I recently shared a somewhat elaborate note to a private list but suspect it might be of interest to the recovery with a human face crowd. It complements Bodo's message and is perhaps somewhat less pessimistic than Kuni's follow up comment, which you will have also received. We are all very encouraged by the adoption of the General Assembly resolution (A/68/L.57/Rev.1). Please note, however, that the original called for a convention and the final draft called for GA adoption of a framework. These are very different. That in itself is a major step back but it was still too much for 10 developed countries to accept, not to mention the 41 countries that abstained. There are answers to the complaints of the governments that abstained or voted against the draft and I hope these can be successfully addressed in the modalities discussion. I also hope Argentina will continue its leadership on the issue in 2015 and beyond as will likely be necessary to actually get to an agreed international debt workout process. I will try to put these developments into context.
The best news in the resolution is that the salience of the problem has been raised at the UN thanks to Argentina. I think the vulture fund case against Argentine is so ludicrous that every sane political authority knows it cannot be allowed to be a precedent and should not be enforced on Argentina. Even the US Government wrote an amicus curiae brief for Argentina, albeit at the appeals court stage. Several governments wrote amicus briefs at the Supreme Court stage, including France and Brazil. And the International Capital Markets Association responded already in August when it launched new suggested standard fine print for bond documentation that will prevent another Argentina vulture fund case (member firms of ICMA help borrower governments bring their bonds to market, so their recommended "boilerplate" text is important).
There is a problem, however, in that the vulture funds usually collect their money in the end and may do so again after certain Argentine legislation expires at the end of the year. It has prevented settlement thus far since it would require giving all Argentina's other bondholders the same deal as it gave the vultures. It cannot afford that. Nobody likes the vulture funds, but it is my understanding that lots of institutional investors (and probably rich individuals as well) from developed and developing countries gladly give them the money to pursue their financial strategies.The Argentina case has apparently been great advertising for this business (they probably also made money shorting Argentine bonds and collecting on credit default swaps when the bond interest payment deadline passed end July).
But this is too much. If not by international agreement, the international community should be able at the very least to stop future vultures through national legislation in major capital market countries. After all, Elliot Associates (the very same guys that have been pursuing Argentina) collected on some Peruvian bank debt through Euroclear in Brussels, after which the Belgian Parliament adopted legislation to prevent misuse of Euroclear for this purpose again. Also, after Donegal International collected in the UK courts on some defaulted Zambian export credits that Romania sold them, the British Parliament adopted legislation to limit what a vulture fund can take home from a HIPC. As the US and UK opposed the UN resolution and as most international sovereign bonds are issued in New York and London under their respective laws, should not those governments at least agree to propose legislation to their legislatures to outlaw vulture fund adventures against insolvent sovereigns? The argument could be, if you won't join in developing a missing piece of the international financial architecture, at least do something useful.
Nevertheless, a majority of governments at the UN have now embarked on a more ambitious track. The resolution commits the General Assembly to agree to modalities for negotiation by the end of 2014 (OP. 6) and to adopt through those negotiations by the end of the 69th session (i.e., by about 16 September 2015) a "legal framework for sovereign debt restructuring processes" (OP.5). The GA "adopts" by agreeing to a resolution which can either be by consensus or by recorded vote. A GA resolution is not binding but a normative statement to which governments give more or less political priority. It is not clear what is meant by the "legal framework" but the resolution refers to restructuring processes (in plural), so the decentralized systems for restructuring bonds, bank debt, bilateral official and on special occasion multilateral debt could remain (or not; it is not clear). One may thus read the text as proposing that the GA adopt a set of legal principles that should govern any and all sovereign debt workouts. The UNCTAD expert group has been working in this vein; e.g., it agreed at its last meeting that the principles of legitimacy and impartiality would be important for a debt workout mechanism. Other principles discussed at earlier expert group sessions included efficiency, sustainability, transparency, ownership, human rights and social protection (for details, see http://www.unctad.info/en/Debt-Portal/Project-Promoting-Responsible-Sovereign-Lending-and-Borrowing/About-the-Project/Debt-Workout-Mechanism/).
It seems, in other words, that the Argentine initiative does not take us all the way to an international debt workout mechanism. The US statement in explanation of vote on Tuesday rejected adoption of a statutory approach, preferring to continue with contractual approach with disputes settled in the courts of the country whose laws govern the contract. But there was no proposal for a statutory approach in the resolution.
In fact, there are several proposals for mechanisms to speed fair and effective debt workouts. Where is the expertise and balanced and representative deliberative body that could help advance from broad principles to an proposed mechanism or process? Answer: the United Nations. It has well-regarded existing expertise on international insolvency in UNCITRAL (United Nations Commission on International Trade Law). Working Group V of UNCITRAL is on Insolvency Law. It does not address sovereign insolvencies, but cross-border matters in mainly corporate bankruptcy. It could address sovereign insolvency if the General Assembly requested it to do so (informal opinion in early 2000s of Jernej Sekolec, former Secretary of the Commission, now retired). And so, after considering the broad principles to put into a framework for sovereign debt workouts during 2015, the GA could request UNCITRAL to develop proposals for how to operationalize them. Should it be through adoption of a model law that countries would then adopt into their domestic legislation (Christoph Paulus)? Or an arbitration mechanism (FTAP)? Or a mediation service (Gitlin/House)? Or something court like (Jubilee South)? UNCITRAL could be asked to study the issue and make a concrete recommendation to the GA, which could debate it in the context of a Financing for Development discussion at which all relevant stakeholders would be represented and at which governments could be represented jointly by their finance and foreign ministries.
The point is, it could be done. The international community actually did it once before, in 1907 in the Hague Treaties that agreed to settle sovereign insolvency through arbitration instead of gunboat diplomacy. More than a century later, Argentina has opened the door a crack. You can almost feel the breeze beginning to come into the room.
Julien J Studley Graduate Program in International Affairs
Milano School of International Affairs, Management, and Urban Policy,
The New School
72 Fifth Avenue, Room 624
New York, NY 10011, USA
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