By Andrew Jay Rosenbaum
ISTANBUL
Sovereign debt crises have tested governments from Iceland to Argentina since the global financial meltdown of 2008.
Now the UN has published a "roadmap" to help countries threatened by huge debt address the problem before and during debt restructuring, hopefully avoiding the need for severe 'austerity' measures.
"Given the fragile current economic climate, more sovereign debt crises have to be expected," Mukhisa Kituyi, secretary general of the UN Conference on Trade and Development, told The Anadolu Agency at the recent G20 conference in Istanbul.
"But resolving these crises can be complex and challenging, as we saw in the recent case of the Argentina crisis."
Argentina has been attempting to work out a sovereign debt default since 2001, when the government defaulted on $100 billion of debt.
Most holders of Argentine government bonds accepted a swap on their investments in 2005 and 2010, losing money in the process, but a small group of hedge funds led by Elliott Management’s NML Capital insisted on full repayment.
In a prolonged legal battle in the U.S., these ‘vulture creditors’ won, leading to the freezing of some Argentine assets in the U.S. as well as a country default on the debt in July last year.
"In the past, there have been no rules about how to work out sovereign debt issues and that is why this leads to disputes of this kind," Kituyi, a former trade minister in his native Kenya, said.
"We have proposed a non-binding procedure that debtors and creditors can follow to avoid disputes."
Last December, the UN General Assembly, passed a resolution establishing an ad hoc committee on sovereign debt restructuring. The committee’s first working session was held in early February and the roadmap was discussed last week.
The roadmap -- based on the principles of legitimacy, impartiality, transparency, good faith and sustainability -- includes recommendations to improve the coherence, fairness and efficiency of current sovereign debt restructuring.
When countries come close to default, a "stylized" debt resolution process is proposed, Kituyi explained.
"This has been designed to be sufficiently general to include many ways of restructuring debts in accordance with the type of debt and other specific conditions," Kituyi told AA.
"This process calls for impartial institutions to deal promptly with liquidity problems, mediate good faith efforts to negotiate with creditors and assess the full involvement of domestic stakeholders in economic and social recovery programs."
The international financial system has recurrently generated debt crises since the early 1980s, Kituyi pointed out.
"International financial organizations have not been able to prevent these crises or to take action on the economic and social costs endured by affected countries," he said.
"In an international context in which many countries are affected by slow growth and deteriorating terms of trade, and remain vulnerable to new financial shocks, it is urgent to design a debt resolution mechanism that preserves the general interest."
