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ASAMBLEA PARLAMENTARIA EURO-LATINOAMERICANA

EURO-LATIN AMERICAN PARLIAMENTARY ASSEMBLY

ASSEMBLEIA PARLAMENTAR EURO-LATINO-AMERICANA

ASSEMBLÉE PARLEMENTAIRE EURO-LATINO- AMÉRICAINE

PARLAMENTARISCHE VERSAMMLUNG EUROPA-LATEINAMERIKA

Committee on Political Affairs, Security and Human Rights

7 April 2016

WORKING DOCUMENTon Sovereign debt restructuring

Committee on Political Affairs, Security and Human Rights

Rapporteur: Ernest Urtasun

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I. INTRODUCTION

The sovereign debt crisis has historically been a recurring problem, often associated withdeveloping countries and unconsolidated democratic systems, as many of the foreignobligations were contracted after authoritarian governments or dictatorships came to power inLatin America and Africa — continents which have traditionally topped the list of debtorcountries — and in a context of international economic relations of great inequality betweenthe North and the South.

However, in recent years, debt has ceased to be a matter solely for the least developedcountries, affecting high- and middle-income countries such as some of the EuropeanMediterranean countries (Greece and Spain for example).

Levels of foreign borrowing have risen sharply, reaching record peacetime levels indeveloped countries, while middle- and low-income countries will have to face problems suchas financial speculation and high human development costs (European Network on Debt andDevelopment, 2014). This situation is a result of resources being transferred in order toservice debt - borrowing from development and affecting present and future generations.

Since 1950 there have been some 600 cases of restructuring in 95 countries throughout theworld, an average of 10 per year.

The restructuring process, used as a last resort by countries because of its consequences forthe economy and banking system, usually comes too late, increasing the economic, social andfinancial costs.

Traditionally, these processes were carried out in a more or less orderly fashion, as the vastmajority of creditors were represented by consortia of international banks and financinginstitutions such as the IMF and World Bank which granted loans with fixed or variablereturns to governments. The debt was thus institutional.

It was following the Brady plan, driven by the US Treasury Secretary, Nicolás Brady, in thelate eighties, that most debt became securitised, which brought significant changes whoseeffects are still being felt today.

The Brady plan basically allowed syndicated loans to be exchanged for free market bonds. Inthis way, a large amount of government securities or bonds entered the financial market, seenas just another asset, easily accessible with high rates of future return, attracting savers andinvestors of all kinds — particularly those specialised in financial speculation.

The market in sovereign bonds bought and sold under market conditions was rapidlyconsolidating; they were accessible without any restriction on secondary markets at very lowprices.

However, despite the optimistic view of political leaders and the international system -represented primarily by the IMF - this brought innumerable complications, which becameapparent when the debtor countries became subject to such great financial pressure that theywere forced to start negotiations with their numerous and, in many cases, unknown creditors,with a view to restructuring their sovereign debt.

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This restructuring, as has already been mentioned, came at times when economies were inextremely worrying situations.

II. TACKLING THE SUBJECT IN THE UNITED NATIONS

1) Introduction

The issue of sovereign debt was pending for a long time, in that it featured in numerous high-level United Nations declarations and meetings, without, however, tangible measures takingshape on the matter.

A significant event which paved the way is the Monterrey Consensus reached at theConference on Financing for Development in 2002, which reinforced the mandate forbuilding a fairer financial system.

The impact of the typical case of Argentina led to potential solutions being proposed — theIMF itself proposed the establishment of the Sovereign Debt Restructuring Mechanism in2002, following a process of self-criticism and review of past actions, mainly prompted bythe crisis in Argentina.

In response to the holdout conflict (2012), the international community expressed support forArgentina and stressed the need for fairer, more balanced mechanisms for restructuringsovereign debt, in accordance with the principles of international law.

Argentina, with the support of the G77 plus China, the group of developing countries thatbrings together 134 of the 193 members of the United Nations, tabled an initiative to bediscussed at the UN General Assembly. Thus, Bolivia, the country holding the G77presidency during the period 2014/2015, presented on 4 September 2014 the draft resolutionTowards the establishment of a multilateral legal framework for sovereign debt restructuringprocesses, urging the international community to address a recurring issue whose political,economic and social consequences jeopardise the sustainable development possibilities of thecountries and societies involved. At the same time, the need was stressed for a sovereign debtrestructuring mechanism and policies to prevent international financial crises and strengthendomestic financial systems, and it was reiterated that countries' efforts to restructure theirsovereign debt should not be hindered or frustrated by commercial creditors, including thosespecialised in financial speculation.

Finally, through the adoption of the resolution, it was attempted to increase efficiency,stability and predictability in the international financial system, and also achieve sustainable,equitable, inclusive economic development in accordance with national circumstances andpriorities.

Subsequently, on 9 September 2014, the United Nations General Assembly adopted theresolution with the aim of finding a timely, effective, comprehensive and durable solution tothe debt issue, to which end it decided to draw up and adopt, through a process of urgentintergovernmental negotiations, during its 69th session, a legal framework for sovereign debtrestructuring processes. It should be noted that this was adopted by 124 to 11 with 41abstentions.

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The Argentinian minister argued that the General Assembly was the right place to pursuediscussions with a view to tackling the issue in an ethical, legal and political way, to put anend to speculation and improve global economic security.

The United States representative maintained that creating a mechanism for restructuringsovereign debt could generate uncertainty, affecting the possibilities of financing fordeveloping countries.

The European Union regretted that it was not in a position to give its support to the initiative,as there were concerns about its substance and objections to the way in which it was beinghandled (the speed with which the issue was tackled, with the outcome known in advance). Itemphasised its active involvement in the work carried forward by the IMF on the contractualframework for resolving collective action issues in sovereign debt restructuring processes, andthe need for substantial, comprehensive analysis of the foreign debt situation in developingcountries and resolution mechanisms which take into account the multiple dimensions of debtsustainability.

On 5 December 2014, Resolution GA/EF/3417 established an ad hoc committee responsiblefor drawing up a multilateral legal framework for sovereign debt restructuring processes, inaccordance with the terms of the draft resolutions adopted by the Economic and FinancialCommittee.

Resolution A/RES 69/247 on Modalities for the implementation of resolution 68/304 wasadopted by the General Assembly on 29 December 2014 by 128 to 16 with 34 abstentions. Itcalled on the United Nations organisations and relevant stakeholders such as the IMF, theWorld Bank, international intergovernmental organisations, academia, etc., to contribute tothe debate. It was established that the committee would meet three times (January, May andJune/July 2015).

The United States argued via its representative that this was a technically complex issue, thedetails of which were being dealt with in more appropriate institutions such as the IMF.

The committee adopted the draft resolution on External debt sustainability and developmentby 128 to 4 (Israel, Japan, United States and Canada) with 46 abstentions.

The European Union representative held that the IMF was the primary forum for discussingthe issue and that the ad hoc committee, should be limited to drafting of a set of non-bindingprinciples based on a voluntary contractual approach which take into account the work beingcarried out on the subject in the IMF.

The United States stated that it was forced to vote against the resolution, due to the fact thatthe amendment was not adopted by consensus as laid down in the Rules of Procedure.

2) Basic Principles on Sovereign Debt Restructuring Processes

At the third meeting, on 24 July 2015, the ad hoc committee said that solutions must be foundthat bring about financial stability by reducing excessive risk, ensuring a fairer and moreefficient way out of the crisis.

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At the same meeting, the following set of principles to guide sovereign debt restructuringprocesses was established:

a) a sovereign state has the right to design its macroeconomic policy, including restructuringits sovereign debt, which should not be frustrated or impeded by any abusive measures;

b) good faith

Both the sovereign debtor and all its creditors must act in good faith in sovereign debtrestructuring negotiations and other stages of the process, with the aim of a prompt anddurable reestablishment of debt sustainability and debt servicing, as well as achieving thesupport of a critical mass of creditors through a constructive dialogue regarding therestructuring terms;

c) transparency

The process must be carried out in a transparent manner; to enhance the accountability of thestakeholders, which can be achieved through the timely sharing of both data and processesrelated to sovereign debt workouts;

d) impartiality

All institutions and actors involved in sovereign debt restructuring workouts, including atregional level, in accordance with their respective mandates, must enjoy independence andrefrain from exercising any undue influence over the process and other stakeholders orengaging in actions that would give rise to conflicts of interest or corruption or both;

e) equitable treatment

States must refrain from arbitrarily discriminating among creditors, unless a differenttreatment is justified under the law, is reasonable, and is correlated to the characteristics of thecredit, guaranteeing inter-creditor equality, discussed among all creditors;

Creditors have the right to receive the same proportionate treatment in accordance with theircredit and its characteristics. No creditors or creditor groups should be excluded ex ante fromthe sovereign debt restructuring process;

f) sovereign immunity

The principle of sovereign immunity from jurisdiction and execution regarding sovereign debtrestructurings is a right of states and exceptions should be restrictively interpreted;

g) legitimacy

The establishment of institutions and the operations related to sovereign debt restructuringworkouts must respect requirements of inclusiveness and the rule of law, at all levels;

h) sustainability

Sovereign debt restructuring workouts must be completed in a timely and efficient manner

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and lead to a stable debt situation in the debtor state, preserving at the outset creditors’ rightswhile promoting sustained and inclusive economic growth and sustainable development,minimising economic and social costs, warranting the stability of the international financialsystem and respecting human rights;

i) majority restructuring

Sovereign debt restructuring agreements that are approved by a qualified majority of thecreditors of a state are not to be affected, jeopardised or otherwise impeded by other states ora non-representative minority of creditors, who must respect the decisions adopted by themajority of the creditors. States must include collective action clauses in their sovereign debtto be issued.

3) The importance of the United Nations’ proposal

The tackling of sovereign debt within the UN provides a key opportunity to address arecurring issue, whose effects jeopardise the sustainable development possibilities ofcountries which, in many cases, in desperate situations, are forced to give in to the claims of aminority group of creditors who - taking advantage of the absence of regulatory frameworksgoverning the subject — put their own speculative interests first.

Although, as was pointed out by the United States and European Union representatives, theIMF is looking at creating a mechanism to facilitate sovereign debt restructuring, this focuseson the inclusion and/or modification of collective action clauses, taking a contractualapproach. In addition, the agreements would be voluntary, as they are not binding. Moreover,its critics point out that there is no legal predictability or guarantee that vulture funds will nottry and hinder the negotiation processes, while decisions on debt sustainability orunsustainability will continue to be issued by the IMF and its executive body, as there is nointeraction with parliaments and civil society, which raises doubts as to the transparency andinclusiveness of the process (European Network on Debt and Development, 2014).

The United Nations’ approach differs very widely from the IMF proposals, in that it focuseson promoting development, democracy and human rights and is based on the principles ofshared responsibility, good faith and cooperation between debtors and creditors whenrequesting and granting financing and in all other related processes, with a view to achievingswift, fair, efficient solutions.

In addition, since it takes place in the UN General Assembly and is open to contributionsfrom international stakeholders (international financial institutions, NGOs, internationalintergovernmental organisations, civil society, academia, parliaments, etc.), the processbecomes much more democratic and transparent.

As regards the effectiveness and viability of the resolutions adopted by the United NationsGeneral Assembly and ad hoc committee, it should be stressed that these will depend, onceagain, on the political will of governments and the international community as a whole.

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III. POSSIBLE SOLUTIONS TO THE ISSUE OF SOVEREIGN DEBT

Given the resolutions adopted by the United Nations General Assembly on sovereign debtrestructuring discussed above, the inclusion of this issue in resolutions such as those on theInternational financial system and development, Financial inclusion for sustainabledevelopment and External debt sustainability and development, and its inclusion in the AddisAbaba Development Conference (2015), the international community appears to have reachedan agreement, at least with regard to the importance of this area and the need to undertakereforms in the international financial system, with a view to making the system moredemocratic and preventing future crises, the economic and social costs of which are extremelyhigh.

The different international stakeholders in this process, including parliaments, which have topromote the adoption of tangible measures such as the introduction of internationalundertakings in their national legislation, have a role - working together towards preventingfuture crises, including collective action clauses (CACs), mobilising international efforts, etc.

With regard to the collective action clauses, aggregation is an element that the IMF isconsidering as a solution to the problem, as it proposes the inclusion of a single vote for allthe instruments concerned in the restructuring. As a safeguard, all creditors must receive thesame menu of instruments, while the minimum number of votes must represent 75 % of theaggregate amount of outstanding principal for all the series concerned (International MonetaryFund, 2014). In addition, the clause must be flexible, allowing for a distinction to be madebetween creditors where appropriate.

In this way, it is sought to limit the blocking possibilities that creditors which refuse to enterinto restructuring processes have under existing agreements, as demonstrated in the case ofArgentina.