> Inicio

Institutional arrangements to deal with sovereign debt: did the Doha FFD Review make any progress?

21 January 2009

By Aldo Caliari, Center of Concern 

In all legislations, a generally accepted principle is that of an independent judiciary and that no party can be a judge on its own cause. At the international level, and in stark contrast with this widespread principle, whenever sovereign debtors run into trouble, the regime (or “non-regime”) for sovereign debt management leaves the creditors in charge of, de facto, deciding on their own claims. That is why civil society advocacy has focused for quite some time on promoting the agreement and implementation of an institutionalised mechanism for the predictable, fair and independent resolution of sovereign debt issues.

This demand gained some traction in the lead up to the Monterrey Conference where one of the major achievements was the agreed principle that creditors and debtors must share the responsibility for preventing and resolving unsustainable debt situations. Agreement was reached to put in place “a set of clear principles for the management and resolution of financial crises that provide for fair burden-sharing between public and private sectors and between debtors, creditors and investors” (para. 51). In another part of the document, governments stated that in order to promote fair burden-sharing and to minimise moral hazards they “would welcome consideration by all relevant stakeholders of an international debt workout mechanism, in the appropriate forums, that will engage debtors and creditors to come together to restructure unsustainable debts in a timely and efficient manner” (para. 60).

These were among the agreements on which the Doha FFD Conference was supposed to assess progress made, lessons learned, etc. The question is: did Doha manage to advance the discussion?

The Doha FFD Document refers to the subject of reforming institutional structures to deal with sovereign debt in three places. In addressing remaining challenges, paragraph 60 goes farther than Monterrey in its assertion that “the existing international debt resolution mechanisms are creditor-driven, while taking into account debtor country situations.” The creditor-driven nature of the existing international debt resolution mechanisms is rightly acknowledged in a way that Monterrey did not. It is in this context that the document goes on to say, “More efforts are needed through international debt resolution mechanisms to guarantee equivalent treatment of all creditors, just treatment of creditors and debtors, and legal predictability.”

Paragraph 61 reads, “We will intensify our efforts to prevent debt crises by enhancing international financial mechanisms for crisis prevention and resolution, in cooperation with the private sector, and by finding solutions that are transparent and agreeable to all.” So far, language that closely resembles Monterrey; but then it calls for these mechanisms to be underpinned by principles such as, “the need to ensure that debt resolution is a joint responsibility of all debtors and creditors, both State and commercial; to recognize that furthering development and restoring debt sustainability are the main objectives of debt resolution; to strengthen transparency and accountability among all parties; to promote responsible borrowing and lending practices; to improve debt management and national ownership of debt management strategies; and to facilitate equivalent treatment of all creditors.” A good number of parameters will therefore qualify the type of arrangements that need to be put in place in order to deal with sovereign debt.

The last reference is paragraph 67, which acknowledges the need to continue to address all relevant issues regarding external debt problems, including through the United Nations, and commits to “consider ways to explore enhanced approaches of sovereign debt restructuring mechanisms based on existing frameworks and principles, with broad creditors’ and debtors’ participation and ensuring comparable burden-sharing among creditors, with an important role for the Bretton Woods institutions.”

The reference to “sovereign debt restructuring mechanisms” is a very broad one that merely restates the commitment at Monterrey (a “sovereign debt workout mechanism” where all parties would come together “to restructure” sovereign debts). Sovereign debt restructuring refers, in this context, merely to a process, one where creditors and debtors come to agreement on how to deal with a number of debt obligations the debtor is unable to meet. The expression as such says nothing about the expected outcomes of such process (which could range from, on one extreme, a mere rescheduling of payments to, on the opposite extreme, a decision to pay zero percent of the debt). As an example, in Argentina’s debt restructuring in 2005, creditors were paid some 30 cents on each dollar. The form is also open as sovereign debt restructurings could be of different kinds: voluntarily agreed on an ad hoc, specific case, contractual (as in collective action clauses) or statutorily pre-determined (as in a bankruptcy regime).

While paragraph 67 to some extent repeats the other references, it also contains language that potentially contradicts them. Certainly, mechanisms “based on existing frameworks” would be impossible to implement when these frameworks are essentially not in sync with principles referred by other paragraphs. For instance, in the Paris Club, all decision-making rests with the creditors, in open contradiction with the need for just treatment of creditors and debtors that Doha mentions in paragraph 61. The Paris Club composition and setting has also proved to be a problem to the principles of restoration of debt sustainability and of equivalent treatment of all creditors. This latter can certainly not be achieved in a framework that, by definition, excludes a large number of creditors, including private ones. Neither the “important role for the Bretton Woods Institutions” can be easily reconciled with the need to have equivalent treatment of all creditors –among which the Bretton Woods Institutions are likely to be found. But admittedly this can be more easily construed in harmony with the rest of the paragraphs as, of course, “important role” may mean several things short of a role in deciding on the claims that come to the body, or any privileged treatment for its claims.

Overall, in terms of progress, one could probably characterise the situation as one of impasse. But some important parameters have been agreed. It is important that, in going forward, these parameters are not taken in isolation but interpreted together and in the light of the Monterrey Consensus, which, it should not be forgotten, maintains full validity as the general framework that countries agreed the Doha Summit would not revise, but only assess in its implementation.