The triumph of perseverance: The G77+ China UN resolution on debt

Oscar Ugarteche

09/09/2014

Opinión

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The G77+China approved in the general Assembly on September 9, 2014 the proposal to create a UN based debt workout mechanism. When all G7 countries are highly indebted (using a World Bank definition of over 100% debt on GDP), this mechanism might come in handy way beyond only the emerging and developing economies, to all countries that subscribe to it. There is one year to construct the mechanism following the precepts of UNCITRAL on trade law. (http://www.un.org/News/Press/docs//2014/ga11542.doc.htm)

This is a Latin American triumph led by Argentina and proposed by Bolivia. It was supported by all Latin American countries bar Mexico. Costa Rica and Peru shifted their vote at the last moment. The vote is bad news for most European civil society organisations working on the debt as their Governments voted against it. The exception is Norway who has taken a positive stance on the matter. In Latin America, Profs. Ugarteche and Acosta proposed a UN based International Board of Arbitration for Sovereign Debt, published in 2003 in Spanish by Polis and in English by the Finnish Journal of Latin American Studies. This feature differentiated their proposal from other European and the IMF one. At the time the world was heading towards a debt crisis and no new mechanisms were visible.

Professor Anne Krueger, then at the IMF, proposed in 2001 the sovereign debt restructuring mechanism (SDRM) with UN support, as an in-house mechanism. This was killed by the US Treasury in 2002. The reason for the IMF proposal was the contagion of financial crises. The US Treasury was essentially against this idea and John Taylor explains well how Treasury’s intervention in Uruguay, in August 2002, facilitated their economic recovery.(http://web.stanford.edu/~johntayl/Onlinepaperscombinedbyyear/2007/The_2002_Uruguay_Financial_Crisis_Five_Years_Later.pdf). That was the end of the SDRM initiative.

Only after the NML Fund case against Argentina and the final ruling which orders the last creditors that did not refinance, to charge equally as much as the first that renegotiated their debt, was the systemic failure problem an issue again. The response was quick to come from the International Capital Market Association (ICMA), the same day as the G77 initiative was introduced into the General Assembly for a vote.

The ICMA reform, backed by the US Treasury, essentially states the US ruling on Argentina is wrong. They state that “...the Issuer shall have no obligation to effect equal or rateable payment(s) at any time with respect to any such other External Indebtedness and, in particular, shall have no obligation to pay other External Indebtedness at the same time or as a condition of paying sums due on the Notes and vice versa.”http://www.icmagroup.org/resources/Sovereign-Debt-Information/.

Secondly, they lower new limits for bondholders to enter a negotiation “which is passed by a majority of: (A) at least 66 2/3 per cent. of the aggregate principal amount of the outstanding debt securities of affected series; and (B) more than 50 per cent of the aggregate principal amount of the outstanding debt securities in each affected series...”. These reforms go in the right direction but not far enough.

The G77+China have made an inroad into the internationalisation of the court, law and jurisdiction which will be resisted by those who voted against: Germany, the UK, the US, Israel, Japan, Australia, Canada, Hungary, the Czech Republic, Ireland and Finland. In favour voted Brazil, Russia, India, China, South Africa, (BRICS) plus Latin America en bloc, Africa en bloc, plus Asia. Abstentions came mainly from the Middle East and island countries plus some New European countries and visibly France, Greece, Spain and Italy. The French abstention is visible as the Club of Paris is led by the French Treasury, while debt ridden countries did not want to scare international financial markets by supporting the initiative. It could be read as France voted against and the other three voted in favour.

The reaction of the US representative placed on the table the fact that they were not expecting the proposal to be presented, least of all to have a majority vote. She said a mechanism (of debt reprofiling) is being discussed at the IMF. The last time, in 2002, the Treasury blocked it in favour of the market mechanism via the IFIs, according to Taylor. The other point she made was that this was going to create economic uncertainty, point that was not raised in 2002 with the SDRM nor in the recent ICMA debate. No uncertainty was created when UNCITRAL was launched. She also stated that in the past, market mechanisms had been preferred, reminding everyone who knew what had happened in 2002.

This resolution is a blow to the dominance by international financial capital of all legal mechanisms related to finance and is a wonderful first step in the right direction for having a global mechanism for global finance. The US Government will hate this, but it does not matter, global problems require global solutions, whatever the State Department and the International Capital Market Association believe. Another world is possible and we are getting there.

- Oscar Ugarteche, a Peruvian economist, works in the Instituto de Investigaciones Económicas at UNAM, Mexico. Member of the SNI/Conacyt. Coordinator of the Observatorio Económico de América Latina (OBELA) www.obela.org and President of ALAI www.alainet.org

https://www.alainet.org/en/articulo/103227