Guest Post: the UN Takes the First Step to Debt Restructuring

FT, Beyond Brics, Sept 10, 2014, 6:30 pm http://blogs.ft.com/beyond-brics/2014/09/10/guest-post-the-un-takes-the-first-step-to-debt- restructuring/

Guest post: the UN takes the first step to debt restructuring By José Antonio Ocampo of Columbia University

On September 9, the United Nations General Assembly approved a resolution to launch negotiations on a multilateral framework for sovereign debt restructuring. The vote was overwhelmingly in favour of the resolution: 124 in favour vs 11 against with 41 abstentions. But it was a deeply divided one. It was essentially approved with the votes of developing countries, but the no votes included the US, Japan, Germany and the UK; the remaining European Union members abstained.

This is, of course, a continuation of the saga of the absurd decisions of a New York judge on Argentine debt: the decision to force the country to pay on the original terms to holders of bonds not tendered at the 2005 and 2010 renegotiations, the ratification of this verdict by the New York Court of Appeals, and the decision of the US Supreme Court not to consider an appeal by Argentina against the latter decision.

The decision was absurd for a myriad or reasons. First, when an investor buys a bond with a high yield that reflects the risk of default, it just does not make sense to force the issuer to pay the bond on the original terms if the risk has already materialized. Second, by intervening in the payments of the restructured bonds, it generated a massive inequity with the over 92 per cent of bondholders who had negotiated a restructuring with Argentina. Third, it interpreted a clause in debt contracts that is aimed at equitably treatment of creditors (the so call pari-passu clause) in a way that forced full repayment by Argentine debt rather than similar treatment for bondholders. Finally, it just does not make sense to grant disproportionate benefits to a small minority of creditors and thereby force a default on a country that did not want to do so.

The saga of Argentina has been recognized by the private sector. The International Capital Market Association, which includes banks, investors and debt issuers, approved in August guidelines that would bind all investors to decisions agreed by the majority. It also approved a more equitable interpretation of the pari-passu clause.

Unfortunately, the aspirations of the private sector for a well-functioning renegotiation process rather than a multilateral framework for debt restructuring is not viable when any minority investor can go to court to demand the original terms. There is no longer any incentive to participate in any debt restructuring or even in the milder “debt re-profiling” in which payments are simply postponed. The absence of incentives to negotiate anything is precisely what the International Monetary Fund had in mind when it said in 2013 that the decision of the US courts had “systemic implications”.

Because it has systemic implications, it needs a systemic solution. This is, by the way, well accepted at the national level in the institution of bankruptcy courts. It simply does not make sense that countries with well-functioning bankruptcy courts will oppose such a solution at the international level. In fact, the US itself, in 2001-2003, promoted the creation of just such a Sovereign Debt Restructuring Mechanism at the IMF –although, in a sign of its own inconsistent views, it also killed those discussions in 2003.

The international community should welcome the UN General Assembly’s decision to launch negotiations on a multilateral framework for sovereign debt restructuring. As I have argued through the years, a good model is the dispute settlement mechanism of the World Trade Organization. That model creates three consecutive stages with clear deadlines: one of voluntary negotiations, a second of mediation and a final of arbitration if the former two fail. The sequence is essential for an efficient and speedy process. The decisions of the appeals court is binding for all parties involved.

One of the advantages of this process is that the dispute settlement process is totally independent of the intergovernmental process and of the WTO secretariat. This is essential for the impartiality of the decisions. So, if such impartiality is ensured and if the major powerful countries that voted against the General Assembly decision agree to launch negotiations, the IMF could be the body to manage the process.

José Antonio Ocampo is a professor at Columbia University, former finance minister of Colombia and former under-secretary-general at the United Nations for economic and social affairs.