**4. The principle of sustainability**

The principles or norms provided in UN General Assembly Resolution 69/319 may be seen as addressing two aspects of SDR: first is the conduct of the relevant actors in the restructuring process; and second is the objective of the restructuring process itself. The principles of sovereignty, good faith, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy and majority structuring primarily relate to the behavior of States, creditors, tribunals and other relevant actors. These principles are meant to address the collective action problem in SDR—that is, the failure to coordinate among the Debtor State and its creditors even if all would be better off if they coordinate.

For instance, the end of Argentina's 15-year stand-off with the majority of its holdout creditors in April 2016 has been attributed to "good faith negotiations" ([22], p. 1). In lifting the injunction against Argentina's payment of its restructured bonds, the New York court judgment "indicated…that the election of Argentina's new government with its willingness to negotiate in good faith…was pivotal in [the] decision…" ([22], p. 2; [23]). In this case, "good faith" was used to characterize the conduct of negotiations between Argentina and its holdout creditors in reaching a settlement that allowed the recovery of 75% of the creditors' original claim. This would be an example of an application of the principle of good faith to address a collective action problem in SDR. Moreover, the principles of sovereignty, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy and majority structuring would have, in varying degrees, played a part in reaching the Argentine settlement as it is often necessary that these principles operate in concert to address a collective action problem.

On the other hand, the principle of sustainability would relate more to the objective of SDR. Guzman and Stiglitz, for instance, stated that "[t]he ultimate goal of sovereign debt restructuring is to restore the sustainability of public debt *with high probability*" ([18], p. 3). The articulation of the principle of sustainability in UN General Assembly Resolution 69/319, however, is noteworthy for its progressiveness:

*Sustainability implies that sovereign debt restructuring workouts are completed in a timely and efficient manner and lead to a stable debt situation in the debtor State, preserving at the outset creditors' rights while promoting sustained and inclusive economic growth and sustainable development, minimizing economic and social costs, warranting the stability of the international financial system and respecting human rights.*

The foregoing is not only concerned with the debt sustainability within the Debtor State, but also "inclusive economic growth and sustainable development… [which] respect[] human rights." This particular articulation is holistic in the sense that it considers the long-term social and economic welfare of the Debtor State which may very include the well-being of its citizens. Significantly, the mention of "human rights" may make SDR resonate with other international norms such as those embodied in the Universal Declaration of Human Rights [24] and the International Covenant on Civil and Political Rights [25].

**131**

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

The IMF has defined debt sustainability "as a situation in which a borrower is expected to be able to continue servicing its debts without an unrealistically large future correction to the balance of income and expenditure" ([26], p. 4). Compared to the UN General Assembly Resolution 69/319, the IMF's definition of "debt sustainability" has been described as being "in purely financial terms" ([10], p. 25). The IMF's definition consists of two components: (1) that the Debtor State "cannot indefinitely accumulate debt faster than [its] capacity to service these debts" ([14], p. 71); and (2) that the service of debts should not require "an unrealistically large future correction to the balance of income and expenditure." The first relates to a financial aspect of sustainability whose objective is to prevent an unbounded accumulation of debts. On the other hand, the second component "implies that there are social and political limits to adjustment[s]" ([14], p. 71) needed to achieve debt sustainability. Thus, "[n]ot all fiscal adjustment paths are realistic, because political and other constraints will influence a country's willingness to pay (as

The recognition by the IMF of social and political limits to adjustment policies in SDR may be seen as going beyond a purely financial framework of sustainability. Although this recognition may be limited insofar as it affects a State's willingness to pay its debts, the IMF's definition is significant to the extent that it implies an assessment of the social and political situation of the debtor State in the context of a sovereign debt crisis. Thus, it may not be entirely accurate to say that the IMF's definition of "debt sustainability" is incompatible with the principle of sustainability in UN General Assembly Resolution 69/319. The IMF's willingness to recognize the social and political aspects of SDR has some kinship with UN General Assembly Resolution 69/319 in its emphasis on "inclusive economic growth and sustainable development." In fact, recent debt sustainability analysis of the IMF factors economic growth within the Debtor State as a contributing variable in assessing

In short, there may be possible points of contact between the IMF's definition of "debt sustainability" and the principle of sustainability in UN General Assembly Resolution 69/319. These points of contact in the understanding of sustainability may play a role in gathering support for a proposal to include "inclusive economic growth and sustainable development" as part of a codified principle of sustainability. Indeed, there is significance in going beyond a purely financial assessment of whether a State's payment of its existing debts may lead to an unbounded accumula-

Fostering "inclusive economic growth" within the Debtor State should be seen as rational and viable strategy in SDR because it addresses the following characteris-

1. Unlike corporations that are the subject of bankruptcy proceedings, there is no option of liquidation or dissolution of a Debtor State because the likelihood of such an event happening as result of a debt crisis is minimal. As such, the debt crisis is necessarily temporary. In most instances, the question to be addressed is not the survival of the State but the duration of the crisis given the measures

2. The assets of the Debtor State that may be used to service its debts are dynamic given a functioning economy that utilizes fiscal policies like raising revenue

3. A distressed Debtor State is also accountable to its citizens who are beneficiaries of its social welfare programs such as "pensioners, those depending on the

tics that is not found in domestic bankruptcy regimes:

that may be implemented to resolve it.

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

opposed to ability to pay)" ([14], p. 71).

sustainability ([14], p. 75).

tion of future debts.

through taxation.

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

The IMF has defined debt sustainability "as a situation in which a borrower is expected to be able to continue servicing its debts without an unrealistically large future correction to the balance of income and expenditure" ([26], p. 4). Compared to the UN General Assembly Resolution 69/319, the IMF's definition of "debt sustainability" has been described as being "in purely financial terms" ([10], p. 25).

The IMF's definition consists of two components: (1) that the Debtor State "cannot indefinitely accumulate debt faster than [its] capacity to service these debts" ([14], p. 71); and (2) that the service of debts should not require "an unrealistically large future correction to the balance of income and expenditure." The first relates to a financial aspect of sustainability whose objective is to prevent an unbounded accumulation of debts. On the other hand, the second component "implies that there are social and political limits to adjustment[s]" ([14], p. 71) needed to achieve debt sustainability. Thus, "[n]ot all fiscal adjustment paths are realistic, because political and other constraints will influence a country's willingness to pay (as opposed to ability to pay)" ([14], p. 71).

The recognition by the IMF of social and political limits to adjustment policies in SDR may be seen as going beyond a purely financial framework of sustainability. Although this recognition may be limited insofar as it affects a State's willingness to pay its debts, the IMF's definition is significant to the extent that it implies an assessment of the social and political situation of the debtor State in the context of a sovereign debt crisis. Thus, it may not be entirely accurate to say that the IMF's definition of "debt sustainability" is incompatible with the principle of sustainability in UN General Assembly Resolution 69/319. The IMF's willingness to recognize the social and political aspects of SDR has some kinship with UN General Assembly Resolution 69/319 in its emphasis on "inclusive economic growth and sustainable development." In fact, recent debt sustainability analysis of the IMF factors economic growth within the Debtor State as a contributing variable in assessing sustainability ([14], p. 75).

In short, there may be possible points of contact between the IMF's definition of "debt sustainability" and the principle of sustainability in UN General Assembly Resolution 69/319. These points of contact in the understanding of sustainability may play a role in gathering support for a proposal to include "inclusive economic growth and sustainable development" as part of a codified principle of sustainability. Indeed, there is significance in going beyond a purely financial assessment of whether a State's payment of its existing debts may lead to an unbounded accumulation of future debts.

Fostering "inclusive economic growth" within the Debtor State should be seen as rational and viable strategy in SDR because it addresses the following characteristics that is not found in domestic bankruptcy regimes:


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

upon the broad normative framework set out at the start.

**4. The principle of sustainability**

be better off if they coordinate.

to address a collective action problem.

progressiveness:

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

The principles or norms provided in UN General Assembly Resolution 69/319 may be seen as addressing two aspects of SDR: first is the conduct of the relevant actors in the restructuring process; and second is the objective of the restructuring process itself. The principles of sovereignty, good faith, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy and majority structuring primarily relate to the behavior of States, creditors, tribunals and other relevant actors. These principles are meant to address the collective action problem in SDR—that is, the failure to coordinate among the Debtor State and its creditors even if all would

For instance, the end of Argentina's 15-year stand-off with the majority of its holdout creditors in April 2016 has been attributed to "good faith negotiations" ([22], p. 1). In lifting the injunction against Argentina's payment of its restructured bonds, the New York court judgment "indicated…that the election of Argentina's new government with its willingness to negotiate in good faith…was pivotal in [the] decision…" ([22], p. 2; [23]). In this case, "good faith" was used to characterize the conduct of negotiations between Argentina and its holdout creditors in reaching a settlement that allowed the recovery of 75% of the creditors' original claim. This would be an example of an application of the principle of good faith to address a collective action problem in SDR. Moreover, the principles of sovereignty, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy and majority structuring would have, in varying degrees, played a part in reaching the Argentine settlement as it is often necessary that these principles operate in concert

On the other hand, the principle of sustainability would relate more to the objective of SDR. Guzman and Stiglitz, for instance, stated that "[t]he ultimate goal of sovereign debt restructuring is to restore the sustainability of public debt *with high probability*" ([18], p. 3). The articulation of the principle of sustainability in UN General Assembly Resolution 69/319, however, is noteworthy for its

*Sustainability implies that sovereign debt restructuring workouts are completed in a timely and efficient manner and lead to a stable debt situation in the debtor State, preserving at the outset creditors' rights while promoting sustained and inclusive economic growth and sustainable development, minimizing economic and social costs, warranting* 

The foregoing is not only concerned with the debt sustainability within the Debtor State, but also "inclusive economic growth and sustainable development… [which] respect[] human rights." This particular articulation is holistic in the sense that it considers the long-term social and economic welfare of the Debtor State which may very include the well-being of its citizens. Significantly, the mention of "human rights" may make SDR resonate with other international norms such as those embodied in the Universal Declaration of Human Rights [24] and the

*the stability of the international financial system and respecting human rights.*

International Covenant on Civil and Political Rights [25].

**130**

government for health benefits or education, etc." ([27], p. 9). Guzman and Stiglitz have called these beneficiaries as the State's informal creditors whose "benefits are part of the social contract" ([27], p. 9).

The lack of an option for "State dissolution" should shift an SDR framework towards economic growth rather than the common pool of assets (see [28]) problem in bankruptcy cases. This is a paradigm shift from a static understanding of a limited pool of assets in domestic bankruptcy proceedings to a dynamic one which accounts for the possibility of growth (or conversely, diminution) based on the macroeconomic conditions of the Debtor State. Thus, "inclusive economic growth" within the Debtor State shortens the duration of a sovereign debt crisis and expands the available pool of State assets that may be used to service its debts. The expansion of the State's asset base also prevents the unbounded accumulation of future debts.

Such endogenous growth implies a multiplier effect in the economy that increases a Debtor State's tax revenues, consumption, investments and expenditures. In the context of SDR, "inclusive economic growth" ultimately means the increased likelihood of the Debtor State to pay its debts. In this way, it benefits everyone: the Debtor State, the creditors and other stakeholders especially those who derive benefit from the Debtor State's social contract.

The project of fostering "inclusive economic growth" within the Debtor State would be seen in contradistinction to the imposition of austerity measures purportedly to set aside money to pay the State's creditors. Guzman and Stiglitz observes that "austerity policies are normally counterproductive *even from a creditors' perspective*" ([27], p. 8). Austerity measures may, in fact, decrease the State's ability to pay its debts by preventing it from spending money domestically to fix its economy.

There is also a question of social justice involved in prioritizing foreign creditors over the Debtor State's social welfare beneficiaries. Limited State assets are being used to pay wealthy investors (which include the so-called "vulture funds") over the State's citizens who may be invoking rights more closely related to value of human life—*e.g.* rights to public health and a sustainable environment. This arrangement in effect violates a hierarchy of values in international law which upholds the primacy of human life over property. Thus, the U.N. Commission on Human Rights issued a Resolution which "affirms that the exercise of the basic rights of the people of debtor countries to food, housing, clothing, employment, education, health services and a healthy environment cannot be subordinated to the implementation of structural adjustment policies and economic reforms arising from the debt" [29].

The treaty codification of "inclusive economic growth and sustainable development" as part of the principle of sustainability helps SDR move beyond a purely financial framework of sustainability. While it may be desirable to adopt more targeted measures to improve the human rights situation in SDR, an emphasis on the Debtor State's endogenous economic growth also addresses this aspect by improving the collective welfare of the relevant actors involved. In particular, an improved economic situation helps the Debtor State fulfill its social contract with its citizens through an increased ability to pay.
