.
Furthermore, recognition of these principles could be placed into the standard “boilerplate” (fine print) of bond contracts. But they should also be reflected in how the relations of private creditors and the sovereign borrower are governed should creditors bring cases to court. This would require reform of court practice in at least some countries so as to be in harmony with the guidelines.
One way to bring that about would be for the General Assembly to ask UNCITRAL to draft a “model law” that if adopted by national legislatures would implement the principles as they relate to the claims of private creditors in domestic courts. UNCITRAL is the appropriate body to undertake this task owing to its deep expertise, including on insolvency issues and in drafting model laws. UNCITRAL is also politically well balanced, with 60 members selected by the General Assembly to reflect the various geographical regions and principal economic and legal systems of the world. The commission operates through working groups, including one on insolvency law, which currently focuses on cross-border issues in corporate insolvency (UNCITRAL, 2013). The draft model law to implement the sovereign debt principles in domestic courts should then be endorsed by the General Assembly, signaling its global political acceptance, on the basis of which each country would then be expected to adapt the model law to fit its constitution and institutions and then adopt it into its legal system.
Each country would then have a comparable process to treat creditor claims against a troubled sovereign, including claims against its own government. Private creditors could still seek a voluntary restructuring agreement, but it would now be explicitly in the “shadow of the court.” The adoption of the model law would thus give greater confidence to sovereign bondholders and other private creditors as to the extent and limitations of their rights to repayment. Not only would this discourage the practice of “forum shopping” to find the most creditor-friendly courts in which to press an unhappy bondholder’s claims, but it would simplify restructuring bonds issued in different markets that might otherwise be subject to widely different domestic laws.
This innovation could be valuable in itself. There is already a strong growth in issuance of government as well as private securities in domestic markets in domestic currencies and under domestic laws. There is also a strong international investor interest in holding such securities (Akyüz, 2015).
Finally, the proposal needs a real-world counterpart to the right of appeal to the philosopher king from the official and/or private participants in the workout. In fact, a relevant forum already exists in the Permanent Court of Arbitration (PCA). It was created in 1899 at The Hague Peace Conference to assist states in peacefully settling disputes. The conference reconvened in 1907 and adopted several additional treaties, including one on using arbitration to settle sovereign debt disputes, with a view to ending “gunboat diplomacy.” The PCA, which is not a court but an international organization with 116 member states, helps parties to a dispute set up arbitral panels for cases encompassing territorial, treaty, and human rights disputes between states, and commercial and investment disputes, including disputes arising under bilateral and multilateral investment treaties. It administers arbitration, conciliation, and fact finding in disputes involving various combinations of states, private parties, state entities, and intergovernmental organizations.
9 In sum, the PCA has a very old mandate to address sovereign debt workouts, a mandate that might be revived.
AND NOW A FIRST STEP
Perhaps we are not so far from being able to take the first step in the reform proposal, that is, reaching global consensus on the principles. Various proposals could inform the consultations. To start, the UN Conference on Trade and Development (UNCTAD) convoked an expert group, which formulated a set of principles on responsible sovereign borrowing and lending to sovereigns (UNCTAD, 2012), and a successor group deliberated on the desirable characteristics of a sovereign debt workout mechanism.
10 The UNCTAD Secretariat then synthesized these efforts in a comprehensive report (UNCTAD, 2015) that informed the debate in the General Assembly’s ad hoc group on sovereign debt workouts. Also relevant, the Human Rights Council adopted “Guiding Principles on Foreign Debt and Human Rights” in 2011.
11 Although the guiding principles were adopted by vote in the Human Rights Council, this seemed to reflect less on the content of the proposals (which seem quite good) and more on the decision to undertake such an exercise in that forum. The Institute of International Finance (IIF), an organization of major private financial institutions, could also contribute to the principles discussion, as it had formulated a set of “Principles for Stable Capital Flows and Fair Debt Restructuring and Addendum” (IIF, 2012).
The principles could be guided as well by the agreed conclusions on sovereign debt in the Addis Ababa Action Agenda, adopted at the Third International Conference on Financing for Development in July 2015 (endorsed by the General Assembly in Resolution 69/313 on July 27, 2015), and by the overall policy imperatives of the 2030 Agenda for Sustainable Development that was adopted on September 25, 2015 at the heads of state summit meeting in the General Assembly (Resolution A/70/1). In this regard, the new principles could accord high priority to poverty eradication, to the creation and maintenance of decent work and rising incomes, and to progress in protecting the planet.
To take the first step, the world’s governments need to agree that the current global system for addressing sovereign insolvency is unacceptable. The preference for staying with the status quo seems weak. It is a preference for the system we know with all its faults rather than taking the risk of attempting reform. That view could change. Nothing in politics is immutable.
NOTES
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