Sovereign Debt Restructuring Processes as a Geopolitical Dispute

On 24 July the United Nations’ Ad hoc Committee on Sovereign Debt Restructuring Processes agreed on a set of “Principles” to be sent to the General Assembly of the UN, which is due to approve it in September. These Principles will become the core of the multilateral legal framework for debt restructuring processes, to be discussed by the UN next year. If approved, such framework will be the first international regulation governing States’ bankruptcies, until now resolved by private agreements between States and creditors. In the absence of legal regulations, predatory funds regularly challenge such agreements in friendly local courts, thus making extraordinary profits at the expense of sovereign nations and honest creditors. By doing that, they also affect the stability of global financial order.

Of the nine principles, the ninth is clearly aimed at disempowering vulture funds, as it states that, if approved by a qualified majority of the creditors, agreements “are not to be affected, jeopardized or otherwise impeded by other States or a non-representative minority of creditors, who must respect the decisions adopted by the majority of the creditors”. If vulture funds are the obvious target of the forthcoming regulation, the countries that dominate financial markets also see their power seriously limited. The fourth principle, entitled “Impartiality”, requires that institutions and actors involved in sovereign debt restructuring workouts should “enjoy independence and refrain from exercising any undue influence over the process and other stakeholders or engaging in actions that would give rise to conflicts of interest or corruption or both”. The sixth establishes that “sovereign immunity” is “a right of States before foreign domestic courts”. The seventh and eighth, finally, refer to the necessary “legitimacy” of institutions and operations related to sovereign debt restructuring workouts, and the need to minimize “economic and social costs” for indebted populations. If implemented, these principles will affect the direct dominion of financial powers –usually the US and the UK, where the main financial plazas operate– over indebted countries in debt restructuring processes.

The UN intervention in such issues was triggered by the Argentinean case. In 2002 the country declared the biggest default in world history. After 2005 the Argentine State proposed a scheme of restructuration of the debt, which was finally signed by 93% of private creditors.Bondholders accepted repayments of around 30% of face value and deferred payment terms. But most of the remaining 7% had been acquired by predatory funds after 2002 in order to litigate. With the invaluable help of Thomas Griesa, a local judge of their own Wall Street neighborhood, they managed to jeopardize the whole operation. Griesa ruled that the usual pari passu clause included in bonds –which is meant to ensure that all holders are treated equally– means that, since the 93% of creditors who accepted new bonds for less money are being paid the totality of their (new) value, then the 7% who did not must be paid the totality of their (old) papers. Last year he also sentenced Argentina to pay cash, immediately, the total value of the old bonds.

As Argentina has refused to obey the judge’s irrational order, Griesa has ordered that no bank is authorized to channel the country’s payments to its creditors. As the Supreme Court of the US refused to hear appeals over this matter, last year Argentina took the case to The Hague International Court; the Court took it, but the US simply ignored it. At the same time, the Argentinean government urged the UN to discuss a multilateral agreement on debt restructuring, which is now under consideration. The US and some of its allies in Europe voted against the initial proposal –which was backed by the vast majority of member-nations– and they are likely to do it again in September and in future votes. They argue that debts are a technical issue that must be handled by technical institution like the IMF rather than by a political body like the General Assembly of the UN. It is obviously not a matter of capability: the “technical” IMF is controlled by the US and allies, while in the “political” General Assembly each country has equal vote.

It may look like another case of the UN giving moral support to the weakest party with no practical consequences. But it may also turn out to be something more consequential, as it has become a geopolitical issue. It is not just about Argentina and other unimportant indebted nations. It is not only about the stability of the international financial system either. The issue at stake here is also the role of the US and its allies as global leaders, as the world moves back to a multi-power system. Much of the support for Argentina’s struggle against vulture funds and for the UN regulation of debt restructurations springs from a wider concern about the stability and predictability of the global financial system, which in turn requires some sort of global regulation independent from the interests and institutions of a single country. As such country is no other than the US, it should not come as a surprise that the new raising financial superpower, China, is actively supporting this proposal in the UN and in international diplomatic circles. And of course, it should not come as a surprise either that this proposal is facing much resistance from financial actors like vulture funds and American ratings agencies, but also from powerful US political forces, particularly Republicans. As I have already pointed out in an earlier Telesur column, this crossroads has been openly expressed in the US newspapers one year ago. In July 2014 the Wall Street Journalfuriously declared that, by refusing to obey judge Griesa, Argentina was instrumental in the “liberals’” evil campaign “to put debt negotiations in the hands of a new global bureaucracy”. This –the journal added–, “would give more leverage to debtors and politicians at the expense of financial markets and U.S. courts”, thus compromising “the integrity of U.S. financial markets for upholding the law and American property rights” (“Argentina Dances With Default”, WSJ, July 27, 2014).

What is at stake in the debate over the regulation of debt restructuring processes is not only the vulture funds’ business and the power of unregulated markets, but also the supremacy of US institutions. In a different geopolitical context, a prospective General Assembly Resolution on debt restructuring processes would end up as just another line in the UN’s annals of wishful thinking. However, as not only indebted countries but also China and other emerging markets are behind this initiative, it may turn out to be a turning point in the global system.




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