United Nations develops new debt resolution mechanism
Legitimacy and impartiality in focus
The United Nations Conference on Trade and Development (UNCTAD) is about to deliver a concept for a new debt workout mechanism. The concept has been developed by a multi-stakeholder expert group that has been convened regularly by UNCTAD since early 2013. Thanks to this new concept, the UN system is finally promising to deliver what developing countries have been calling for since the 1971 Action Programme of Lima – namely, orderly debt workouts that explicitly take into account the development implications of a heavy debt servicing burden, and an emphasis on the need to establish a new international mechanism for dealing with developing country debt problems. The final concept is expected to be ready and released in September 2014, in time for consideration by the UN General Assembly
Key pillars: legitimacy and impartiality
The fourth and final thematic session of the expert group took place in New York on 7 July and focused on the legitimacy and impartiality of a new debt workout mechanism. It was strongly influenced by the 16 June Argentina ruling of the US Supreme Court, which strengthened vulture funds and has probably put an end to the traditional ‘non-regime’ of sovereign debt restructuring that mainly built on the voluntary participation of private bondholders.
Legitimacy and impartiality are key aspects that have been identified because the traditional (non-)regime is perceived as creditor-biased and attributes key decision-maker roles to creditor institutions. This might lead to conflicts of interest, as interested parties take on the role of judge. At the New York session, the expert group discussed the choice of elements that would make the new debt workout mechanism most legitimate, and the trade-offs that such choices would imply.
Source, process and outcome legitimacy
The discussions in New York addressed three legitimacy dimensions of the new debt resolution mechanism – the source, the process and the outcome legitimacy:
- Source legitimacy implies that the new concept as such needs to be put in place by a legitimate process, e.g. by state consent, or even by more participatory and democratic legitimisation processes.
- Process legitimacy addresses the debt workout as such and may include aspects such as impartial decision-making, transparency, a right for all affected parties to be heard, a check on allowance or disallowance of creditor claims, debtor ownership, a comprehensive and fair treatment of different debt categories, and well-reasoned decisions.
- Outcome legitimacy refers to the desired debt workout achievements: the debtors’ return to debt sustainability and to ‘normal’ financing on capital markets, a reasonable recovery of creditor money, and last but not least to minimise the harmful impact of debt crisis and structural adjustment on development and on the human rights of affected countries and people.
Towards development-friendly debt workouts
The fact that human rights and development are explicitly stated as intended outcomes of a debt resolution mechanism reflects the wider mandate of the UN, in contrast to other institutions that are taking part in the reform debate. Earlier this year, the International Monetary Fund (IMF) presented a new proposal for reforming its crisis-lending framework. However, this is mainly intended to reduce the costs of debt restructurings. It turned a blind eye to the devastating impacts of debt crises on the social and economic fabric of heavily indebted countries. The UN’s concept is expected to embed the new debt workout mechanism as an essential building block for a development-friendly international financial architecture. After all, the UN’s mandate comes from various General Assembly resolutions and UN conferences, most prominently the 2002 International Conference on Financing for Development and its Monterrey Consensus. This was prompted by the development damage that debt overhangs and unresolved debt crises have inflicted on developing countries and their populations.
The next steps towards implementation
Much conceptual work on new debt resolutions mechanisms has been done over the past few years. The UNCTAD expert groups’ work is complemented by additional policy debates held by the UN’s Department of Economic and Social Affairs (DESA). Outside the UN system, the Euro crisis and Argentina lawsuits inspired many academics to rethink the traditional (non-)regime for sovereign debt restructurings. What has been missing until now is the translation of concepts into actual practice through an institution-building process. The political pressure to get things done is increasing. Both developing countries (through the Group of 77) and the major middle-income countries (through the Group of 24) have recently released bold statements calling on the international community to make the new debt resolution mechanism a priority of the financial architecture reform agenda. It is expected that the EU will join in as soon as the European Commission overcomes its fear of distorting creditor confidence in Euro crisis countries. In light of recent experience, everyone in Europe knows that muddling through debt crises is no longer an option. Major EU players such as Germany have been calling for more than a decade to set up insolvency regimes for sovereign debtors.
What is needed now is an intergovernmental process mandated to reform the international sovereign debt regime.