On September 10th, the United Nations General Assembly adopted a draft resolution on “Basic Principles on Sovereign Debt Restructuring Processes.” The adoption of nine guiding principles—sovereignty, good faith, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy, sustainability, and majority restructuring—marks perhaps one more step on the ostensible journey “towards the establishment of a multilateral legal framework for sovereign debt restructuring processes,” which was set in motion by a pair of UNGA resolutions passed in September and December of 2014. Whether this latest move is a harbinger of concrete progress or change (if there is an unintended sense of normativity to ‘progress’), or instead mere gesture, remains to be seen. These prospects are even more uncertain where, as here, consensus-building is imperative (at 7) and the issue is one as highly charged as sovereign debt restructuring (“SDR”).
Argentina’s recent experience with sovereign debt is illustrative of the context in which this resolution was adopted. A brief and oversimplified history follows: In 2001, Argentina experienced its most severe economic crisis in decades. External public debt was already quite high (at 9) at this time and thereafter rose considerably (at 4) to unsustainable levels, culminating in 2002 with Argentina’s default on its foreign debt (and record rates of poverty and unemployment). The succeeding governments restructured Argentina’s debt in two rounds of negotiations in 2005 and 2010, with 92% of creditors accepting the new deal (creditors received exchanged bonds and GDP-indexed bonds).
Unfortunately for Argentina, that left the 8% of ‘holdout’ creditors who sued to obtain full face value of the bonds. In NML Capital, Ltd. v. Republic of Argentina, the court held that “the pari passu clause in Argentina’s defaulted bonds ‘prohibits Argentina, as bond payor, from paying [restructured] bonds without paying on the [holdout] Bonds.’” (At 2 n.4.) In other words, if Argentina were to pay the “willing” creditors who restructured what they were fully owed under that agreement, it would also have to pay the “holdout” creditors what they were fully owed under their agreement—which did not include the restructuring. Owing to their conduct (and returns, following NML v. Argentina), these holdout creditors have been termed “vulture funds” by detractors, and not always without good reason. For example, NML Capital spent $48 million on the relevant bonds in 2008, significantly below face value and well after the initial crisis and first round of restructuring. Under the ruling of NML v. Argentina, however, NML Capital now stands to receive about $832 million—a return of over 1,600%.
The SDR resolution, as mentioned above, is part of a larger push by some to establish a formal international legal framework to facilitate sovereign debt restructuring. Proponents, including the economists Joseph Stiglitz and Thomas Piketty, draw on the Argentinian experience and ongoing Greek debt crisis to underscore the risks posed by the lack of a governing framework. In the absence of such mechanism, i.e., in the world as it exists today, the SDR landscape is often characterized by “voluntary, informal negotiated restructurings.” (At 6.) To some, the pitfalls of this “market” approach can be seen in the holdout problem exemplified by NML Capital, especially when considering the collateral damage to the citizens of defaulting nations.
Others (at 3 n.9), however, defend the existing “contractual” approach to SDR, which involves the use of collective action clauses (“CACs”) in debt contracts as a way to solve the holdout problem. CACs allow for a defined supermajority of the contracting parties to amend critical repayment terms, such as the principal and interest rate, which in theory might surmount the problem of holdout creditors. Adherents to the “contractual” approach argue that the current system has been quite successful (at 6), at least or particularly when compared with the possible alternatives (e.g., an international legal framework). However, many have argued that CACs are insufficient to solve the holdout problem. As Steven Schwarcz notes, many extant debt contracts lack CACs, while in others the supermajority requirement may be sufficiently high “that vulture funds are able to purchase vote-blocking positions that enable them to act as holdouts.” (At 4.) Ultimately, the issue for market participants is “whether there exists a problem that is substantial enough to warrant imposing the risk that the new regime might not get it right.” (At 6.) This is the cost-benefit analysis facing nations today.
Introduced by South Africa’s representative on behalf of the Group of 77 and China, though driven largely by the Argentinian delegation (at 15–16), the SDR draft resolution passed easily and overwhelmingly: there were 136 votes in favor, six against, and 41 abstentions. Notwithstanding the popular support, the measure faced notable opposition from the United States, Germany, Japan, Canada, Israel, and the United Kingdom. The rest of the European Union abstained, in accordance with its common position, as did all other nations characterized as having advanced economies (at 148) by the IMF (with the exception of Iceland, which voted in favor). This cleavage is no coincidence. It appears to represent a semi-ideological rift between and from the respective standpoints of creditor nations (large, advanced economies) and debtor nations (smaller, China notwithstanding, developing economies). This broad characterization, however, does not mean that the divide is susceptible to easy or precise delineation.
U.N. General Assembly resolutions are, of course, non-binding on member states. Nevertheless, there is much to be gleaned from this particular resolution and its 2014 predecessors. A brief examination of the yearlong run-up to the vote illustrates some of the difficulties involved in intergovernmental decision-making, while the ultimate distribution of votes highlights a semi-contentious rift between advanced and developing economies that shows no signs of lessening. Especially because there is “skepticism . . . whether any formal framework, such as a convention, is feasible—at least in the near future—without U.S. and E.U. support,” (at 13) the distribution of “yeas” and “nays” is revealing and worth considering in more detail.
The initial roadblock to consensus concerns institutional (in)competence. For many of those opposing or abstaining, a primary reason was the belief that “[t]he UNGA is not the appropriate forum for discussing the complex issues attached to [s]overeign debt restructuring” (at 5). Instead, these nations, including all dissenters and the EU, consider the IMF to be the proper place for discussion and resolution of SDR-related issues. The IMF is, of course, a more specialized organization focused on international monetary cooperation, and has historically played a role in nearly all sovereign debt restructuring. Indeed, one of the first statutory approaches to SDR, since discarded, was proposed in the preliminary U.S. draft for the charter of the IMF.
Supporters of the proposal harbor no such institutional concerns. Some commentators claim that the UNGA, as “a more representative institution,” is indeed an appropriate forum for SDR discussions. Others have argued that notwithstanding the historic involvement of the IMF in past sovereign debt restructurings, “there is a ‘lack of standards vis-à-vis’ the IMF’s role as an international lender of last resort,” and, as a result, that the “structure of IMF-led debt restructurings has been woefully inadequate” (at 10).
Of the actual principles outlined in the resolution, opponents seem most hostile towards the first, which reads in part: “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.” This “right to restructure” has drawn its fair share of critics. For example, the Australian representative (at 11) pointed to this first principle as the foremost reason for Australia’s abstention. Jill Derderian, the U.S. Counselor for Economic and Social Affairs, was even more candid in her remarks, stating that the proposal was problematic “in several respects, including language that could be construed as acknowledging a certain ‘right’ to restructure sovereign debt, which does not exist” (emphasis added).
The EU appears perhaps above all to be concerned with the prospect of establishing the binding statutory framework, unlike the current market-based, contractual approach. References in the September and December 2014 resolutions to such a statutory approach led the EU members to discontinue their participation (at 4) in the newly created ad hoc committees on sovereign debt restructuring. The nine principles were largely the product of these committees, and the drafters of the final SDR resolution even eschewed explicit statutory language in favor of the “set of principles” limitation favored by the EU. It appears, therefore, that the EU members at the very least missed an opportunity for a more meaningful engagement in the decision-making process.
“Ultimately, these market participants [i.e. debtor states and their investors and other creditors] would have to reach some consensus on an SDR [mechanism] if a successful regime were to emerge” (at 7). This may pose problems for those who support the position of developing countries. While the votes in favor of the SDR resolution significantly outnumbered those against it, the key to any further progress in all likelihood remains with those 47 opposing or abstaining nations. Depending on how one characterizes those abstentions, the national opinion landscape resembles either a gently upsloping hill—consisting of little opposition, some ambivalence, but most of all support—or else two sharply divided peaks—one smaller but vastly more influential than the other. For those in favor of this most recent U.N. resolution, the hope is that the former more accurately captures national sentiments.