Nine United Nations principles that can help Greece and the Eurozone in 2017

Added 12 Jan 2017
Last December’s clash between the finance ministers of the Eurozone (the Eurogroup) and Greece shows how far we are from a long-term and sustainable solution to Greece’s debt issues. On 5 December, the Eurogroup endorsed proposals presented by the European Stability Mechanism (ESM) that will lead to symbolic debt relief and might represent up to a 20% debt reduction by 2060, according to the ESM. European governments did not take any further steps, however, as they remain divided on the future of Greece’s programme and most notably on the 3.5% fiscal surplus target after 2018. Even the International Monetary Fund (IMF), an organisation that can hardly be considered a radical leftist group, felt the need to clarify that it is not calling for more austerity for Greece and that the 3.5% target is not credible. It suggested instead a 1.5% objective in parallel with debt relief. This position from the Director of the IMF’s European Department, Poul Thomsen, has the merit of stressing the unsustainable nature of Greece’s debt. However, it is unlikely that this issue will be treated with as much pragmatism in the coming months.

Without further agreement between Eurogroup members, Greece will need to pursue or even increase its austerity policies for the foreseeable future. This grim perspective might explain why Greece’s Prime Minister Alexis Tsipras decided to grant a Christmas bonus to pensioners and cancelled VAT increase in some islands affected by refugees’ flows - with little support from European partners. In any case, Greece’s creditors didn’t appreciate the idea that Greeks could receive a Christmas gift without their approval or even consultation and the Eurogroup retaliated by suspending the debt relief measures adopted the week before. 

Any serious discussion about the restructuring of Greece’s debt will most likely not happen before the general elections in Germany in September, or even after, depending on the results and in particular the gains made by the anti-EU AfD party. Should the situation change and debt negotiations take place for Greece, other European countries will probably call for restructuring of their own debt, for example Portugal, Spain and perhaps Italy, considered by some observers as a major risk for the European economy in 2017

A hope for 2017? The installation of a universal Debt Workout Mechanism!

The inability of Greece’s creditors – and partners – to find a long term sustainable solution is not surprising. Creditors’ institutions are usually not best placed to organise fair and efficient debt workouts. This is because they don’t want to accept the idea that they will not be reimbursed in full. While the current situation might lead to an eventual default of Greece’s payments, a fair and sustainable restructuring would however lead to a situation in which Greece’s creditors could realistically expect to be partially reimbursed. The absence of a legal regime to manage debt crises makes their resolution complex and often inefficient. This explains why more than 50% of debt restructurings with private creditors since 1970 were followed by another restructuring or default within five years

There is however a way for decision-makers to not only to find a solution to the never-ending story of Greece’s debt, but to better manage all debt crises. When a private individual or a private company can no longer pay its debt, a legal insolvency regime allows it to reduce and renegotiate the terms of its debt so that its situation improves and its operations continue. This is the best solution for both the company and its creditor, as it allows the continuation of the company so that it can pay the restructured debt. The creation of an insolvency regime for sovereign debts would improve the management of debt crises. This is not only true for debtor states and their population but also for their creditors who suffer from unequal and unfair treatment under the current system. 

How precisely this insolvency regime, or debt work-out procedure, would work is an open question and many ideas have already been advanced - a summary of this debate can be found in this report – and should be debated by the international community. In 2015, the United Nations General Assembly adopted a resolution establishing nine basic principles on sovereign debt restructuring processes

  • The principle of sovereignty recognised the state’s right to restructure its debt.
  • Good faith in the negotiation processes. 
  • Transparency to enhance accountability of the different actors involved. 
  • Impartiality of the actors and institutions involved requires their independence.
  • Equitable treatment requires states to refrain from arbitrary discriminations among creditors.
  • Sovereign immunity means that sovereign debt contracts are constrained by international law. 
  • Legitimacy implies that debt workouts should be inclusive and respect the rule of law. 
  • Sustainability means that debt workouts should be concluded in a timely manner and restore debt sustainability. 
  • Finally, majority restructuring means that debt restructurings agreed by a majority of creditors should be respected by all creditors. (A more detailed summary and analysis of these principles can be found here.)
While the international community should continue to discuss at the United Nations the establishment of a debt workout mechanism, the nine principles can and should be applied now to better manage ongoing debt crises. Will the Europeans finally find a fair and sustainable solution to Greece’s debt? The implementation of the nine UN principles would go a long way to achieving it.