Wednesday, October 7, 2015

UN: more needed to curb ‘vulture’ activity

By Ignacio Portes
Herald Staff

General Assembly’s non-binding resolution not enough to protect sovereigns, UNCTAD says

The recently-passed, Argentina-sponsored United Nations General Assembly resolution establishing guidelines for future sovereign-debt restructurings is not enough to protect countries against hostile bondholders, according to a report released yesterday by the UN body specialized on trade and development, UNCTAD.

The non-binding nature of the resolution means that some of its principles can be ignored, even if that comes at a political cost, UN officials said.

Statutory, binding mechanisms such as the creation of an independent court with no relation to creditors to solve disputes similar to the one Argentina is undergoing with NML Capital and other so-called “vulture” funds in New York should be the way forward, UNCTAD’s latest Trade and Development Report argues.

For that to happen, multilateral agreements would need to be signed or reformed, but achieving that would actually “promote fair burden-sharing and a restoration of debt sustainability mechanisms that would permit an impartial assessment of a country’s debt situation,” the report said.

Two existing approaches

According to UNCTAD, there are broadly three types of approaches to improve protection for sovereign debt restructuring mechanisms.

The first is a market-based approach that focuses on legal improvements to the existing contractual system. This has already been applied by new bond issuers such as Mexico and Greece following the global repercussions of Argentina’s legal showdown with the so-called “vulture funds.”

New issuers added stronger contract clauses aimed at making it harder for hostile minority bondholders to block a debt-restructuring process. Reforms to Colective Action Clauses (CACs) and clarification of the pari passu (equal treatment of bondholders) provision, which was interpreted by New York Judge Thomas Griesa as supporting the “vultures” legal challenges to Argentina, are already being widely adopted.

But according to UNCTAD, “even third-generation CACs remain structurally deficient” and vulnerable to speculative attacks.

The second approach is a “semi-institutional” one that advocates the use of soft-law international principles in line with those approved recently by the United Nations’ General Assembly to help inform and guide a restructuring process.

“No resolutions from the UN General Assembly are binding. They are important, however. The Universal Declaration of Human Rights is not binding either, but it is strongly influential — it is the building block of modern rights and it was incorporated into the constitutions of most democratic countries. Rejecting these non-binding resolutions has a political cost,” a UN representative said during UNCTAD’s presentation of the report in Buenos Aires on Monday.

Individual countries can pass laws in line with the guidelines established by the UN, but their non-binding nature is still a clear limit, as “there is no guarantee that a critical mass of parties will be willing to make more permanent commitments to these principles,” so UNCTAD is calling for a third, stronger approach.

A new, binding approach

“A statutory approach that aims to establish internationally binding rules and procedures on sovereign debt restructuring” is the ultimate objective, according to the report.

While the General Assembly resolution is praised as a first step in this direction, more is needed to achieve that goal, and two proposals are currently on the table.

“The first of these foresees the development, in some form or other, of a sovereign debt restructuring facility under the auspices of the IMF. A second set of suggestions emphasizes the need for a more permanent and impartial international institution, not itself involved in sovereign lending, and favours the establishment of an independent tribunal, whether housed in existing courts (such as the Permanent Court of Arbitration or the International Court of Justice) or newly established in its own right,” UNCTAD said.

In either case, a