UN Wrestles With Argentina's Sovereign Debt

Original news:

The United Nations General Assembly voted in favour of a legal framework to help regulate restructuring of foreign sovereign debt on 9 September 2014. The project was suggested by the Argentine Government.

Giuseppe Bianco, PhD fellow in international economic law at the Universities of Oslo and Paris 1 Panthéon-Sorbonne, assesses the situation for the Restructuring & Insolvency PSL team at Lexis Nexis.

What is the UN's proposal and what is the legal effect of a UN resolution?

The General Assembly, comprising all the member states of the United Nations, adopted by majority a resolution on 9 September 2014 in New York. In essence, the proposal is to launch negotiations to create a multilateral legal framework for sovereign debt restructuring processes. The intergovernmental negotiations will be a priority for the sixty-ninth session of the Assembly, from September 2014 to September 2015.

Resolutions adopted by the General Assembly in themselves do not generally create legal obligations binding on UN member states. Resolutions on internal and budgetary matters, however, are binding.

What problems has the Argentinian sovereign debt issue highlighted with the existing regime?

The default by Argentina on its sovereign debt in December 2001 has highlighted all the problems of the current regime. There is no pre-established framework or forum a debtor in need can resort to. Today sovereign debt is mostly held by hundreds of thousands of dispersed private bondholders, with different interests--finding an agreement with them is very complicated. Furthermore, some hedge funds (the so-called 'vultures') purchase sovereign bonds at discounted rates, refuse to agree to the restructuring and sue the debtor to obtain full repayment of capital and interests. Litigation ensues in a host of domestic and international jurisdictions. A domestic judge's innovative interpretation of a contract clause for a holdout creditor can bring about a new default for the majority of bondholders who had consented to the restructuring.

Why did the US and UK oppose the UN proposal?

Some states, such as the US and the UK, are of the view that a multilateral legal framework such as the one proposed by the UN is not the right solution for sovereign debt crises. They prefer market-oriented approaches, for instance collective action clauses in sovereign bond contracts. These clauses allow a super-majority of creditors to agree on a modification of the terms (for instance, the interest rate or the payment date) and make it binding on all creditors. The US representative at the UN has raised concerns over the economic uncertainty that a new, multilateral framework might create. This might dissuade investors from providing financing to developing countries.

What are the next steps?

Before the end of 2014, the UN General Assembly will define the modalities for the intergovernmental negotiations on the mechanism. It is quite unlikely that they will end up in the creation of a legal framework binding on all UN member states. Already in 2003, negotiations at the International Monetary Fund on a similar mechanism were stopped precisely because the US withdrew its support, and opted for market-oriented approaches. At any rate, the UN will provide a forum for discussion and study of an extremely important topic for developing and developed countries alike.

What are the likely effects for practitioners if the multilateral legal framework is implemented?

In the unlikely event of a multilateral legal framework coming into being, its specific provisions will need to be examined. Potentially, one single, centralised entity would be in charge of conducting negotiations between the sovereign debtor and its creditors. Litigation will no longer take place before different domestic courts, but be concentrated before an international forum, probably an arbitral tribunal. This will change the way in which restructuring negotiations are conducted. Moreover, vulture funds will be effectively prevented from suing debtor states to collect the total capital plus interests. Furthermore, the drafting of sovereign bond contracts might also need to be revised in order to take account of such new framework.

If you are a LexisPSL subscriber, click the links below for further information on sovereign debt:

UN adopts new sovereign debt restructuring mechanism  (Subscriber access only)

Sovereign debt - overview (Subscriber access only)

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First published on LexisPSL Restructuring and Insolvency

Interviewed by Anne Bruce

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor

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