While the EU debt negotiations are stuck, the UN lays foundations for a better debt restructuring framework

Thursday 19 February 2015, by Bodo Ellmers

The first meeting of the new UN General Assembly Committee for the creation of a new sovereign debt restructuring framework took place in New York from 2 to 5 February. With the old debt crisis unresolved, and new ones on the doorstep, the expectations of stakeholders were high. In particular developing countries, BRICS countries and civil society made bold statements in support of a better regime. However, some rich countries that are powerful IMF shareholders stayed away from the first session. The EU made its best contribution indirectly: The messy debt negotiations that it conducted in Brussels at the same time delivered conclusive evidence regarding why a fair, predictable and orderly debt restructuring framework is badly needed.

UN debt restructuring framework takes off

The session in New York was the first of three working sessions of the brand new UN ad hoc committee on sovereign debt restructuring processes. It builds on the mandate provided by the UN General Assembly’s landmark Resolution 68/304 in September last year, which recognised “the sovereign right of any State to restructure its sovereign debt, which should not be frustrated or impeded by any measure emanating from another State”, and noted “with concern that the international financial system does not have a sound legal framework for the orderly and predictable restructuring of sovereign debt”.

The UN process intends to fill that gap in the international financial architecture, while at the same time embedding public debt management in the development and human rights agendas of the United Nations. This comes 13 years after the UN’s Monterrey Consensus on Financing for Development reached an international agreement to create an “international debt workout mechanism … to restructure unsustainable debts”.

The joint statement of the G77 emphasised that debt crises concern all country groupings, developing and developed countries alike, and that “the lack of a structured mechanism is a major failure of the current international architecture, which leads, among other issues, to long delays in debt restructuring, unfair outcomes and loss of value for both debtors and creditors”. Many countries, very explicitly Brazil, stressed that the UN is the most legitimate forum to set the rules for sovereign debt restructurings and that the new debt restructuring framework is part of the ‘means of implementation’ for the post-2015 development agenda.

At last: A transparent and inclusive forum

The main purpose of the first session was to create the space for a political debate on the principles of a multilateral debt restructuring framework. While such debates usually take place in the opaque atmosphere of the IMF governance bodies or the Eurogroup, the new UN Committee took it for the first time to a fully inclusive and transparent forum. While the IMF does not even disclose the minutes of its Board meetings, the whole world could watch the debate at the UN – and which positions the different governments took – live through the UN’s Web TV. Such process innovations that create legitimacy are already a huge achievement of the new UN process, as sovereign debt restructurings are of key concern for all nations, and all their citizens and taxpayers. The opaque way in which the IMF operates opens avenues for financial sector lobbyists to influence the outcomes of sovereign debt restructurings, and the design of the IMF’s own framework as such, which for many is too creditor-friendly and made the huge taxpayer-funded bank bailouts possible.

Stakeholders also started to make the first concrete proposals. For instance, Argentina submitted the idea that future debt restructuring processes will be managed by an “Oversight Committee” consisting of representatives of three states (the debtor and two others), and should come with a clear deadline (maximum 18 months). In the current ‘non-system’, the process can take more than ten years of negotiations and trials, and still it is not certain that there will be no holdouts.

A coalition of 27 civil society organisations, including Eurodad, made a submission that clarified what they expect from the process, namely a framework along the following principles:
• Independent institution for decision-making
• Comprehensive treatment of all sovereign debts in one single process
• Independent assessment of debt sustainability under consideration of developmental and human rights criteria
• Assessment of debt stock under responsible finance criteria, cancellation of debt found to be illegitimate
• Transparent and inclusive process, giving citizens a right to be heard.
The chair of the UN’s ad hoc committee has been mandated to produce an elements paper that includes all the principles and options.

The EU: indecisive at the wrong time

Nothing is officially known about the positions of EU member states. This is remarkable as the EU is currently the world region that is most affected by the debt crisis. Moreover, the next big sovereign debt restructuring is most likely to be in Europe, as the Greek government has already requested a sustainable solution to their unsustainable debt burden. The EU should also be the most interested party when it comes to a really legally binding framework, not least because holdout creditors massively drove up the costs of the last Greek debt restructuring that either the Greek or the EU taxpayers will have to shoulder, depending on who will ultimately pay the price for the bailout.

However, the EU stayed away from the first session, leaving many empty seats in the UN’s conference room. EU diplomats who spoke with Eurodad said that this was due to the way the UN Resolutions were negotiated by the G77 countries, which did not sufficiently strive for consensus building with the EU. But the EU’s split vote on the UN General Assembly Resolutions indicates that there is a deep rift between EU member states. Rumours are that, while in particular Southern European countries are very sympathetic to participation in the process, some influential EU member states still oppose it, either because they have been targeted by financial industry lobbyists, or because they prefer to have the discussions at the IMF.

Ahead of the meetings, European CSOs have called on all EU member states to engage constructively in this crucial process, and will repeat this call. When looking at the Greek tragedy that is playing out at the Eurogroup meetings, it is clear that Europe currently offers the most compelling evidence to show why the international financial architecture needs a fair, orderly and predictable debt restructuring framework.