Sovereign debt restructurings, as can be seen from examples like Greece and Argentina, are difficult, often traumatic experiences for the sovereign debtor and its citizens. It is invariably the case that in a sovereign debt restructuring (SODR), the sovereign, because it either has lost access to financing or can only obtain it on more expensive terms, will be forced to reduce its expenditures in order to try and meet its renegotiated debt payments.
This means that it is entirely foreseeable that the SODR will result in a range of adverse social and political impacts and in adverse human rights impacts on at least some of the various SODR stakeholders. The citizens of the debtor country are likely to suffer from reduced access to health services, education services and other social services and to experience job losses. There may also be adverse impacts on civil and political rights, for example, access to justice. Creditors may also suffer adverse human rights impacts. For example, in the Argentinian debt crisis, the bondholders who incurred losses included pensioners and other citizens of modest means in countries like Italy.
One consequence of these potential impacts is that SODRs usually involve struggles between the debtor and its creditors and amongst the different stakeholders on both the creditor and debtor sides to avoid having to bear the negative financial, economic, social, human rights, environmental and political consequences of the SODR. As a result, each sovereign’s debt restructuring process is likely to be conflict-ridden, inefficient and with a high probability of resulting in a sub-optimal outcome. In fact, the risk of sub-optimal outcomes has increased as financial markets have become larger and more globalized so that sovereign debtors – at least those with access to financial markets – are able to borrow from a broader range of creditors. One consequence is that SODRs are difficult, often traumatic, experiences for the sovereign debtors and their populations, and frustrating and potentially costly for their creditors.
Given these high stakes, the amount of efforts made over the past seventy years to improve the process is not surprising. One recent manifestation of these efforts has been the promulgation of a number of international norms and standards that either explicitly or implicitly are applicable to SODRs. Interestingly, these standards all recognize that SODRs have substantial social and political effects in addition to their financial and economic consequences but they do not provide detailed guidance on how the parties should deal with these social and political impacts in negotiating and agreeing on a sustainable SODR. This is intriguing because shortly before these documents were developed, in other forums, companies and states had established a set of international norms and standards dealing with the social and human rights responsibilities of businesses. Yet the standards applicable to SODRs do not refer to the norms and standards applicable to the responsibilities of businesses.
The seeming disconnect between the developments in regard to, on the one hand, the SODR process and, on the other, business and human rights, is particularly striking because many of the world’s most significant financial institutions have publicly available human rights policies that, at least prima facie, are applicable to SODRs.
The disconnect between these two developments raises at least two questions. First, should the human rights and business standards be applied to the SODR process. Second, if they should be applied to the SODR process, how should they be applied? In a recent article I attempt to answer these two questions. This exercise serves three purposes. First, it will enable us to see if these human rights and business standards can add value to SODRs in the sense of reducing their human rights costs without unduly increasing their financial costs. Second, it will provide some additional insight into how easily human rights law can be adapted to financial transactions specifically and to business more generally. Third, this exercise might help us better understand how to plug the gap in global economic governance that allows different actors in global governance to develop international standards on SODR and on business and human rights on parallel tracks that do not seem to communicate with each other.
Daniel D. Bradlow is SARCHI Professor of International Development Law and African Economic Relations, Centre for Human Rights, University of Pretoria and Professor Emeritus, American University Washington College of Law. Click here to read full article published in the Yale Journal of International Law on which this blog is based.