Fixing the collective action problem in sovereign debt restructuring: significance of Global South solidarity

Abstract

This paper attempts to analyse the limitations of contractual mechanisms of resolving collective action disputes against sovereign debtors. The Global South has been at the receiving end of the sovereign debt obligations and collective action clauses (CACs) agenda. The lack of control over the domestic economy and the human rights impacts of mounting sovereign debt brings to the fore the absolute lack of fairness and equity in the CAC-based framework for restructuring sovereign debt. The contemporary international order does not address the non-economic concerns of an indebted state. The unfair treatment meted out to the Global South opens the need for Third World approaches to international law (TWAIL) voices against sovereign debt. The current discourse and literature on CAC have remained mainly aloof to the contributions and importance of TWAIL in the context of CACs. Sovereign debt and the use of CACs need a fresh outlook based on the development of international human rights law. Alternative movements based on Global South solidarity against the present structural and systemic problems of sovereign debt and CACs need to be explored.

Keywords:

• Sovereign debt
• collective action clauses
• human rights
• TWAIL
• Global South solidarity

Acknowledgements

The authors thank Prof. Partha Ray and Prof. V. K. Unni for their contribution to and comments on the earlier drafts of this paper.

Notes

1 Traditionally, equal treatment of all the creditors was taken care of by the pari passu clause. It is a peculiar clause of lending contracts that prescribes that a borrower shall not extend preferential treatment to any creditors. All creditors ought to be treated equally, all the more so in case of cross-border agreements. Owing to the existing legal inadequacies, some recalcitrant creditors leveraged this statutory provision and the court gave an altogether different interpretation of the clause in the case Elliot Associates v. Republic of Peru: the court stated that ‘the debt should be diminished equally towards all creditors in proportion to their claim’ (Sookun 2010: 36). See Elliott Associates, LP v. Republic of Peru, 948 F. Supp. 1203 (S.D.N.Y. 1996) US District Court for the Southern District of New York – 948 F. Supp. 1203 (S.D.N.Y. 1996).

2 Wright and Pitchford provide evidence that in some complicated cases, ‘negotiation costs are in excess of 3% of the total value of a restructuring’ (Wright and Pitchford 2007, 22).

3 Brazil issued bonds that required a threshold of 85%; Uruguay proposed aggregated voting that had an 85% threshold and allowed various kinds of outstanding bonds to be pooled. Further, the threshold for each category of bond issue that was pooled was lowered to 67% in order to support the restructuring. This kind of aggregation is potent as it essentially ‘lowers the threshold for the amendment of an individual bond if a high proportion of the holders of all bonds that are part of the aggregated restructuring support the proposed amendment’ (Roubini and Setser 2004, 6).

4 See Elliott Associates., L.P. v. Banco de la Nacion and the Republic of Peru, 194 F.3d 363, 368–70, 380–81 (2d Cir. 1999).

5 The Republic of Argentina, Prospectus Supplement – 2005, January 10 to Prospectus – 2004, December 27.

6 Rebuplica Oriental del Uruguay, Prospectus Supplement – 2003, April 10 to Prospectus – 2003, April 10.

7 Mandate of the Independent Expert on the Effects of Foreign Debt and Other Related International Financial Obligations of States on the Full Enjoyment of Human Rights, Particularly Economic, Social and Cultural Rights, Vulture Funds and Human Rights – Remarks by Juan Pablo Bohoslavsky (2015, February 25). Retrieved from http://www.ohchr.org/Documents/Issues/Development/IEDebt/VultureFundsAndHumanRights2014.pdf

8 Advocating an international bankruptcy court modeled on Chapter 11 of the US Bankruptcy Code are Jeffrey Sachs (1995), Anne Krueger (2001, 2002) and Steven Schwarcz (2000).

9 See:

1. 1. UNGA Resolution: Basic Principles on Sovereign Debt Restructuring Processes (A/69/L.84);

2. 2. ‘Statement on the Importance and Relevance of the Right to Development, Adopted on the Occasion of the Twenty-Fifth Anniversary of the Declaration on the Right to Development’ (E/C.12/2011/2);

3. 3. 2010 Human Rights Council Resolution: The Effects of Foreign Debt and Other Related International Financial Obligations of States on the Full Enjoyment of All Human Rights, Particularly Economic, Social and Cultural Rights. (A/HRC/RES/14/4);

4. 4. Plan of Implementation of the World Summit on Sustainable Development (2002);

5. 5. ‘Consolidation of Findings of the High-Level Task Force on the Implementation of the Right to Development’ (A/HRC/15/WG.2/TF/2/Add.1 and Corr.1).

This list is not exhaustive.

10 In 2012, the European Union mandated that all Eurozone sovereign bonds must iterate CACs in their bond contracts.

Additional information

Notes on contributors

Salamah Ansari

Salamah Ansari works with the Indian Institute of Management, Kozhikode, Kerala, India. She earned her doctorate from the Indian Institute of Management, Calcutta. Prior to her PhD, she worked with the Indian Institute of Management, Ahmedabad, as an academic associate. Her research interests include urban governance, sovereign debt restructuring and public international law. Her recent works include ‘Legislative Design of Director’s Responsibility in India: In Search of Clarity’ (with M. Deva Prasad and S. Narayan, Statute Law Review, 2020); and ‘Participatory Urban Development in India: A Tale of Two Townships’ (Environment and Urbanization ASIA, 12, no. 1 (2021), 136–147).

Deva Prasad M.

Deva Prasad M. is Assistant Professor of law at the Indian Institute of Management, Kozhikode, Kerala, India. Prior to this, he worked as Assistant Professor in the National Law School of India University, Bangalore (NLSIU), Bangalore. His current research interests include corporate law, public international law and intellectual property rights law. He holds an LLM from NLSIU and a PhD from the National University of Juridical Sciences. He has published in national and international journals including Statute Law Review, Economic and Political Weekly, International Journal of Law and Information Technology, Space Policy and Environmental Policy and Law.

R. Rajesh Babu

R. Rajesh Babu is Professor of law and public policy at IIM Calcutta, Kolkata, India. He has over two decades of experience in academia, with intergovernmental organisations and as a practising lawyer. His research centres on international economic law (trade and investment), adjudication and settlement of disputes in the national and international context, and liability of corporations for wrongful conduct. He has been a DAAD Visiting Scholar at the Hamburg University, Germany, a Global Scholar-in-Residence at the Graduate Institute, Geneva, and a Fellow at the Hague Academy of International Law. He is currently State Volume Editor (India) for the Encyclopaedia of Public International Law in Asia (Brill/Nijhoff: Netherlands, 2021).