Over 130 developing countries have unanimously submitted a proposal to the United Nations calling for new legal rules to stop predatory financial speculators like vulture funds from undermining debt restructurings. This proposal will be voted on in the UN General Assembly next week, most likely on Tuesday 9 September.
The motion, if successful, could represent a major step forward by providing quicker more efficient ways of dealing with government debt crises, and reduce the likelihood of them happening by indicating that lenders will no longer get bailed out for their reckless loans. The creation of such rules could, amongst other things, solve the current impasse over Argentina’s debt, where two vulture funds NML Capital and Aurelius Capital Management are seeking a gigantic profit after speculating on the South American country’s debt, have refused to accept a debt restructuring agreed by 93% of other creditors, and have had their claim backed by a US court, forcing the country into its second debt default in 13 years.
The group of developing countries, known as the G77 plus China, have proposed the creation of a ‘multilateral convention’ to establish ‘a legal regulatory framework for the sovereign debt restructuring process’. The creation of such a ‘bankruptcy’ process for governments could end the currently lawless world of international debt, allowing necessary debt restructurings to take place in an efficient and timely manner, and not be undermined by vulture fund speculators.
Sarah-Jayne Clifton, Director of Jubilee Debt Campaign, said:
“This is a welcome move that developing countries are collectively calling for fairer ways of dealing with international debts. Countries across the world would benefit from the existence of a fair, independent and transparent way to arbitrate on debts when governments cannot afford to pay. The danger is that rich countries such as the UK will seek to block, delay or undermine this proposal on behalf of financial sector lobbyists.”
Previous efforts to introduce such proposals have been met with resistance from Western governments, with the UK and US having actively sought to block them. The Liberal Democrats have a policy to “lead international calls for the creation of a fully transparent international debt arbitration service”, and over 100 backbench British MPs have publicly supported creating “a fair, independent and transparent arbitration mechanism for sovereign debt.”
However, in spite of this the UK joined France, Australia and Japan last month in blocking a UN group of experts from proposing the creation of a debt arbitration mechanism as part of the policies needed to meet new Sustainable Development Goals, which will be replacing the Millennium Development Goals next year.
Support for international action to protect the debt restructuring agreements of sovereign governments is growing, not just amongst the governments themselves but also amongst creditors. Last week, the private sector International Capital Markets Association (ICMA) proposed that government bond contracts should include new wording on collective action clauses and equal treatment to prevent situations like the current deadlock over Argentina’s debt. However, the ICMA proposals would only apply in new contracts, and so would take several decades to have any impact. Moreover, they would only apply to debts owed through bonds, rather than comprehensively covering all debts owed by governments, including directly to banks, to multilateral institutions such as the IMF and World Bank, and other governments.
Other proposals put forward by rich country governments have pushed for the IMF to run a debt restructuring mechanism. However, the IMF is itself a large lender, so there is a clear conflict of interest for the IMF to both be a creditor and arbitrator over government debts.