**3. Establishing a treaty-based normative framework**

When UN General Assembly Resolution 69/319 ("B asic Principles on Sovereign Debt Restructuring Processes") was adopted 10 September 2015, 136 States voted in favor, six States voted against, and 41 States abstained ([18], p. 4; [10], p. 37). Among those which opposed the resolution were the US and the UK, "the two major jurisdictions for sovereign debt issuances by emerging economies, as well as Canada, Germany, Israel and Japan" ([18], p. 4).

UN General Assembly Resolution 69/319 ar ticulates nine principles in SDR:


*Accounting and Finance - New Perspectives on Banking, Financial Statements and Reporting*

enforcement of foreign judgments; and (c) the choice of law ([12], p. 7). Governing law clauses in a debt instrument may include the specific choice of law provision designating, for instance, New York or English or Japanese Law; or a provision that references an international norm such as a particular treaty or the principle of State sovereignty. Moreover, the adjudicatory body constituted by the debt instrument applies the choice of law or the referenced international norm pursuant to the

During a sovereign debt crisis, the Debtor State may unilaterally restructure its debts pursuant to its sovereign right to set its own macroeconomic policy. In this context, foreign creditors demand that such clauses be contained in debt instruments to effectively act as restraints against unilateral restructuring by a Debtor State. These clauses therefore imply a waiver of the Debtor State's sovereignty. By introducing elements of foreign laws in debt instruments, these clauses "internationalize" what would otherwise be purely domestic contracts that may be amended by the Debtor State. It has been said that "[m]any countries do not regard foreign creditors with great sympathy, especially when the country is bankrupt and the citizens are throwing stones in the street" ([13], p. 4). Thus, for instance, New York or English Law "continue to dominate sovereign and quasi-sovereign lending in large parts of the world[,] including many emerging markets" [14]. New York and English Law are often the choices of law in debt instruments because of their "insulating effect" against "legislative changes in the borrower's country" ([13], p. 4). It is also a factor that the United States and the United Kingdom are often the home States of creditors who hold sovereign bonds. On the other hand, Debtor States normally agree to these clauses in order to access capital from foreign creditors. The present regime of SDR has also been described as "contractual" given that debt contracts are the primary sources of rights and obligations with respect to sovereign debt. In the case of purely domestic indebtedness, a State has wide leeway in dealing with its debts using its own legal system. However, when a State borrows capital from foreign markets, debt contracts trigger the interaction between two legal systems and, to a more limited extent, between the Debtor State's legal system and international law. This precisely characterizes a conflict of law regime which is principally concerned with the "existence in the world of a number of separate municipal systems of law" ([12], p. 4). As a consequence, without an overarching framework, SDR is necessarily based on the Debtor State's *ad hoc* negotiations with its creditors based on those contracts. The *ad hoc* nature of these negotiations is reinforced by the fact that the distressed Debtor State has to deal with a diverse set

of creditors including hedge funds and institutional investors.

Thus, the myriad of sovereign debt contracts is the core operational legal framework in the resolution of a sovereign debt crisis. The application of the international principle of State sovereignty is, to a large extent, determined through the State's express and implied waivers of such principle contained in the debt contracts. In most cases, international law is applied in SDR if it is incorporated in these contracts. While sovereign debt contracts may be covered by an investment treaty as in *Abaclat v. Argentina* [15], this has not evolved into a consistent international norm in SDR. In the first place, whether debt contracts are considered protected under an investment treaty would depend on the specific definition of "investment" under such treaty. Second, such expansive interpretation of "investment" has been criticized as a departure from the common understanding of "investment" as long-term commitment of capital that contributes to the economic development of the host State (see [16], pp. 515–517). In any event, there are currently more than 3000 investment treaties in the world with varying definitions of investment [17]. This situation in international investment law is hardly one that reflects a consistent

**126**

international norm in SDR.

contract.


The thrust of this paper's proposal to codify UN General Assembly Resolution 69/319 in to a treaty is to formalize the foregoing principles without necessarily adopting the resolution *in toto*. Its main objective is to introduce these norms as a multilateral framework in SDR without, at the moment, imposing any specific measure to implement them. If the voting of UN General Assembly Resolution 69/319 is any indication, only the 136 States which voted in favor of the resolution would probably regard its codification in a positive light. Thus, to improve chances of success, a proposal for codification should court the "no" and "abstain" votes by introducing changes that accommodate their positions.

It is not surprising that the influential developed economies voted against UN General Assembly Resolution 69/319 gi ven that their citizens are mostly the creditors of distressed Debtor States and that they have an interest in protecting the sovereign debt market within their jurisdictions. One of their declared principal objections is that "the IMF as the primary forum to discuss sovereign debt restructuring issues" instead of the UN General Assembly [8]. Equally important are their objections against the specific manner by which the nine principles in SDR were articulated in the resolution.

The European Union, for instance, has declared its objections to a number of statements in the resolution:

*Paragraph 4 requests "all institutions and actors involved in sovereign debt restructuring," including "at regional level," to "refrain from exercising any undue influence over the process and other stakeholders or engaging in actions that would give rise to conflicts of interest." Such a statement fits poorly with both the EU institutional setting and its practical situation, where possible discussions related to the stock of debt of a Member State take place primarily at regional level, against a background in which the Member States themselves are often the main creditors (directly or via the financial assistance mechanisms that they have established).*

*Paragraph 5 states that "creditors have the right to receive the same proportionate treatment in accordance with their credit and its characteristics" and that "no creditors or creditor groups should be excluded ex ante from the sovereign debt restructuring process." Such a statement denies the customary preferred creditor status recognized to the International Financial Institutions (IMF, ESM...) when lending to a Sovereign in distress, with possible major negative implications on their ability to fulfill their primary mission.*

*Paragraph 9 states that "sovereign debt restructuring agreements that are approved by a qualified majority of the creditors of a State are not to be affected, jeopardized or otherwise impeded by other States." This statement is very problematic for issuances under foreign jurisdiction (the overwhelmingly dominant case for developing and emerging countries). Issuing under a foreign jurisdiction does, by definition, involve accepting the competence of the courts of another State. This is a point of major importance for the EU, as a very large part of the world's sovereign issuances under foreign jurisdiction are made under the jurisdiction of one of its Member States (UK) [19].*

**129**

*Sustainability in Indebtedness: A Proposal for a Treaty-Based Framework in Sovereign Debt…*

In codifying the SDR principles into a treaty, it is worthwhile to consider these objections which relate to the specific wording of UN General Assembly Resolution 69/319. In general, it is easier to accommodate concerns about specific wordings than the more fundamental objections premised on the market-based approach to SDR. This is driven by a pragmatic consideration of securing State support by postponing the imposition of concrete SDR measures and, at the same time, advancing the main objective of introducing a multilateral normative framework for SDR. The broad codification of the norms contained in UN General Assembly Resolution 69/319 would be a compromise between a "soft law" approach (usually in the form of guidelines that may be adopted by States) and a "hard law" approach in the form of enforceable specific SDR measures. While the proposal takes the form of a treaty, the SDR norms to be articulated therein should be deliberately broad to give States the flexibility to implement them within specific contexts. As such, this would not be an unqualified "surrender of sovereignty" on the part of State parties that may be part of their reluctance towards UN General Assembly Resolution 69/319 (consider, for instance, the 41 abstaining votes). A degree of flexibility is needed in SDR especially in view of the rapidly changing

This proposal is preliminary: it is designed to set the grounds for more concrete and "hard law" SDR measures in the future. It follows the so-called Incremental Approach that "complement, rather than replace, existing mechanisms, including contractual approaches and the activities of the International Financial Institutions or the Paris Club, and guide their operation" ([10], p. 38). Despite not codifying concrete SDR measures, a treaty-based multilateral normative framework would hopefully exert a "compliance pull" on the current SDR regime towards a shared understanding of these norms. A multilateral normative framework in SDR would reinforce the "use [of] the interpretive space between the factual and the normative, between apology and utopia, in order to highlight and strengthen trends in

The broad codification of the norms in UN General Assembly Resolution 69/319 would be a significant advancement in itself towards establishing a multilateral normative framework in SDR. Even from the perspective of market-based proponents, the efficiency and equity problems in the present regime of SDR is serious enough to warrant reform. It is the kind of reforms needed that is the subject of intense debate which straddles between, on one hand, the value of uniform and predetermined rules and, on the other, that of flexibility. This paper's proposal seeks to bridge those values by supporting a predetermined normative framework in SDR while retaining the flexibility needed to undertake the restructuring process.

As a political matter, there is no doubt that the support of influential developed countries like the US and the UK would considerably help the success of the proposed treaty. However, even if there are limited States which become parties to the treaty, it cannot be discounted that some actors might prefer to deal with States with

A treaty-based normative framework in SDR would also mean that domestic courts of State parties would be obligated to apply the norms embodied in the treaty. Howse observes that even with international arbitration, "domestic courts are the ultimate mechanism [in SDR], as is illustrated by international investment law." ([21], p. 244). This is because it is often the case that most of the Debtor State's assets are located within its jurisdiction. Moreover, it is not unlikely for treaty-based SDR norms to influence international arbitration (based on debt contracts) given that State parties to the arbitration now have a treaty obligation to follow the SDR norms. Thus, while treaty-based SDR norms are deliberately broad, there will be some measure of enforcement of those norms especially at the domestic level.

*DOI: http://dx.doi.org/10.5772/intechopen.82470*

nature of the sovereign debt market (see generally [20]).

current practice that support debt sustainability" ([10], pp. 38–39 ).

a reasonably predictable SDR framework as forwarded by the proposal.

### *Sustainability in Indebtedness: A Proposal for a Treaty-Based Framework in Sovereign Debt… DOI: http://dx.doi.org/10.5772/intechopen.82470*

In codifying the SDR principles into a treaty, it is worthwhile to consider these objections which relate to the specific wording of UN General Assembly Resolution 69/319. In general, it is easier to accommodate concerns about specific wordings than the more fundamental objections premised on the market-based approach to SDR. This is driven by a pragmatic consideration of securing State support by postponing the imposition of concrete SDR measures and, at the same time, advancing the main objective of introducing a multilateral normative framework for SDR.

The broad codification of the norms contained in UN General Assembly Resolution 69/319 would be a compromise between a "soft law" approach (usually in the form of guidelines that may be adopted by States) and a "hard law" approach in the form of enforceable specific SDR measures. While the proposal takes the form of a treaty, the SDR norms to be articulated therein should be deliberately broad to give States the flexibility to implement them within specific contexts. As such, this would not be an unqualified "surrender of sovereignty" on the part of State parties that may be part of their reluctance towards UN General Assembly Resolution 69/319 (consider, for instance, the 41 abstaining votes). A degree of flexibility is needed in SDR especially in view of the rapidly changing nature of the sovereign debt market (see generally [20]).

This proposal is preliminary: it is designed to set the grounds for more concrete and "hard law" SDR measures in the future. It follows the so-called Incremental Approach that "complement, rather than replace, existing mechanisms, including contractual approaches and the activities of the International Financial Institutions or the Paris Club, and guide their operation" ([10], p. 38). Despite not codifying concrete SDR measures, a treaty-based multilateral normative framework would hopefully exert a "compliance pull" on the current SDR regime towards a shared understanding of these norms. A multilateral normative framework in SDR would reinforce the "use [of] the interpretive space between the factual and the normative, between apology and utopia, in order to highlight and strengthen trends in current practice that support debt sustainability" ([10], pp. 38–39 ).

The broad codification of the norms in UN General Assembly Resolution 69/319 would be a significant advancement in itself towards establishing a multilateral normative framework in SDR. Even from the perspective of market-based proponents, the efficiency and equity problems in the present regime of SDR is serious enough to warrant reform. It is the kind of reforms needed that is the subject of intense debate which straddles between, on one hand, the value of uniform and predetermined rules and, on the other, that of flexibility. This paper's proposal seeks to bridge those values by supporting a predetermined normative framework in SDR while retaining the flexibility needed to undertake the restructuring process.

As a political matter, there is no doubt that the support of influential developed countries like the US and the UK would considerably help the success of the proposed treaty. However, even if there are limited States which become parties to the treaty, it cannot be discounted that some actors might prefer to deal with States with a reasonably predictable SDR framework as forwarded by the proposal.

A treaty-based normative framework in SDR would also mean that domestic courts of State parties would be obligated to apply the norms embodied in the treaty. Howse observes that even with international arbitration, "domestic courts are the ultimate mechanism [in SDR], as is illustrated by international investment law." ([21], p. 244). This is because it is often the case that most of the Debtor State's assets are located within its jurisdiction. Moreover, it is not unlikely for treaty-based SDR norms to influence international arbitration (based on debt contracts) given that State parties to the arbitration now have a treaty obligation to follow the SDR norms. Thus, while treaty-based SDR norms are deliberately broad, there will be some measure of enforcement of those norms especially at the domestic level.

*Accounting and Finance - New Perspectives on Banking, Financial Statements and Reporting*

debtor State…"

articulated in the resolution.

statements in the resolution:

*ability to fulfill their primary mission.*

8. *Sustainability* "implies that sovereign debt restructuring workouts are completed in a timely and efficient manner and lead to a stable debt situation in the

9. *Majority restructuring* "implies that sovereign debt restructuring agreements that are approved by a qualified majority of the creditors of a State are not to be…impeded by other States or a non-representative minority of creditors…"

The thrust of this paper's proposal to codify UN General Assembly Resolution 69/319 in to a treaty is to formalize the foregoing principles without necessarily adopting the resolution *in toto*. Its main objective is to introduce these norms as a multilateral framework in SDR without, at the moment, imposing any specific measure to implement them. If the voting of UN General Assembly Resolution 69/319 is any indication, only the 136 States which voted in favor of the resolution would probably regard its codification in a positive light. Thus, to improve chances of success, a proposal for codification should court the "no" and "abstain" votes by

It is not surprising that the influential developed economies voted against UN General Assembly Resolution 69/319 gi ven that their citizens are mostly the creditors of distressed Debtor States and that they have an interest in protecting the sovereign debt market within their jurisdictions. One of their declared principal objections is that "the IMF as the primary forum to discuss sovereign debt restructuring issues" instead of the UN General Assembly [8]. Equally important are their objections against the specific manner by which the nine principles in SDR were

The European Union, for instance, has declared its objections to a number of

*Paragraph 5 states that "creditors have the right to receive the same proportionate treatment in accordance with their credit and its characteristics" and that "no creditors or creditor groups should be excluded ex ante from the sovereign debt restructuring process." Such a statement denies the customary preferred creditor status recognized to the International Financial Institutions (IMF, ESM...) when lending to a Sovereign in distress, with possible major negative implications on their* 

*Paragraph 9 states that "sovereign debt restructuring agreements that are approved by a qualified majority of the creditors of a State are not to be affected, jeopardized or otherwise impeded by other States." This statement is very problematic for issuances under foreign jurisdiction (the overwhelmingly dominant case for developing and emerging countries). Issuing under a foreign jurisdiction does, by definition, involve accepting the competence of the courts of another State. This is a point of major importance for the EU, as a very large part of the world's sovereign issuances under foreign jurisdiction are* 

*made under the jurisdiction of one of its Member States (UK) [19].*

*Paragraph 4 requests "all institutions and actors involved in sovereign debt restructuring," including "at regional level," to "refrain from exercising any undue influence over the process and other stakeholders or engaging in actions that would give rise to conflicts of interest." Such a statement fits poorly with both the EU institutional setting and its practical situation, where possible discussions related to the stock of debt of a Member State take place primarily at regional level, against a background in which the Member States themselves are often the main creditors (directly or via the financial assistance mechanisms that they have established).*

introducing changes that accommodate their positions.

**128**

In sum, this treaty-based normative framework in SDR may set the course for a series of actions which may lead to more concrete and enforceable measures in SDR. This is the import of the Incremental Approach that "highlight[s] and strengthen[s] trends in current [and future] practice" ([10], p. 38) and which is designed to continuously build upon the broad normative framework set out at the start.
