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UN makes call for new approach to sovereign debt crises

Protest, Buenos Aires, August 2014 Image copyright AP
Image caption Argentina has seen protests against so-called "vulture funds"

The United Nations has called for a new legal system to help countries resolve unsustainable debts.

The immediate spur for the call was the difficulty faced by Argentina.

The country has been subject to legal action in the US courts over a debt crisis more than a decade ago.

The approval of a UN resolution does not necessarily mean a new system will be set up, but it is a sign of international concern about potential implications of Argentina's situation.

The proposal received the support of 124 UN member countries, with 11, including the United States, voting against.

There has been a long-running debate about whether new arrangements are needed to help countries that get into a situation where they cannot maintain the payments on their debts.

As things stand today, there is no official system. Sometimes countries successfully negotiate debt exchanges - new payment terms - with their creditors or bondholders, and do so without missing any payments.

Uruguay did it in 2003 and there have been others.

'Vulture funds'

But Argentina did default at the start of 2002. What followed was years of complex and sometimes acrimonious negotiations with the creditors, which are still not fully resolved.

The overwhelming majority of creditors did eventually accept an exchange, which involved heavy losses for them.

But some did not and have sought full repayment using the US courts - because the debts, or the bonds, were issued under New York law.

The legal action by investors known as "hold-outs" or, pejoratively, as "vultures", has hindered Argentina's efforts to return to financial normality.

It has defaulted on payments due to the bondholders who did accept the debt exchange. The continuing dispute will delay Argentina's return to international financial markets.

The concern arising from the Argentine situation is that it might make it harder in future for countries to negotiate settlements with creditors if they get into financial difficulty.

If creditors believe that they might get paid in full if they hold out, or if they believe they might not get paid even if they do accept an exchange, then they will have less incentive to consent to a debt restructuring.

It's a concern shared by the International Monetary Fund.

So what can the United Nations do about it?

Debt negotiations

What it has done is voted to launch discussions seeking to establish a new "multilateral legal framework for sovereign debt restructuring processes".

Campaigners have long sought a kind of international bankruptcy court for his kind of crisis. The IMF supported this approach at one stage.

The basic idea is that a country with an unsustainable debt burden would be able to to negotiate with creditors, without being sued for any missed payments. The result would be binding on all creditors.

This idea is sometimes called a "sovereign Chapter 11" - a reference to the provisions in US bankruptcy law that allows businesses to renegotiate their debts.

The main alternative is to extend the use of what are called collective action clauses in government debt, which enable creditors who support a debt restructuring - and they sometimes do - to force it on at least some who don't.

There can be problems in getting this to apply to all a country's debts and there are many government bonds which still do not have these clauses.

But they have been used - for example, in the case of the financial crisis in Greece - with some, though not complete, success.

The US was among a small group that opposed the UN resolution. A US official warned that a statutory system could create uncertainty that could affect the provision of finance to developing countries.

The adoption of a UN resolution does not guarantee that any new system will be created.

The fact that the US was among the objectors is a major obstacle. But it is a clear statement of a widely held concern.

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