On September 10, the UN General Assembly will vote on a resolution to adopt “Basic Principles on Sovereign Debt Restructuring Processes” (“Basic Principles”).
The “Basic Principles” bring to a culmination work by a committee of the UN General Assembly that concluded last July. While they bring to closure the work of this body, at the same time they represent the first step in a process towards introducing institutions that can deal on a more fair and humane way with situations of sovereign debt crises, a demand that had been at the forefront of civil society struggles for a long time.
The committee that developed the Basic Principles had been created by a resolution adopted in September of 2014, with a mandate to set up a multilateral legal framework for sovereign debt restructuring. The resolution had required a vote, rare step in the General Assembly, which normally operates by consensus, and the result of a refusal of Western creditors to endorse the process.
Chaired by Bolivia, the committee moved ahead with its deliberations which included, in several sessions, the presence of Ministry of Finance representatives of UN member countries and renowned economists like Professor Joseph Stiglitz, civil society and academic and trade associations. It relied on the Secretariat services of the United Nations Conference on Trade and Development. Among the European countries, Switzerland and Norway attended the proceedings, while Greece was the first member of the European Union to attend. Subsequent to the initiation of its work, several events upped pressure on member states to ensure a successful outcome. Last April, the European Parliament issued a resolution calling on all European countries to engage constructively in the process. Debt crises in Greece, Ukraine and Puerto Rico in the United States, brought home the point that deficits in the existing mechanisms for addressing debt restructuring are no longer a topic of relevance to developing countries only.
The negotiations towards the Third Financing for Development Conference held in Addis Ababa (Ethiopia) last July also featured hot debate on the issue. The compromise language ultimately agreed was unsatisfactory insofar as it refused to explicitly mention the then-ongoing work of the General Assembly committee, but it implicitly did so in a generic reference to work on debt restructuring being carried out by the “United Nations system.” The conference outcome also referred to the activities of vulture funds in two places, in one of which it expressed concern “by the ability of non-cooperative minority bondholders to disrupt the will of the large majority of bondholders who accept a restructuring of a debt-crisis country’s obligations, given the potential broader implications in other countries.”
The expected adoption of the “Basic Principles” by the General Assembly formalizes their historical nature as a first time the UN attempts to issue such guidance. They also pave the way for further work on their basis (a resolution on modalities of a process to continue to elaborate on the legal framework is envisioned for late in the Fall).
The human rights significance of this achievement had been manifest in a letter by civil society organizations stating the issue was one of “the most heated debates in the international community about how to balance the interests of creditors and debtors in ways that ensure States can respect their obligations in the promotion and protection of rights.” In line with this, in 2013 the Human Rights Council regretted “the absence of mechanisms to find appropriate solutions to the unsustainable foreign debt burden of low- and middle-income heavily indebted countries, and that, to date, little headway has been made in redressing the unfairness of the current system of debt resolution, which continues to place the interests of the lenders above those of indebted countries and the poor in those countries. . . “
More punctually, the lack of a system for sovereign debt restructuring allows “vulture funds” – financial companies that profiteer by buying sovereign debt at low price in times of crisis and suing for the full amount when the debtor’s situation has improved – to disrupt debt restructuring agreements reached by a debtor with the majority of creditors. In the words of the Human Rights Council, repayments to those funds have “direct negative effects” on the capacity of Governments to fulfill their human rights obligations.
So, to the extent that the “Basic Principles” can begin to chart a response to “vulture funds” activities, the human rights case for supporting them is undeniable. In a letter submitted to European Union member countries, more than 35 debt justice advocacy organizations referred to the “ability of vulture funds to sabotage debt restructuring processes through aggressive litigation” and considered the adoption of the resolution as an essential step in ensuring that taxpayers’ money “is no longer used to pay vulture funds.”
A more detailed look at some of the principle makes the case for support even clearer. Principle 1 recognizes the right of a state to “in the exercise of its discretion, . . . design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures.” In this sense, it presents a helpful complement to several Guiding Principles on Foreign Debt and Human Rights that call on governments to ensure the primacy of human rights, non-discrimination, progressive realization, non-retrogression and minimum core obligations (Guiding Principles 6 through 20) in their lending and borrowing activities and is, arguably, a precondition to them.
Principle 3 calls for transparency “to enhance the accountability of the actors concerned.” Both transparency and accountability are important operative human rights principles in and of themselves, and a crucial element in the enjoyment of the right to participate in public affairs. They are also relevant to the enjoyment of economic and social rights. The Committee on Economic, Social and Cultural Rights has said that in its assessment of whether a State party has taken reasonable steps to the maximum of its available resources to achieve progressively the realization of the provisions of the Economic, Social and Cultural Rights Covenant it places “great importance on transparent and participative decision-making processes at the national level.”
Principle 7, on 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.” This principle provides useful backing to a core demand of human rights groups, namely, that disputes concerning the restructuring of sovereign debt be addressed by an international mechanism that is neutral and independent from both creditors and debtor. The international debt restructuring mechanism’s independence of creditors and debtors is also asserted in the Guiding Principles on Foreign Debt and Human Rights (Guiding Principles 84 and 86.a).
Principle 8, on sustainability, explicitly mentions human rights: “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.” In making human rights a visible factor that should balance creditors’ rights in a debt restructuring, its importance cannot be overstated.
Principle 9 (that majority restructurings should not be “affected, jeopardized or otherwise impeded by other States or a non-representative minority of creditors”) holds relevance in the context of fighting off “vulture funds” attempts to undermine the achievements in a debt restructuring or debt cancellation that a debtor country may have received from other creditors.
The absence of a multilateral and rules-based system for sovereign debt restructuring is not only a glaring gap in the international financial architecture, as a former IMF Deputy Managing Director said more than a decade ago. It makes States’ obligations to respect and protect human rights subordinated, in the case of a debt crisis, to the whims of creditors and, in some cases, even a small minority of them. The principles to be adopted by the UN, as a first attempt to create rules to curb such behavior in what is a messy vacuum, deserve the full support of the human rights community.