United Nations Headquarters in New York City. (Shutterstock)
United Nations Headquarters in New York City. (Shutterstock)

In a previous post, I shared a few of the guiding principles outlined in a options paper entitled, Toward a Multilateral Debt Workout Process: Principles, Elements and Institutional Options, that was circulated by the UN Commission on Trade and Development (UNCTAD) Secretariat at the second working session of the UN General Assembly Ad Hoc Committee, which took place on April 28-30 2015 in New York City. In this post, I'll delve a little deeper into the broad options the paper presents.

The importance of timely preventative measures is emphasized in the options paper. It is suggested that there should be country specific early warning indicators. Interim financing can keep essential services functioning during a workout. An immediate standstill of debt related payments should be introduced as soon as the decision to restructure is made. The duration of the standstill and the possible exceptions to it are debatable. The options paper argues that there is a need for a comprehensive, inclusive, transparent and efficient sovereign debt forum, and it is best that this is determined in advance of a debt crisis. This could be established and made available to any sovereign debtor, it could be provided for in debt contracts, or it could be established by the sovereign debtor on falling into crisis. Interim financing that serves the sustainability goal should be exempt from the comprehensive restructuring. There needs to be a clear procedure to mark the settlement and exit from the workout process.

There are four options presented in the paper: a market based approach, a domestic approach, a semi-formal international approach, and a formal international approach.

The options paper describes market based approaches as voluntary, negotiated in advance of crisis and designed to permit gradual reform which may aid market stability. They could include sophisticated and universal use of collective action clauses in sovereign bond issues that bind all creditors, aggregated across multiple bond series when a negotiated agreement obtains a threshold level of support. Other elements could be GDP indexed bonds, contingent-convertible bonds (CoCos) (which convert the debt payment terms upon some contingency specified in advance), clarification of the pari passu (equal treatment) provision, and mechanisms for dealing with credit default swaps.

The paper suggests that combining a domestic law strategy with market based approaches could reinforce and expedite market reforms. Collectively states could develop a model law to be adopted by all states as their domestic law containing built-in incentives to designate a jurisdiction that has adopted the model law as the forum for resolving debt contracts. UNCITRAL might be a suitable venue to develop such a model law in a multilateral process that is known for its technical proficiency and that is somewhat removed from the political limelight. In such an environment it may be easier to develop consensus around ideas that are commercially sound and legally effective. In the meantime there is nothing to prevent reform-minded individuals from developing model law prototypes, such as Steven L. Schwarcz, Stanley A. Star Professor of Law & Business, Duke University School of Law and CIGI ILRP Senior Fellow, has been doing.

According to the Ad Hoc Committee’s options paper a semi-formal international approach could improve coordination and strengthen shared principles and practices in respect to initial negotiations and mediation or arbitration if negotiation does not resolve everything.  It would rely on existing structures and mechanisms.  An independent body would provide coordination and technical support to existing fora (Paris, Club, London Club, Ad hoc bond negotiations), refining and promoting internationally recognized debt workout rules and principles and developing a store of accessible information on past negotiations and best practices. It would be a neutral venue for discussion between debtors, creditors and other stakeholders. This is similar to the concept Richard Gitlin and Brett House have proposed as the Sovereign Debt Forum.  It could be permanent or ad hoc, but in the latter case would lack the continuity that would give it greater legitimacy, credibility and expertise.

A formal international approach would need to be established through a multilateral process that had the capacity to bind all parties. Two approaches are considered in the options paper. One would involve the establishment of a sovereign debt restructuring mechanism or facility under the auspices of the IMF, through amendment of the IMF Articles of Agreement. The other would be the establishment through a new treaty or modification of an existing treaty, of a tribunal capable of making debt-restructuring decisions that are binding on all the parties and enforceable against public and private creditors in all jurisdictions, housed at a permanent, impartial international institution not directly implicated in sovereign lending, such as the Permanent Court of Arbitration or the International Court of Justice. Legal decisions would be based on a body of rules agreed to in advance of the establishment of the debt workout mechanism, which could provide for a standstill during the tribunal process, transparency and broad participation in the proceedings and rules that promote “more universal and long-run goals”. It is noted that concerns about impartiality likely would remain with the option of an IMF sovereign debt restructuring mechanism. As for the independent model, the options paper notes that if such a treaty could be negotiated, ratification would take considerable time to address pre-existing and powerful institutional interests. 

The paper suggests that these four broad options are not mutually exclusive but can be viewed as elements of a comprehensive strategy, with states simultaneously pursuing improvements to market approaches, reforming domestic laws, developing a semi-formal coordinating mechanism immediately and seeking to establish a more formal tribunal by treaty over the longer term. The paper concludes by arguing that a multilateral framework developed though an inclusive process will strengthen legitimacy and accountability and prevent a race to the bottom in sovereign debt regulation.

Although the interventions at the Ad Hoc Committee meeting sometimes came across as  impractical and unbalanced, the options paper presented to delegates adopted a more realistic and incremental approach. In effect, it recommends trying everything possible to improve the management of sovereign debt restructuring: strengthen contractual terms, improve and harmonize domestic laws, create an informal workout mechanism and keep working on developing a multilateral debt restructuring treaty and tribunal.  Developing a model domestic law for managing sovereign debt issues would contribute to building consensus on the rules and principles to be applied and could facilitate agreement on a treaty.  It might even obviate the need for a treaty, at least in the short term, if key states or sub-nationals adopt the model law and if its provisions are incorporated into debt contracts. It is possible that UNCITRAL, which has extensive experience in developing model laws on matters of international commerce, might consider this topic worthy of further study with a view to developing a global model law for adoption by member states.  If this were done through a treaty it would be possible also to establish a permanent independent sovereign debt tribunal.

The Ad Hoc Committee asked for comments on its draft paper by May 15 with a view to developing a "Zero Draft" by May 25.  Informal discussions and negotiations are planned for June in an attempt to draw into this multilateral process such essential participants as the IMF, the World Bank and more advanced economies. The third and final session of the Ad Hoc Committee is set for 30 June - July 2.  It seems unlikely this Ad Hoc Committee process can produce agreement on concrete proposals for a multilateral framework in such a short time. However, the more pragmatic approach outlined in the options paper of pursuing the full range of reform opportunities (contract, model law, informal and formal mechanisms), might help build support for a longer term global reform agenda. 

The sovereign debt restructuring issue may be yet another example where the development of a global rule of law may be both complicated and assisted by experimentation at different levels, in multiple fora and by a diversity of stakeholders. In view of these dynamics, on Sunday June 14th CIGI ILRP will sponsor a roundtable discussion building on the model law developed by Professor Schwarcz at the International Insolvency Institute’s 15th Annual Conference in Naples, Italy.

Although the interventions at the Ad Hoc Committee meeting sometimes came across as impractical and unbalanced, the options paper presented to delegates adopted a more realistic and incremental approach.
The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.
  • Oonagh E. Fitzgerald was director of international law at CIGI from April 2014 to February 2020. In this role, she established and oversaw CIGI’s international law research agenda, which included policy-relevant research on issues of international economic law, environmental law, IP law and innovation, and Indigenous law.