SOVEREIGN DEBT RESTRUCTURING AS A GLOBAL GOVERNANCE PHENOMENON

By: Laura Galindo Romero*

I. Introduction ....................................................................................................................... 1 II. Traditional approach to Sovereign Debt Restructuring: ............................................. 2

A. CURRENT AD-HOC MECHANISMS: THE PARIS CLUB AND THE LONDON CLUB ................ 4 B. DEBATE OVER CONTRACTUAL V. STATUTORY APPROACHES .......................................... 6

1. Contractual approaches ............................................................................................. 6 2. Statutory approaches ................................................................................................ 11 a) Sovereign Debt Restructuring Mechanism ............................................................... 12

b) Bankruptcy model (US Chapter 11) ......................................................................... 13 c) Fair and Transparent Arbitration Processes .............................................................. 14

III. SDR as a global governance phenomenon .................................................................. 16 A. SDR HAS AN IMPACT ON PUBLIC SPHERES ..................................................................... 17

B. SDR IS A FRAGMENTED PHENOMENON .......................................................................... 19 C. SDR IMPLIES AN EXERCISE OF GLOBAL REGULATORY AUTHORITY ................................ 21

1. Global regulatory authority by adjudication ............................................................ 21 2. The Troika bailout in Greece .................................................................................... 23

IV. Two possible prisms to approach SDR as a global governance phenomenon ......... 26 A. GLOBAL ADMINISTRATIVE LAW ................................................................................... 26

B. INTERNATIONAL PUBLIC AUTHORITY ............................................................................ 27 V. Are the current initiatives addressing SDR conceiving a global governance

approach? ......................................................................................................................... 30 A. THE UNCTAD PRINCIPLES ON RESPONSIBLE SOVEREIGN LENDING AND BORROWING ...................................................................................................................... 30 B. TOWARDS A MULTILATERAL LEGAL FRAMEWORK FOR SOVEREIGN DEBT RESTRUCTURING PROCESSES .............................................................................................. 32

V. Conclusions ...................................................................................................................... 34

References ............................................................................................................................. 36 * LL.B Candidate (Fall 2015) at Universidad de los Andes (Bogotá, Colombia); Lawyer at Cárdenas y Cárdenas Abogados; Researcher at the Global Justice Clinic; Alumni Centre for Transnational Legal Studies (Georgetown Law, London UK); Alumni International Arbitration Academy of Law (Paris, France); Alumni Program on International Organizations, Law and Diplomacy (Washington College of Law, Washington D.C.), e-mail: ln.galindo28@uniandes.edu.co. I would like to thank my thesis advisor, Pr. Rene Urueña for sharing with me his expertise, all his valuable insights and for all the encouragement extended to me.

I. Introduction

The recent debt distresses of Greece, Argentina and Ukraine, amongst other countries

have reinvigorated the debate over whether to bail out defaulting countries or, instead,

restructure their debt. To date, there are no international rules dealing with Sovereign

Debt Restructuring (hereinafter "SDR").

In light of this legal vacuum, this paper discusses how SDR has been traditionally

approached,1 and later contests this traditional approach by illustrating its drawbacks,

suggesting later a new approach, which understands SDR as a global governance

phenomenon. The argument, in a nutshell is that SDR needs to be framed as a global

governance phenomenon in order to add a public law perspective to the current debate

on its potential regulation. 2 While this paper does not suggest a specific SDR

mechanism, it seeks to give a timely contribution to the current legal discussion

surrounding SDR, particularly at a moment where creating a legal framework for a debt

workout mechanism is on the current agenda.

Is the traditional approach to SDR ignoring issues of fundamental importance such as

human rights? Has the traditional understanding of SDR been limited in its scope?

Should a comprehensive approach towards SDR better encompass the public law

concerns around it? Is there an urgent need to regulate SDR from an international

economic law perspective? Why have previous proposals to reform SDR failed? Are the

current initiatives attempting to regulate SDR conceiving a global governance

approach? Are there actors exercising international public authority with respect to

SRD? This paper attempts to address these concerns by arguing there is a need to

reframe the current legal debate around SDR and by presenting two means of resolving

this global governance phenomenon.

1 For the purposes of this paper, the term ‘restructuring’ is used as comprising not only the act by which the parties actually reschedule or reduce the debt of the troubled state, but the entire bundle of measures comprised in a sovereign debt workout, including conditionalities and adjustment measures in the context of lending into arrears. In other words, sovereign debt restructuring (SDR) is one of several measures available to address the issue of uncontrollable levels of sovereign debt. As its name suggests, SDR refers to various techniques for changing the debt’s original payment terms so that the net present value of the debt is reduced or otherwise becomes more manageable, see: Waibel, Michael. "Opening Pandora’s Box: Sovereign Bonds in International Arbitration". 101 Am. J. Int’l L. 711, 712 (2007). 2 While SDR involves complex processes and approaches, this paper will examine only those aspects of SDR that may be more relevant for the purpose of a global governance understanding.

2 After this introduction, this paper is structured as follows. Section 2 examines the

traditional approach to SDR, both done by past scholarship and other public policy

makers; it will later describe the current procedures governing SDR processes and

proposals suggested in the past for reforming it. It will then discuss why these proposals

have not been effective in addressing comprehensively the complexities involved in

SDR. Section 3 criticizes the way in which SDR has been approached by offering a new

approach, which implies an assessment of SDR as a global governance phenomenon. It

will demonstrate why the traditional approach appears insufficient to comprehend the

specific characteristics and implications of SDR and the challenges it faces. After

identifying SDR as a global governance phenomenon, section 4 prescribes two possible

contexts under which to address this issue, by using two legal traditions of public law,

namely the Global Administrative Law approach as well as the International Public

Authority one. Moreover, section 5 enquires whether the current initiatives, such as the

UNCTAD Principles of Responsible Sovereign Lending and Borrowing as well as the

recent Multilateral Framework for Sovereign Debt Restructuring, currently undertaken

by the United Nations General Assembly, provide useful global governance avenues for

addressing the challenges presented by SDR. Finally, this paper provides some

conclusions and suggestions for further consideration and continuous research in this

particular field.

II. Traditional approach to Sovereign Debt Restructuring:

While there is no universally accepted definition for sovereign debt restructuring, it has

been traditionally defined as a process (or processes) by which a sovereign debtor, faced

with such a serious debt crisis that it can no longer meet its debt repayment schedule as

originally agreed, reaches an agreement with its creditors to amend and restructure the

debt's original terms and conditions so that, for example, the amount of debts is either

reduced and/or rescheduled.3

This traditional approach to SDR has been characterised by a private law paradigm, that

is, it has been deeply embedded on the assumption that debt restructuring is a matter of

private law agreements governed by horizontal relationships between a sovereign debtor 3 Waibel, Michael. "Opening Pandora’s Box: Sovereign Bonds in International Arbitration", 101 Am. J. Int’l L. 711, 712 (2007).

3 and each of its creditors. In other words, SDR has mainly been understood to be an

issue based on the contracts,4 where in case of default, a State finds itself in the

impossibility of reimbursing the interest and the principal on its debt, the only available

path stems from the contractual instrument linking the creditor and the debtor (either a

loan or a bond).

Moreover, whilst in the past sovereign debtors enjoyed a wider protection in both

immunity from jurisdiction and immunity from enforcement, the current scenario is

very different.5 Forum selection clauses inserted in these contractual instruments have

opened the doors for creditors (of jurisdictions different from those of the issuing State)

to sue sovereign debtors before foreign domestic courts. 6 In other words, when

sovereign debtors insert waivers into bonds, the latter translates into limiting its

sovereign immunity from jurisdiction.

In sum, the main consequence is that the negotiation of a rescheduling of sovereign debt

or a standstill has mostly depended upon the bargaining powers of the parties, since

otherwise legally the matter is left to free contract.7 Hence, this traditional approach can

be summarized as being mainly oriented by private law.

This section first analyses the above-mentioned private law approach to SDR, by

describing the current mechanisms that have dealt with the restructuring of sovereign

debt and second, by inquiring about the proposals suggested in the past for reforming

SDR.

The current SDR processes involve national governments and several governmental

groupings, multilateral institutions and private sector representatives; however all these

actors interact in different forums. They intervene mostly in informal forums and rely 4 In fact, the last suggestion put forward by the IMF can be characterized by being solely based on the contractual nature of sovereign debt. See: IMF, "Strengthening The Contractual Framework To Address Collective Action Problems In Sovereign Debt Restructuring" (2014), available at: http://www.imf.org/external/np/pp/eng/2014/090214.pdf 5 Yang, Xiaodong. STATE IMMUNITY IN INTERNATIONAL LAW. Cambridge University Press: Cambridge, 2012, p. 12. 6 The evolution of the absolute sovereign immunity theory has become much more apparent, limiting then the jurisdictional protection traditionally awarded to sovereigns before domestic courts of other States. Generally, for the case of bonds (mostly), these forum selection clauses designate the courts of the traditional financials centres, namely: London or New York. 7 Wood, P. ‘How the Greek Debt Reorganisation of 2012 Changed the Rules of Sovereign Bankrupty’, Allen & Overy, Global Law Intelligence Unit (2012), available at http://www.allenovery.com/intelligenceunit

4 on general principles, which are applied on a case-by-case basis. In the view of several

observers, "their outcomes strongly depend on the bargaining power of the parties

involved".8 Before describing the current procedures, it may be helpful to have an

overview of the Sovereign Debt Restructuring procedures by type of creditor.

A. CURRENT AD-HOC MECHANISMS: THE PARIS CLUB AND THE LONDON CLUB

Currently, when the world’s major sovereign creditors seek to address the difficulties

that individual sovereign debtors have in meeting their debt-servicing obligations to

them, they usually work through the Paris Club. The Paris Club is an informal forum,9

serviced by the French Treasury, where the major sovereign creditors agree to take a

common approach to restructuring the repayment schedules on each of the individual

loans owed to each of the member States’ government agencies or offices, or sometimes

they agree to reduce the amount of outstanding debt itself.10

8 See: Fritz, Thomas and Philipp Hersel. “Fair and Transparent Arbitration Processes: A New Road to Resolve Debt Crises.” FDCL-Verlag, (2002), available at: http://probeinternational.org/library/wp-content/uploads/2011/02/FTAP_english.pdf

9 Although many scholars acknowledge it as an "official" SDR mechanism. 10 See: Cosio-Pascal, Enrique "The emerging of a multilateral forum for debt restructuring: the Paris Club". No. 192. United Nations Conference on Trade and Development (2008), available at: http://unctad.org/en/docs/osgdp20087_en.pdf. “The process of debt restructuring with the Paris Club can be summarized as follows: A country that wants to restructure its debt has to approach the Club’s secretariat and demonstrate its payment difficulties and need for debt relief based on its economic and financial situation. Debtor countries are also required to agree to a structural adjustment program with the IMF. Once a country satisfies these criteria, it meets and negotiates with a group of its creditors at the Paris Club so as to come to an agreement on broad restructuring terms. This final agreement (the “agreed minutes”) is not legally binding, but establishes the minimum debt relief conditions that will guide the bilateral negotiations required for the bilateral agreements to become

Source: International Monetary Fund WP/12/203.

5

On the other hand, the process of debt renegotiations between sovereign debtors and

private creditors (mostly composed of commercial banks) is typically categorised as the

“London Club” restructuring.11 The core element of the London Club process is the

Bank Advisory Committee (BAC), or Creditor Committee,12 its key aim was to

overcome coordination problems amongst hundreds of individual banks and to bundle

restructuring expertise in the hands of large banks and their legal and financial

advisors.13

However, these ad hoc mechanisms have certain drawbacks. These “non-institutions”14

are very limited in their scope to address SDR comprehensively because: not only is the

Paris Club a forum limited for sovereign creditors, but also not all sovereign creditors

effective” see: Grigorian, David A. and Raei Faezeh, “Government Involvement in Corporate Debt Restructuring: Case Studies from the Great Recession, ” IMF Working Paper 10/260 (2010), 15. 11 Despite its name, the London Club is neither a statutory institution based in London nor a well-organized club, see: Rieffel, Lex. RESTRUCTURING SOVEREIGN DEBT: THE CASE FOR AD HOC MACHINERY, 108 (2003). 12 The BAC is a group of 5–20 representative banks which negotiate on behalf of all banks affected by the restructuring. 13 “London Club negotiations tend to proceed as follows: In the early stage of financial distress, a debtor government contacts its one or two major bank creditors asking them to organize and chair a steering committee. During the 1970s and 1980s, it was easy for the government to identify their major creditors, as most lending took place via syndicated loans and there was barely any trading on secondary markets. Also, banks were well informed about who held the debt, so that communication was easier than in today’s more dispersed bond markets.” (Ibid, 17) 14 During the 50th Anniversary of the Paris Club, Agustín Carstens, Deputy Managing Director of the IMF, highlighted the role of the Paris Club: “As an informal group of financial officials, the Club is a remarkable "non-institution" institution that has demonstrated time and time again its flexibility in being able to respond to needs in an evolving world.” See: IMF “The Paris Club, the IMF and Debt Sustainability” (2006), available at: https://www.imf.org/external/np/speeches/2006/061406.htm. See also: A former Secretary of the Paris Club, Mr. De Fontaine Vive, has referred to such entities as “non-institutions.” Ann Pettifor, Just as in Kosovo, available at: http://www.henciclopedia.org.uy/autores/AnnPettifor/JustKososvo.htm

Source: IMF and Paris Club website.

6 are members of the Paris Club (virtually the same occurs in the case of the London

Club). 15 These mechanisms exclude consideration of debts owed to multilateral

institutions, to other commercial banks and to other private creditors.

Moreover, sovereign debtors have manifested genuine concern about the effectiveness

and (to some extent) the bias of the Paris Club; the heavy cost in terms of the time

consumed in individual negotiations with many creditors and the fact that creditors can

also apply pressure in bilateral rescheduling.16 Nevertheless, the Paris Club serves as the

only "specialised" international forum for debt restructuring of sovereigns in debt

crisis.17

B. DEBATE OVER CONTRACTUAL V. STATUTORY APPROACHES

The traditional legal literature on SDR has mainly been focused on the duality:

contractual or statutory approach to SDR. Under the former, sovereign debtors and their

creditors attempt to consensually negotiate a debt restructuring, aided by collective-

action clauses, pari passu clauses and by exchange offers with exit consents. Under a

statutory approach, sovereign debtors and their creditors would be bound by a legal

framework that sets forth a process to facilitate debt restructuring.18

This section first describes of what the contractual approaches consists and later it will

describe the proposed legal frameworks which have been put forward to regulate SDR.

Finally this section concludes by illustrating both the drawbacks of the current

contractual approaches and the failure of the statutory proposals.

1. Contractual approaches

15 However here it is not limited at the bilateral level, as is the case for the Paris Club. 16 See: Herman, Barry, José Antonio Ocampo and Shari Spiegel, eds. OVERCOMING DEVELOPING COUNTRY DEBT CRISES. Oxford University Press, Chapter 9 (2010). 17See: Cosio-Pascal, Enrique "The emerging of a multilateral forum for debt restructuring: the Paris Club". No. 192. UNCTAD (2008), available at: http://unctad.org/en/docs/osgdp20087_en.pdf. 18 See: Schwarcz, Steven L., "Sovereign Debt Restructuring Options: An Analytical Comparison". Harvard Business Law Review, Vol. 2, (2012). Available at SSRN: http://ssrn.com/abstract=1872552

7 Since the 1980s, the composition of privately held sovereign debt has shifted from

syndicated bank loans to bondholders.19 Issuing bonds has become a more attractive and

widely utilised option for developing countries wishing to raise funds.20 This shift

linked States and individuals, corporations or funds to purchase bonds on the primary or

on the secondary markets.

One of the most challenging obstacles in the SDR process is obtaining creditors’

consensus. Typically, a sovereign debt instrument involves multiple creditors that have

diverse interests and expectations about the economic future of the sovereign debtor. In

consequence it raises the question of what would happen if creditors fail to reach a

consensus about the proposed SDR agreement to amend and restructure the debt’s

original terms and conditions. Is a majority’s consent sufficient to bind a minority group

of creditors to the proposed agreement?21

Holdout litigation problem

This problem often leads to what is called the “holdout litigation problem”.22 The term

refers to a situation in which, notwithstanding the majority’s consent, a minority group

refuses to accept the proposed agreement and instead chooses to litigate for full

repayment.23 If such minority group succeeds in their holdout litigation and obtains full

19 See: Bolton, Patrick and Jeanne, Olivier. “Structuring and Restructuring Sovereign Debt: The Role of a Bankruptcy Regime” IMF, Working Paper No. 07/ 192 (2007). 20 "This shift was accelerated in 1989 with the creation of Brady Bonds, which are tradable bonds that were issued in exchange for outstanding loans. While Brady Bonds have not been issued in recent years, many of the innovations of Brady Bonds found their way into modern bond offerings. According to Standard & Poor’s sovereigns ratings list, several countries have their bonds considered as “junk bonds,” i.e., bonds that have a high default risk: Albania, Angola, Argentina, Azerbaijan, Bangladesh, Belarus, Belize, Benin, Bolivia, Bosnia and Herzegovina, Burkina Faso, Cambodia, Cameroon, Cape Verde, Cook Islands, Costa Rica, Dominican Republic, Ecuador, Egypt, El Salvador, Fiji, Gabon, Georgia, Ghana, Grenada, Guatemala, Honduras, Indonesia, Jamaica, Jordan, Kenya, Latvia, Lebanon, Macedonia, Mongolia, Montenegro, Mozambique, Nigeria, Pakistan, Papua New Guinea, Paraguay, Philippines, Romania, Senegal, Serbia, Sri Lanka, Suriname, Uganda, Ukraine, Uruguay, Venezuela, Vietnam and Zambia. See: Standard & Poor’s, “Sovereigns Ratings List”, available at: http://www.standardandpoors.com/ratings/sovereigns/ratings-list/en/us?sectorName=Governments&subSectorCode=39 21 Jung, Youngjin and Daniel Han, Sangwook. “Sovereign Debt Restructuring under the Investor-State Dispute Regime”, 31 Journal of International Arbitration 1 (2014) pp. 75 - 96, 76. 22 Hays II, James M. “The Sovereign Debt Dilemma”, 75 BROOK. L. REV. 905, 917 (2010). 23 Ibid.

8 repayment, it would certainly undermine other creditors’ participation in the proposed

agreement and may threaten to undo the whole SDR scheme.24

There have been several holdout litigations in the past. A notable US case is National

Union Fire Insurance Co. of Pittsburgh v People's Republic of the Congo, where in

1989 a New York court granted summary judgment for the plaintiff, emphasizing that

participation in SDR is voluntary and foreign governments may not unilaterally impose

an arrangement on unwilling private creditors.25

More recently, in the case NML Ltd. v The Republic of Argentina, the US federal judge,

Thomas Griesa ruled that Argentina had to repay in full to the so-called “vulture funds”

that had bought its sovereign debt at ridiculous prices; later, the State was forced into

default.26 The facts speak for themselves: NML Capital, was a subsidiary of the hedge

fund Elliot Management, headed by Paul Singer, whom spent USD $48m on bonds in

2008; and after the Griesa ruling, NML Capital received approximately USD $832m (a

return of more than 1,600%).27 Ever since, a wide array of public condemnation

followed.

Collective Action Clauses (CACs) and pari passu clauses

In striving to resolve the “holdout litigation problem”, certain types of clauses have

been utilised, namely: Collective Action Clauses28 (hereinafter “CACs”) and pari passu

clauses. 29 With CACs a majority of creditors can force a minority of creditors

(presumably the “holdout” creditors) to accept a debt restructuring. Whereas, pari passu

24 Schwarcz, Steven L.“Idiot’s Guide” to Sovereign Debt Restructuring, 53 Emory L.J. 1189, 1193 (2004). 25 National Union Fire Insurance Co. v. The People’s Republic of the Congo, 729 F. Supp. 936, at 944 (SDNY 1989) , see also: A.I. Credit Corp. v. The Government of Jamaica, 666 F. Supp. 629 (SDNY 1987). 26 Or also named as "griesafault" by the social media, see: Clarin, "El Greisafault de la Argentina". Web. 23 March 2015, http://www.clarin.com/politica/Griesafault-Argentina_0_1189681085.html 27 The Guardian, "Argentina default? Griesafault is much more accurate", Web. 23 March 2015, http://www.theguardian.com/business/2014/aug/07/argentina-default-griesafault-more-accurate 28 The current system that the international community endorses is essentially contractual and relies on Collective Action Clauses (CACs). CACs are clauses in debt contracts that permit a “supermajority” of creditors (as opposed to unanimity) to amend terms of sovereign bonds in a debt-restructuring process. 29 Pari passu clauses guarantee “all creditors can be regarded equally and will be repaid at the same time and at the same fractional amount as all other creditors.”

9 clauses guarantee that: “all creditors can be regarded equally and will be repaid at the

same time and at the same fractional amount as all other creditors.”30

Mexico started in early 2003 by issuing a $1 billion bond containing CACs in New

York.31 Subsequently, other countries, such as South Korea, South Africa and Brazil,

also issued bonds with CACs in New York.32 More recently, CACs became mandatory

for the Euro area government bonds starting in January 2013.33

However, both clauses have proven to be controversial. On the one hand, CACs have

been ineffective in protecting sovereign debtors and their creditors for several reasons:

CACs constitute what some scholars call a “private market solution,” meaning these

clauses work only on an agreement-by-agreement basis.34 As a result, CACs tend to

make the legal framework obscurer for creditors, making it more costly for debtors and

creditors to negotiate debt-restructuring agreements. In fact, this is precisely what

happened to Argentina in 2001, when several individual investors and hedge funds who

bought the distressed debt at discounted prices (up to 95%) refused the restructuring

proposal and chose to claim higher prices for bonds or assets (up to the full face value),

including past due interests, despite the fact that 70% of bondholders had already agreed

to the proposal.35 On the other hand, in the case of Greece, CACs were not available

straight away, since 90% of the total debt in 2011 did not contain the CACs.36

Moreover, pari passu clauses have failed to address the problem and provide for

equality amongst creditors, mainly because courts and scholars have been unable to

30 Nguyen, Davy VH. “Too Big to Fail-Towards a Sovereign Bankruptcy Regime." Cornell Int'l LJ 45, 697, 714 (2013) 31 Ghosal, Sayantan and Kannika Thampanishvong. "Does strengthening Collective Action Clauses (CACs) help?" Journal of International Economics 89.1: 68-78 (2013). 32 Ibid. 33 European Council, Treaty Establishing the European Stability Mechanism, 2 February 2012, Web. <http://www.european-council.europa.eu>, art 13. 34 Hal S., Scott .“A Bankruptcy Procedure for Sovereign Debtors?”, 37 INT’L L. 103, 129 (2003). 35 Nguyen, Davy VH. “Too Big to Fail-Towards a Sovereign Bankruptcy Regime". 45 Cornell Int'l LJ 697 (2013), 713, fn. 146. See also: Hornbeck, J.F. "Argentina's Defaulted Sovereign Debt: Dealing with the "Houldouts", CSR Report for Congress, February 6, (2013). 36 Choi S.J., Gulati M. and Posner E.A. “Pricing Terms in Sovereign Debt Contracts: A Greek Case Stud with Implications for the European Crisis Resolution Mechanism.” Capital Markets Law Journal, Vol. 6 Issue 2, pp. 162-187 (2011).

10 come to a stable and consistent interpretation of such clauses.37 As critiqued by

Olivares, “The broad interpretation of the pari passu clause is a very delicate issue

because we are opening a Pandora’s box without knowing what might emerge (…)

cases such as: Elliott Associates LP v Peru; NML Ltd. v Republic of Argentina

illustrated the controversial interpretation of this clause within sovereign bonds.”38

Moreover, as suggested by Olivares, Gulati and Scott, “the clause has little or no

meaning in the sovereign debt context.”39

Furthermore, the existing institutions and mechanisms that have managed sovereign

debts have not solved the debt crises of developing countries in the 1980s,40 nor have

they prevented or solved the debt and financial crises of the last decade, including those

in Mexico, Southeast Asia, Brazil and Argentina,41 and as seen from the current events

occurring with the current European (Greek) debt crisis, the upcoming scenario does not

seem hopeful. 42 In spite of the widespread occurrence of sovereign default, 43 as

suggested by Von Bogdandy and Goldmann "an international bankruptcy court or an

37 “The interpretation of the pari passu clause in the pre-Argentine litigation was incorrect. It was based on the Belgian court’s interpretation of the pari passu clause in the broad sense.”Olivares-Caminal, Rodrigo “The pari passu clause in sovereign debt instruments: developments in recent litigation”, available in: http://www.bis.org/publ/bppdf/bispap72u.pdf. See also: Buchheit, Lee C. and Jeremiah S. Pam. "The Pari Passu Clause in Sovereign Debt Instruments." Emory LJ 53 869 (2004); Gelpern, Anna. "Building a Better Seating Chart for Sovereign Restructurings", 53 Emory L.J. 1119, 1139 (2004). 38 Ibid. 39 Olivares-Caminal, R. “To rank pari passu or not to rank pari passu: that is the question in sovereign bonds after the latest episode of the Argentine saga”, Law & Business Review of the Americas, vol 15, no 4. (2009); Olivares-Caminal, R. “Understanding the pari passu clause in sovereign debt instruments: a complex quest”, 43 The International Lawyer 3 (2009); see also: Gulati, M and R Scott. THE THREE AND A HALF MINUTE TRANSACTION: BOILERPLATE AND THE LIMITS OF CONTRACT DESIGN, Chicago University Press. (2012) 40 Sovereign debt restructurings have been a pervasive phenomenon, amounting to more than 600 cases in 95 countries. Of these, 186 debt exchanges were with private creditors (foreign banks and bondholders) while 447 agreements restructured bilateral debt with the Paris Club, see: Grigorian, David A. and Raei Faezeh, “Government Involvement in Corporate Debt Restructuring: Case Studies from the Great Recession, ” IMF Working Paper 10/260 (2010), 5. 41 For an interesting description of the reasons that led to the euro zone crisis, see Martin, Fernando M & Waller, Christopher J. “Sovereign Debt: A Modern Greek Tragedy” (2012) 94:5 Federal Reserve Bank of St. Louis Review 321. 42 See: Olivares-Caminal, R. “The EU architecture to avert a sovereign debt crisis”, OECD, available at: http://www.oecd.org/finance/financial-markets/49191980.pdf 43 "The beginning of the industrial age in the nineteenth century saw a virtual explosion in the number of sovereign defaults facilitated by increasingly developed financial markets." Carmen Reinhardt and Kenneth Rogoff have counted 83 defaults for that period on external debt alone, see: Reinhart, Carmen and K. Rogoff, THIS TIME IS DIFFERENT ,Princeton University Press, 91(2009).

11 international treaty specifying rules for sovereign defaults has not yet seen the light

of day".44

In sum, the current procedures already in place have failed to protect not only sovereign

debtors but also creditors (both public and private). In light of the above ambiguity, one

can conclude that the current private law approach to SDR does not appear to address

the complexity of the plurality of problems involved with SDR processes. In light of the

above, one might conclude that both ad-hoc mechanisms dealing with SDR, as well as

the contractual approaches to SDR (such as CACs and pari passu clauses) have not

satisfactorily addressed the complexities involved in SDR processes. In the following

subsection, the next section will describe the past proposals suggested to regulate SDR.

2. Statutory approaches

Since the 1970s, a debate has been going over whether the international financial

system should have a mechanism for addressing the restructuring of sovereign debt.45 A

considerable number of renowned scholars as well as other relevant public policy actors

have developed proposals for SDR mechanisms,46 however none of those proposals

44 Von Bogdandy, Armin and Goldmann, Matthias. "Sovereign Debt Restructurings as Exercises of International Public Authority: Towards a Decentralized Sovereign Insolvency Law." (2013) available at: http://ssrn.com/abstract=2089480. 45 “Twelve years ago, at the first International Conference on Financing for Development, held in Monterrey, our leaders expressed their commitment to working to create an international mechanism for renegotiating debt. A similar commitment was made at the second Conference, held in Doha in 2008. Furthermore, at the conclusion of the 2009 Conference on the World Financial and Economic Crisis, we reaffirmed the importance of exploring “enhanced approaches to the restructuring of sovereign debt” (resolution 63/303, para. 34). At that time, a committee of experts appointed by the President of the General Assembly at its sixty-third session made specific recommendations for establishing an international bankruptcy court. The Secretary-General’s reports on external debt, sustainability and development have also stressed for many years the importance of addressing this issue and have made recommendations on establishing a specific mechanism. The United Nations Conference on Trade and Development has also been considering the matter since the end of the 1970s.” G.A. Res A/68/107. See also: Rogoff, K. and J. Zettelmeyer, ‘Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976–2001’, IMF Staff Papers No. 49, 470 (2002). 46 K. Raffer, ‘Applying Chapter 9 Insolvency to International Debts: An Economically Efficient Solution with a Human Face’ (1990) 18 World Development 301–11, emphasizing the difference between Chapters 9 and 11 of the US Bankruptcy Code, the latter relating to companies which may be liquidated, the former to municipalities which may not; see: Sachs, J. “Do We Need an International Lender of Last Resort?”, Graham Lecture at Princeton University, 20 April 1995, available at 〈http://www.earth.columbia.edu/sitefiles/file/about/director/pubs/intllr.pdf〉 (accessed 14 December 2012), advocating private lending instead of the IMF with the IMF as arbiter; Buchheit, Lee and Gulati, G.M. "Sovereign Bonds and the Collective Will" 53 Emory L.J. 1317 (2003); Paulus, C. "A Statutory Procedure for Restructuring Debts of Sovereign States" (2003).

12 have proven successful in addressing SDR,47 as they have so far been rejected.48

Some suggested statutory proposals to regulate SDR are discussed below.

a) Sovereign Debt Restructuring Mechanism

In 2001, Anne Krueger First Deputy Director of the IMF put forward a Sovereign Debt

Restructuring Mechanism (hereinafter “SDRM”). 49 The SDRM proposal basically

consisted on the following: the mechanism would have allowed a sovereign and a

qualified majority of creditors to reach an agreement that would then be made binding

on all creditors that are subject to the restructuring; discouraged creditors from seeking

to enhance their position through litigation during the restructuring process; and might

have helped to induce priority financing for the distressed debtor; amongst other

features.50

Nonetheless, the SDRM proposal was postponed after strong opposition coming from

the financial markets and even some sovereign debtors.51 On the one hand, sovereign

debtors claimed that it would raise the cost of borrowing for them, 52 and on the other

hand, lenders opposed the introduction of SDRM on the basis that “it would erode their

rights as creditors, make defaults easier and more frequent, therefore drying up the

47 For the purposes of this work, a comprehensive approach will be that that involves the participation of both parties all creditors (private and public) and the debtor State. 48 Until now, States have been reluctant to give up power to supranational rules or institutions. 49 KRUEGER, ANNE. A NEW APPROACH TO SOVEREIGN DEBT RESTRUCTURING (Washington, DC: International Monetary Fund, (2002); “At its best, the SDRM would achieve “what the diplomats, gunboat captains, administrators and judges of the last two hundred years failed to achieve: an effective method by which the official sector could encourage orderly workouts of private sector claims without shouldering the full moral, political and financial responsibility for these workouts” in Buchheit, Lee “The role of the official sector in sovereign debt workouts”, Chicago Journal of International Law, 6, 342 (2005) 50 The problem that Krueger addressed was straightforward, see: Krueger, Anne, New Approaches to Sovereign Debt Restructuring: An Update on Our Thinking (2002), available at: http://www.imf.org/external/np/speeches/2002/040102.htm; “When any debtor nation develops economic difficulties, its creditors worry about being repaid, so they move as quickly as they can to protect their positions”, see also: Cooper, Richard N. “Chapter 11 for Countries?”, Foreign Affairs, July/August (2002). 51 Following concerns about the debt sustainability of some countries in the Eurozone in 2010, the idea of a permanent debt restructuring mechanism to replace the European Financial Stability Facility, which expired in 2013, gained ground. Eurozone governments also decided to include CACs in their sovereign bonds, see: WAIBEL, MICHAEL. SOVEREIGN DEFAULTS BEFORE INTERNATIONAL COURTS AND TRIBUNALS, Cambridge Press, 14-18 (2013). 52 “They believe that such a mechanism would be perceived by creditors as magnifying a moral hazard problem, according to which sovereigns would feel freer to take excessive risks and this, incorporated in the creditors’ valuation of the financial instruments, would lead them to expect higher rates of return”, see: Orzan andrea. “Sovereign Debt Restructuring Mechanism: Who opposes it and why?” (2004), available at: http://www.cilae.org/publicaciones/SDRM.pdf.

13 emerging-markets bond market”.53 Moreover, the role of the IMF as a non-binding

arbitrator of the sovereign debtor also brought criticism.54

Despite the criticism to the SDRM, it has been the first institutional approach to SDR

and the first initiative that attempted to address its particular complexities. Furthermore,

the fact that under certain conditions, a sovereign’s international debt repayments

should be temporarily suspended while negotiations take place on restructuring that debt

(stand-still) was a significant first step to tackle the problem. Moreover, the ability of

the majority to force decisions on a potentially dissenting minority, the rapid and

orderly resolution of restructuring processes and the consequent lesser fall in the bonds’

value would all benefit creditors. However, to what extent can this proposal be a good

or best solution? One cannot lose sight of the fact that a “lender” will be at the same

time a lender and an arbitrator; moreover, the role the IMF plays in evaluating a

sovereign’s level of unsustainable debt, cannot be underestimated.55

b) Bankruptcy model (US Chapter 11)

In light of the lack of a comprehensive legal framework regulating SDR, many scholars

have suggested that a bankruptcy regime should be created to fill the current

international legal vacuum,56 and others have even suggested that implementing features

53 Ibid. 54 Especially if one takes into account, that the IMF is also a lender. The NGOs CIDSE and Caritas Internationalis demand that the role of the IMF should be restricted to that of a lender acting as a consultant on behalf of all or some creditors, if so they wish. The IMF, they argue, cannot act in any "independent" role because of its creditor function, see: Caritas Internationalis and (CIDSE), “The Sovereign Debt Restructuring Mechanism (SDRM)”, available at: http://www.globalpolicy.org/component/content/article/210/44755.html. Moreover, a disturbing and fundamental issue for the SDRM’s success is its approval by governments around the world, whose vote is necessary in order to modify the IMF’s Articles of Agreement and make it statutory. (See: Orzan, ibid). 55 The level of debt sustainability is currently determined by the IMF; however, the IMF analysis has been the target of vigorous criticism for lack of transparency and political capture. See Torres, Hector R. “Reforming the International Monetary Fund-Why Its Legitimacy Is at Stake”, 10 J. Int'l Econ. L. 443, 447-50 (2007); Wyplosz, Charles. “Debt Sustainability Assessment: The IMF Approach and Alternatives”, 2-3, 12-14 (Graduate Inst. for Int'l Studies, Working Paper No. 03/2007, (2007), available at http:// repository.graduateinstitute.ch/record/11765/files/HEIWP03-2007.pdf. 56 Grigiene, Jurgita and Mockiene, Akvile. “Can a Sovereign State Declare Bankruptcy?” 3 BALTIC J. L. & POL. 125, 131 (2010).

14 of the U.S. bankruptcy framework would bring more certainty and order to the

current debt restructuring structure.57

Proponents of this approach have put forward that there are some characteristics within

domestic bankruptcy law,58 which might be extended to the international arena. Bolton

highlights that there are four components common to most bankruptcy reorganisation

institutions: i) a stay on debt collection efforts to prevent a costly run for the assets; ii)

broad enforcement of absolute priority; iii) majority voting amongst creditors on the

proposed reorganisation plan; and iv) new higher priority financing to keep the firm

going while its liabilities are restructured.59

The idea behind this proposal is that enforcing a bankruptcy regime will lead to a more

efficient and less costly debt-restructuring process.60 In essence, there are a lot of

similarities between this proposal and the SDRM mechanism.61 Nonetheless, the biggest

critic of this proposal is that domestic bankruptcy law serves as a useful model in the

insolvency context, but the applicability of the corporate model is limited and cannot

capture all the unique characteristics of a sovereign state.62

c) Fair and Transparent Arbitration Processes

Although this proposal is not formally part of the statutory approach to SDR, it merits

some discussion. Since more than a decade ago, Kunibert Raffer proposed the

adaptation of essential features of Chapter 9, Title 11 of the US Code, claiming how

Chapter 9’s core idea respects the foundation of the Rule of Law: impartial decision

57 Rasmussen (2004) analysis the similarities between large, publicly held corporations and states, founding that Chapter 11 becomes an attractive pool to troll for solutions to today's sovereign debt crisis; see also: Gelpern, Anna. “Building a Better Seating Chart for Sovereign Restructurings”, 53 EMORY L.J. 1119, 1159 (2004); Gelpern, Anna. “A Skeptic's Case for Sovereign Bankruptcy”, 50 Hous. L. Rev. 1095, 1122 (2013). 58 Particularly in U.S. Bankrupcy Law, Chapter 11. 59 Bolton, Patrick “Toward a Statutory Approach to Sovereign Debt Restructuring: Lessons from Corporate Bankruptcy Practice Around the World”, IMF Staff Papers, Vol. 50, Special Issue (2003), available at: http://policydialogue.org/files/publications/Approach_to_Sovereign_Debt_bolton.pdf 60 Bolton, Patrick and Jeanne, Olivier. “Structuring and Restructuring Sovereign Debt: The Role of a Bankruptcy Regime” 6 (IMF Working Paper No. 07/ 192, 2007) at 5. 61 In fact one could say that this proposal is at the core of other proposals such as the SDRM. 62 Rasmussen, Robert. “Integrating a theory of the state into sovereign debt restructuring”, 53 Emory L.J. 1159, 1162 (2004); see also: IMF, Proposals for a Sovereign Debt Restructuring Mechanism (SDRM) (2003), available at:http://www.imf.org/external/np/exr/facts/sdrm.htm

15 making.63 It was later termed as the Fair Transparent Arbitration Process (hereinafter

"FTAP") by NGOs. Basically, the proposal consisted of leaving the settlement of debt

disputes to an international arbitral tribunal. Social movements and intellectuals (and by

now even some official authorities) in the global North and South, have encouraged the

establishment of FTAPs processes.64 With participation of the affected governments and

especially civil society, they claim that this approach should resolve the current debt

overload of developing countries and prevent it in the future.65 One interesting feature is

that these types of proposals have come up as a reaction to the failure of the SDRM

proposal describe above.

The FTAP proposal suggests that: "an independent institution, such as an international

arbitration panel, must drive a truly comprehensive debt restructuring process."66

According to its advocates, this judgment would aim to bring down debts to sustainable

levels where analyses of sustainability take into account first and foremost the financing

of poverty reduction programmes.67 However, nowadays the creation of a special

judicial forum entrusted with the task of settling only sovereign debt disputes seems to

be very unlikely.68

In sum, the current traditional private law oriented approach addressing SRD prevents

us from seeing that SDR entails a system of global governance. As seen before, the

current ad-hoc mechanisms dealing with SDR are insufficient to address the

complexities and its impact on the other public spheres of this phenomenon. Moreover,

63 See: Raffer, K. Applying chapter 9 insolvency to international debts: an economically efficient solution with a human face.18 World Development 2, 301-311 (1990); Raffer, K. "Solving sovereign debt overhang by internationalising Chapter 9 procedures." Oiip-Österr. Inst. für Internat. Politik. (2001). 64 For example, the NGO “Caritas Internationalis, International Cooperation for Development and Solidarity (CIDSE)” has participated in this regard. 65 See: Fritz, Thomas and Philipp Hersel. “Fair and Transparent Arbitration Processes: A New Road to Resolve Debt Crises.” FDCL-Verlag, (2002), available at: http://probeinternational.org/library/wp-content/uploads/2011/02/FTAP_english.pdf 66 “This panel – whose members are chosen by the debtor and the creditors alike – would determine debt sustainability thresholds consistent with internationally agreed poverty reduction objectives such as the Millennium Development Goals.” Ibid. 67 Furthermore, the CIDSE/CI suggests that creditors and the sovereign debtor must agree on safeguards to redirect debt reduction savings to these programmes Global Policy Forum, “The Sovereign Debt Restructuring Mechanism” (2003), available at: http://www.globalpolicy.org/component/content/article/210/44755.html 68 Hanefeld, Pr. Inka suggests that: “a special sovereign debt tribunal is not likely to emerge any time soon,” see: “Is there a Need for a Sovereign Debt Tribunal?” (2012) available at: http://blogs.law.nyu.edu/transnational/2012/10/is-there-a-need-for-a-sovereign-debt-tribunal/

16 as seen from the above proposals, they have all departed from private law oriented

approaches in their attempt to regulate SRD. As a consequence, these proposals have

failed to understand SDR comprehensively, they have merely acknowledged a narrow

understanding of SDR and their recommendations usually ignore issues of global

governance as analysed below. The following section argues for the need to understand

and approach SDR as a global governance phenomenon in reaction to this traditional

approach that does not allow us to see that SDR entails a system of global governance.

III. SDR as a global governance phenomenon

To overcome the failures of the traditional approach as explained above, this section

argues that SDR must be approached as a global governance phenomenon to better

identify the public law aspects as well as the authoritative dynamics involved in it.69

The concept of global governance has the virtue of enlightening those issues that the

traditional approach to SDR often obscures or ignores, namely mechanisms, procedures,

rules and principles that have begun to emerge, or have been purposefully intertwined

into the fabric of a variety of bodies, both formal and informal, in the global

administrative space.70

Therefore, framing SDR in terms of global governance means a paradigm change in its

traditional understanding, in other words it helps us to identify the current challenges

that SDR faces, challenges which are otherwise not evident by solely observing SDR

though the aforementioned traditional private law lenses.

The current qualities characterizing SRD, evidence features of global regulatory

governance, particularly where several dynamics in SDR processes not only blur the

division between domestic and international law but also contest the traditional vision

69 James Rosenau argues that global governance “encompasses the activities of governments, but it also includes the many other channels through which ‘commands’ flow in the form of goals framed, directives issued and policies pursued,” where such exercises of control have transnational repercussions. See: Rosenau, James N. “Governance in the Twenty-first Century” (1995) 1 Global Governance 13 at 14; Shapiro, Martin “Administrative Law Unbounded: Reflections on Government and Governance” 8 Ind. J. Global Legal Stud. 369 (2001); Slaughter, Anne-Marie "A NEW WORLD ORDER" (Princeton: Princeton University Press, 2004) at 12; Aman, Jr., Alfred C. “The Limits of Globalization and the Future of Administrative Law: From Government to Governance” 8 Ind. J. Global Legal Stud. 379 (2001). 70 See: Kingsbury, Benedict “The Administrative Law Frontier in Global Governance” 99 American Society of International Law Proceedings 143 (2005); Kinney, Eleanor “The Emerging Field of International Administrative Law: Its Content and Potential” 54 Admin. L. Rev. 415 (2002) at 416-17.

17 of international law. A global governance approach is then revolutionary in the sense

that governance issues resulting from globalization are its core concern.71

Yet, recasting SDR as a global governance phenomenon generates more questions than

answers; this section strives to frame SDR as a public law oriented concern, thus

introducing a vision that competes with the traditional approach outlined above,

presenting SDR instead as a phenomenon that implies broader challenges such as

legitimacy, transparency, accountability, as well as many other public law concerns.

In the case of SDR, both domestic and international actors, both formal and informal

bodies and both private and public actors, come together in participating and being

affected by SDR processes. We are currently facing a scenario: where domestic courts

as well as arbitration tribunals are asserting stronger power of review over SDR

processes; where millions of individuals are being affected due to austerity measures

inflicted upon them; where SDR processes have been disorderly handled; where holdout

creditors have undermined major restructuring processes undertaken previously by

sovereign debtors; and in general, where SDR has not yet been adequately regulated.

This state of affairs raises public law concerns which otherwise would remain unseen by

adopting solely the traditional approach indicated above.

To illustrate why SDR must be considered as a global governance phenomenon, this

sub-section describes some examples of how SDR has an impact on other public

spheres, of why SDR is a fragmented phenomenon and of how some actors are

increasingly exercising regulatory power with respect to SDR, with the aim of

evidencing that SDR implies an exercise of global governance.

A. SDR HAS AN IMPACT ON PUBLIC SPHERES

Since rules on how to handle sovereign defaults are unclear, SDR does not solely affect

a particular sovereign debtor or its creditors, but ultimately it affects other public

spheres. Sovereign debtors with unsustainable debt burdens and the with threat of an

imminent default, face substantial difficulties that hamper not only the achievement of

debt sustainability goals but in the short and the long run hinder their economic 71 See Calliess, Gralf-Peter and Renner, Moritz. “Between Law and Social Norms: The evolution of Global Governance”, 22 Ratio Juris 260 (2009).

18 growth.72 In fact, not only the citizens of the defaulting State may face the problem

of a substantial decline in their standard of living,73 but the State itself will lose access

to trade credit facilities,74 it will undergo a decline in foreign trade75 and it will in

general experience an economic growth delay, especially in the case of developing

countries.76

Recently, Bohoslavsky and others have made an important contribution to the debate

surrounding sovereign financing. The contributors of the book “MAKING SOVEREIGN

FINANCING AND HUMAN RIGHTS WORK” integrate and pose a great methodological

challenge to both sovereign debt and human rights legal theory, by explaining how

72 Despite the debate on the causation of debt and economic growth, this paper will rely the empirical studies that are found in the literature where there is a consensus on the negative relationship between unsustainable levels of debt. See: Reinhart, C. and Rogoff, K. “Growth in a Time of Debt”, American Economic Review Papers and Proceedings, 100(2) (2010), 573–8; Elbadawi et al. used cross-sectional data for ninety-nine countries to investigate the relationship between external debt and economic growth. The authors arrived the view that current debt inflows as a ratio of GDP have influenced economic development unfavourably, see: Elbadawi, A. I.,Ndulu, J. B. and Ndung’u, N. (1996). “Debt Overhang and Economic Growth in Sub-Saharan Africa.” Paper presented at the IMF/World Bank Conference on External Financing for Low-income Countries, December. Washington, DC: IMF/World Bank; Pattillo et al offer and ample economic overview on the causation of debt and decline in economic growth: “Why do large levels of accumulated debt lead to lower growth? The best-known explanation comes from "debt overhang" theories, which show that if there is some likelihood that, in the future, debt will be larger than the State’s repayment ability, expected debt-service costs will discourage further domestic and foreign investment and thus harm growth. Potential investors will fear that the more a country produces, the more it will be "taxed" by creditors to service the external debt and thus they will be less willing to incur costs today for the sake of increased output in the future. This argument is represented in the debt "Laffer curve", which posits that larger debt stocks tend to be associated with lower probabilities of debt repayment. On the upward-sloping or "good" section of the curve, increases in the face value of debt are associated with increases in expected debt repayment, while increases in debt reduce expected debt repayment on the downward-sloping or "bad" section of the curve, see also: Pattillo, Catherine A., Helene Poirson and Luca Antonio Ricci. “External debt and growth”. No. 2002-2069. International Monetary Fund, 2002. 73 Rasmussen, Robert “Integrating a theory of the state into sovereign debt restructuring”, 53 Emory L.J. 1159 2004, at 1159. 74 Martinez, Jose Vicente and Guido Sandleris, “Is it Punishment? Sovereign Defaults and the Decline in Trade,” 30 J. Int’l Money And Fin. 909, 915–20 (2011). 75 See: Rose andrew K. "One Reason Countries Pay Their Debts: Renegotiation and International Trade”, 77 Journal of Development Economics, 189-206, (2005). 76 Poor countries are vulnerable to a poverty trap, which can be caused or exacerbated by an excessive foreign debt burden, See: Sachs, Jeffrey "Resolving the debt crisis of low-income countries.", Brookings Papers on Economic Activity, 257-286.(2002); GA Res. 66/189 (2012), External debt sustainability and development; GA Res. 55/2 (2000), United Nations Millennium Declaration ¶¶15, 16, 28; Goldmann, Matthias. “Responsible Sovereign Lending and Borrowing: the View From Domestic Jurisdictions”, Max Planck Inst. for Comp.Pub.Law and Int.Law, at 38-39 (2012); UNCTAD, “Principles on Responsible Sovereign Lending and Borrowing” (2012) Principle 7, 9; UNCTAD, Cosio-Pascal, Enrique. “The Emerging of a Multilateral Forum for Debt Restructuring: The Paris Club (2008),” UNCTAD/OSG/DP/2008/7, at 11; Panizza, Sturzenegger, Zettelmeyer, “International Government Debt”, UNCTAD (2010), UNCTAD/OSG/DP/2010/3, at 12; Buchheit, Lee; Gulati, Mitu. “Responsible Sovereign Lending and Borrowing”, 73 Law & Contemp. Probs. 63, 79 (2010); Reinisch, August Debt Restructuring And State Responsibility Issues, in THE EXTERNAL DEBT, 549 (D. Carreau, M.Shaw eds, 1995).

19 private, official and multilateral loans and financial aid can affect human rights.77

They suggest that despite the growing focus on sovereign debt due to the recent crisis in

Europe, there has been little examination of the impact of sovereign debt crises on

enjoyment of human rights.

As suggested in this book, "sovereign debt has deep intergenerational and global

redistributive implications, which lead us to the problem of global distribution of

political authority and economic growth".78 Moreover, Bohoslavsky and Letnar Cêrnič

suggest that "(…) it is pertinent to consolidate the change of the paradigm of traditional

international law, which is created by states for state and non-state actors and take a

thorny road of creating international law also through legal sources more receptive to

a broad range of stakeholders’ views and interests, including, centrally, those of the

citizens."79

Hence, these new linkages suggested by the recent legal literature reinforce the idea that

SDR has not been comprehensively approached. There are several other areas and

subjects impacted (either directly or indirectly) by SDR processes and present new

challenges, such a legitimacy in decision making, participation, transparency,

accountability, amongst other public law concerns.

B. SDR IS A FRAGMENTED PHENOMENON

As suggested in previous sections, in contrast to other international economic law

regimes such as international trade (or arguably investor-state arbitration), currently

there is no legally established procedure for restructuring the debt of defaulting states,80

77 They sought to demostrate the causal link between sovereign financing and human rights by using a macro or a micro approach, once this causal link is identified, they explain why the existing gap should be filled, see Bohoslavsky, Juan P and Cernic, Jernej "MAKING SOVEREIGN FINANCING AND HUMAN RIGHTS WORK", Hart (2014). 78 Bohoslavsky, Juan Pablo and Letnar Cêrnič, Jernej. "Placing Human Rights at the Centre of Sovereign Financing, in " MAKING SOVEREIGN FINANCING AND HUMAN RIGHTS WORK" (ed. Bohoslavsky, Juan Pablo and Letnar Cêrnič, Jernej), Bloomsbury Publishing ( 2014), p. 6. 79 Bohoslavsky, Juan Pablo and Letnar Cêrnič, Jernej. "Placing Human Rights at the Centre of Sovereign Financing, in " MAKING SOVEREIGN FINANCING AND HUMAN RIGHTS WORK" (ed. Bohoslavsky, Juan Pablo and Letnar Cêrnič, Jernej), Bloomsbury Publishing ( 2014), p. 7. 80 “While there is no universally accepted definition, a sovereign debt restructuring can be defined as an exchange of outstanding sovereign debt instruments, such as loans or bonds, for new debt instruments or cash through a legal process. Sovereign debt, here, refers to debt issued or guaranteed by the government of a sovereign state.” see: Grigorian, David A. and Raei Faezeh,"Government Involvement in Corporate Debt Restructuring: Case Studies from the Great Recession," IMF Working Paper 10/260 (2010); Buchheit, Lee C; Gelpern, Anna; Gulati, Mitu;

20 whether we resort to treaties, customary law, or case law.81 Instead what we have is a

fragmented international financial architecture unable to understand and address the

complexities surrounding SDR.82 The increasing variety of debt instruments involved,

the plurality of actors involved and the range of legal jurisdictions in which debt is

issued, continuously increases the complexities around this phenomenon.

As seen above, sovereign borrowers and their lenders have taken recourse to ad-hoc,

non-binding and individual arrangements.83 The consequences of this poor global

coordination based on insufficient, informal and fragmented rules have been devastating

in some instances.84 As pointed out by Von Bogdandy and Goldmann "the current ad

hoc solutions facilitated by the Paris/London Club, International Financial Institutions

(IFIs), the G20 and other forums might not always represent the best balance between

the interests of lenders and borrowers, between private and public creditors, or simply

put, between the global North and South."85

Consequently, the lack of clear boundaries in terms of behaviour, as well as inadequate

expectations regarding the behaviour of lenders and borrowers, "has subjected

sovereign debt-financing to the short-term conveniences of decision makers and agents

at the expense of the medium to long term economic and social interests of governments

and citizens,86 up to and including default."87 The latter presents concerns with respect

Brunnermeier, Markus; Eichengreen, Barry; El-Erian, Mohamed; De Gregorio, José; Panizza, Ugo; Weder di Mauro, Beatrice; Zettelmeyer, Jeromin. “Revisiting Sovereign Bankruptcy”. Committee on International Economic Policy and Reform. Report. Brookings Institution, October 2013; Nguyen, Davy VH. "Too Big to Fail-Towards a Sovereign Bankruptcy Regime" 45 Cornell Int'l LJ (2013): 697. 81 Fritz, Thomas and Philipp Hersel. “Fair and Transparent Arbitration Processes: A New Road to Resolve Debt Crises.” FDCL-Verlag, (2002) available at: http://probeinternational.org/library/wp-content/uploads/2011/02/FTAP_english.pdf 82 Gelpern, Anna. “A Skeptic's Case for Sovereign Bankruptcy” 50 Hous. L. Rev. 1095, 1122 (2013). 83 Ibid. 84 Li, Yuefen, Olivares-Caminal, R and U. Panizza, “Avoiding Avoidable Debt Crises: Lessons from Recent Defaults” in C. Primo Braga and G. Vincelette (eds), SOVEREIGN DEBT AND THE FINANCIAL Crisis (The World Bank, 2011) 243. 85 See: Espósito, Carlos, Yuefen Li and Juan Pablo Bohoslavsky, “Sovereign Debt Restructurings as Exercises of International Public Authority, Towards a Decentralized Sovereign Insolvency Law” in SOVEREIGN FINANCING AND INTERNATIONAL LAW: THE UNCTAD PRINCIPLES ON RESPONSIBLE SOVEREIGN LENDING AND BORROWING, Oxford University Press (2013). 86 “Moreover, the lack of a compulsory restructuring mechanism has caused collective action problems among creditors and allowed debtor states unwilling to undergo macroeconomic adjustments to delay restructuring.” see: ibid; Trebesch, C. “Delays in Sovereign Debt Restructurings. Should we really blame the creditors?”, 44 Proceedings of the German Development Economics Conference, Zurich (2008), available at: http:/ hdl.handle.net/10419/39906.

21 to the predictability of SDR processes, as well as of the bargaining power of

sovereign debtors undergoing SDR processes.

C. SDR IMPLIES AN EXERCISE OF GLOBAL REGULATORY AUTHORITY

Moreover, several actors are increasingly deciding and/or intervening either unilaterally

or collectively in SDR processes. This subsection identifies some cases where certain

global regulatory authority88 has been exercised either via adjudication or through the

imposition of harsh austerity measures on sovereign debtors, leaving the latter with little

room for manoeuvre to handle their financial demands.

1. Global regulatory authority by adjudication

Courts and tribunals at the national, regional and international levels have been

important agents in interpreting and applying legal norms, which ultimately have

moulded SDR processes. As already illustrated above, domestic courts have upheld

holdout behaviour.89 This section focuses on other types of adjudication, namely the

adjudication resulting from investment arbitration tribunals.

Benedict Kingsbury and Stephan Schill have stated that investor-State arbitration is a

form of international public law.90 That is, that investor-state arbitration is better

analogized with judicial review of governmental conduct under administrative law at

the domestic level or international judicial review.91

The dramatic rise of the investor-state dispute regime has arguably significantly

changed the dynamics of SDR, as it is increasingly becoming a relevant player in this 87 See: Espósito Carlos; Yuefen Li and Juan Pablo Bohoslavsky. “Introduction, The search for common principles.” in SOVEREIGN FINANCING AND INTERNATIONAL LAW: THE UNCTAD PRINCIPLES ON RESPONSIBLE SOVEREIGN LENDING AND BORROWING, Oxford University Press (2013). 88 I use the term global regulatory authority based on the same concept of International public authority as suggested by von Bogdandy and Goldmann, as analysed below. 89 See: Allied Bank International v. Banco Credito Agricola de Cartago, 757 F.2d 516 (2d Cir. 1985); Elliott Associates v. Banco de la Nacion, 194 F.3d 363 (2d Cir. 1999); as well as the NML case mentioned above. 90 See: Kingsbury, Benedict and Stephan W. Schill. "Investor-state arbitration as governance: fair and equitable treatment, proportionality and the emerging global administrative law." NYU School of Law, Public Law Research Paper 09-46 (2009). 91 Likewise, investment arbitration has been classified by Van Harten, G and Martin Loughlin as a "comprehensive form of administrative law", see: Van Harten, G and M Loughlin, “Investment Treaty Arbitration as a Species of Global Administrative Law” 17 European Journal of International Law 121(2006).

22 regard. 92 While some scholars enthusiastically object the role played by the

International Centre for Settlement of Investment Disputes (“the ICSID”), 93 the fact is

that they have exercised certain global regulatory authority when considering sovereign

debt as an investment and therefore have had a say on SDR processes.

In Abaclat (and others) v. The Argentine Republic, the arbitral tribunal at ICSID set a

new precedent for the investor-state arbitration world. The Tribunal held that it had

jurisdiction94 to hear claims brought by some 60,000 Italian bondholders against the

Republic of Argentina following Argentina’s default and later partial restructuring of its

sovereign debt. 95 The Abaclat Claimants’ basic substantive argument was that

Argentina’s sovereign debt restructuring amounted to expropriation and therefore

violated the fair and equitable treatment standard established under the Argentina-Italy

BIT in 1990.96 The tribunal finally came to the conclusion that in respect to the

protective purpose of the BIT and in light of the wording of Art. 1, the Argentine

sovereign bonds were a form of investment covered by the BIT.97 In contrast, in 2015 in

92 Ibid. “Rather, one can possibly expect that the number of sovereign debt cases brought before tribunals under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) will increase given the recent developments, for example, in Greece.”See also: Abaclat and Others (Case formerly known as Giovanna A Beccara and Others) (Claimants) v. the Argentine Republic (Respondent), Decision on Jurisdiction and Admissibility, ICSID Case No. ARB/07/5, 4 August 2011; Fedax N.V. (Claimant) v. The Republic of Venezuela (Respondent), Case No. ARB/96/3, Decision of the Tribunal on Objections to Jurisdiction, 11 July 1997; Ceskoslovenska Obchodni Banka, A.S. (Claimant) versus The Slovak Republic (Respondent), Case No. ARB/97/4, Decision of the Tribunal on Objections to Jurisdiction, 24 May 1999; Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco (ICSID Case No. ARB/00/4), Decision on Jurisdiction of 23 July 2001. 93 As Michael Waibel has suggested: "ICSID tribunals – in addition to lacking jurisdiction – are unable to effectively deal with sovereign debt crises" in: Waibel, Michael. SOVEREIGN DEFAULTS BEFORE INTERNATIONAL COURTS AND TRIBUNALS, 316 (2013). 94 Although, there was a strong dissenting opinion by Georges Abi-Saab against collective proceedings. Abi-Saab resorted to the US Supreme Court’s decisions in Stolt-Nielson S.A. v. Animal Feeds International Corp and AT&T Mobility LLC v. Concepcion ET UX which held to the effect that there are fundamental differences between class action arbitration and bilateral arbitration, including the degree of risk for defendants such that they cannot be expected to have undertaken a mass claim risk in arbitration, which lacks a multi-layered appeal and review process (Abaclat, Dissenting Opinion, ¶¶146–153). 95 In the tribunal’s decision on jurisdiction and admissibility, the majority of the tribunal accepted the ICSID jurisdiction over mass claims of bondholders. After noting that the ICSID is silent on the availability of collective proceedings as a form of arbitration. (See: Abaclat et al. (formerly known as Beccara et al.) v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 Aug. 2011, ¶517). the majority viewed that denial of availability of collective proceedings would be contrary to ‘the purpose of the BIT’ and ‘the spirit of ICSID (ibid, ¶518). 96 Beess und Chrostin, Jessica. "Sovereign debt restructuring and mass claims arbitration before the ICSID, the Abaclat case." Harv. Int'l LJ 53 (2012): 505. 97 More recently, in the case Giovanni Alemanni v. The Argentine Republic (Giovanni Alemanni and others v. The Argentine Republic, ICSID Case No. ARB/07/8, Decision on Jurisdiction and Admissibility (Nov 17, 2014), which also includes a case of sovereign debt default, the tribunal was unanimously in favor of allowing the proceedings to

23 Poštová banka, a.s. and Istrokapital SE v. Hellenic Republic, in an unprecedented

decision, an ICSID tribunal denied jurisdiction with respect to certain Greek bonds.98

The ICSID forum might appeal greatly to a creditor due to the smooth recovery process

which is provided by it.99 Gallagher has suggested that, "investors are beginning to use

trade and investment treaties as a way to challenge sovereign debt restructurings,

thereby leaving a margin of manoeuvre for prospective holdout creditors".100

Hence by adjudicating disputes, which affect undergoing SDR processes, both domestic

courts as well as international tribunals, such as the ICSID, serve as an example of

institutions that exercise certain global regulatory authority with respect to SDR.

2. The Troika bailout in Greece

Second example of actions that qualify as an exercise of global regulatory authority is

the case of recent austerity measures inflicted upon Greece. In February 2012, Greece

launched the largest sovereign debt restructuring in history covering €205 billion in

debt.101 Since 2009, Greece has undergone a historic economic collapse; economic

output has shrunk by 25% and the unemployment rate hovers near 26%.102

continue. Likewise, this was a case which was also brought under the Italy-Argentina BIT and it is the latest in the line of mass claim proceedings in investment arbitration. 98 Several creditors initiated proceedings before the ICSID, basing their claims on the BITs signed by Greece with Cyprus and with Slovakia, alleging that Greece had expropriated them by unilaterally amended the terms of outstanding bonds (by inserting a collective action clause), see: Poštová banka, a.s. and ISTROKAPITAL SE v. Hellenic Republic (ICSID Case No. ARB/13/8), Decision on Jurisdiction (April 9, 2015). 99 Particularly since the ICSID system does away with the obstacles to enforcement deriving from State immunity; ICSID Convention, Art. 54 (1). Thus, if private creditors obtain a favourable award by the investment arbitral tribunal, they can enforce it in any State party to the ICSID Convention. 100 Gallagher, Kevin P. argues "Such tactic may be prevented by excluding debt from the definition of investment in BITs or by adding annexes limiting the scope to challenge restructuring outcomes." See: UN - Ad hoc Committee on a multilateral legal framework for sovereign debt restructuring processes. First working session (3−5 February 2015) Web April 12, 15 <http://www.unctad.info/upload/Debt%20Portal/GA%20Ad%20hoc%20committee%20statements/Summary-Ad%20hoc%20Committee%20First%20working%20session%20Feb.%202015.pdf> 101 IMF. “Sovereign debt restructuring—recent developments and implications for the fund’s legal and policy framework” Web. April. 10, 2015 <https://www.imf.org/external/np/pp/eng/2013/042613.pdf 102 Yardley, Jim and Alderman, Liz. "Greece Chooses Anti-Austerity Party in Major Shift". NY Times. Web. April. 7, 2015 <http://www.nytimes.com/2015/01/26/world/europe/greek-election-syriza.html?_r=0

24 To prevent an economic catastrophe, the so-called Troika (the International

Monetary Fund, the European Central Bank and the European Commission) issued the

first of two international bailouts for Greece, which would eventually total €240

billion103. These bailouts came with the so-called "austerity programs", requiring deep

budget cuts and steep tax increases. Said programs continue to be implemented

regardless of the hardship imposed on the Greek people after more than five years of

economic depression.104

As of the last quarter of 2014 Greece owes:

Creditor Amount owed

Troika

IMF €27 billion105

EU €194.8 billion106

ECB €26 billion107

Others €69.2 billion

Total €317 billion

What the situation around Greece's debt highlights is that first, sovereign defaults are no

longer a problem of developing countries but rather a global phenomenon and second,

that conditionality (as in this case, in the form of austerity programs) constitutes an

exercise of global regulatory authority, particularly when unsustainable debt burdens

camouflaged under the veil of recovery programs limit the scope of manoeuvre of the

distressed sovereign debtor, raising as a consequence questions of legitimacy with 103 This is just (85%) owed directly to the Troika itself, out of the 317 billion of Greek's total debt, or about $264 billion at today’s exchange rates, see: Alderman, Liz. "Explaining the Greek Debt Crisis". NY Times. Web. April 12, 2015 < http://www.nytimes.com/2015/04/09/business/international/explaining-the-greek-debt-crisis.html?_r=0> 104 Greece's citizens have been forced to accept harsh austerity measures as a condition of the bailouts, leading to riots, strikes and widespread anger. See: Hope K. "Greece seeks two-year austerity extension". Financial Times, Web. August 14, 2012 < http://www.ft.com/intl/cms/s/0/979cd2f4-e635-11e1-ac5f-00144feab49a.html> 105 See: IMF <http://www.imf.org/external/np/tre/activity/2014/030614.htm> 106 Cited in "Six key points about Greek debt and the forthcoming election" Web April 12, 2015 < http://www.eurodad.org/files/pdf/54bfcb0f01b0b.pdf> "€52.9 billion from the first programme <http://ec.europa.eu/economy_finance/publications/occasional_paper/2012/pdf/ocp94_summary_en.pdf> and €141.9 billion from the second programme <http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/index_en.htm EU debts are due to begin to be repaid in 2020.>" 107 See: IMF <http://www.imf.org/external/pubs/ft/scr/2014/cr14151.pdf > p. 61.

25 respect to the measures imposed, particularly when relevant stakeholders are not

included in the decision-making process.108

Hence, the abovementioned considerations, namely that SDR has an impact in other

public spheres, that SDR is a fragmented phenomenon and that SDR implies an exercise

of global regulatory authority, unveil public law concerns that raise questions of

legitimacy as well as transparency and accountability considerations, issues which

would be otherwise obscure or habitually ignored under the traditional approach to SDR

as suggested above, ultimately reinforcing the argument that the traditional private law

oriented approach needs to be abandoned and suggest instead that SDR should be seen

through global governance lenses.

In other words, understanding SDR as a global governance phenomenon raises several

public law concerns that call for urgent answers particularly with respect to the

legitimacy, 109 accountability, predictability, impartiality, 110 transparency, 111 good

faith112 and of sustainability concerns involved in SDR processes.113 However, if SRD

is to be understood as a global governance phenomenon, how should this phenomenon

be better addressed? The concept of global governance does not allow for the

identification of what the focus of a legal discourse should be. Now that SDR has been

108 See: Lienau, O. “Legitimacy and Impartiality in a Sovereign Debt Workout Mechanism”, available at http://www.unctad.info/en/Debt-Portal/Project-Promoting-Responsible-Sovereign-Lending-and-Borrowing/About-the- Project/Debt-Workout-Mechanism/ (2014). 109 As suggested by the UNCTAD Sovereign Debt Workout Principles, Legitimacy requires that the establishment, operation and outcomes of mechanisms and procedures for sovereign debt workouts observe the requirements of ownership, comprehensiveness, inclusiveness, predictability and other aspects of the rule of law. See: UNCTAD, Sovereign Debt Workouts: Going Forward Roadmap and Guide, available at: http://unctad.org/en/PublicationsLibrary/gdsddf2015misc1_en.pdf (accessed on May 3, 2015) 110 Ibid, "Impartiality requires that actors, institutions and information involved in debt workouts are free from bias and undue influence. While it is natural for creditors and debtors to pursue their self-interest, debt workouts require a neutral perspective, particularly with regard to sustainability assessments and decisions about restructuring terms." 111 Ibid, " Transparency requires that information on debt workout institutions, processes and the underlying data is available to the public." 112 Ibid, "Good Faith requires that debt workout procedures and their legal and economic outcomes meet basic expectations of fairness." 113 Ibid, " Sustainability requires that sovereign debt workouts are completed in a timely and efficient manner and lead to a stable debt situation while minimizing costs for economic and social rights and development in the debtor state".

26 presented as a global governance phenomenon, the following section examines two

possible solutions to address this phenomenon.

IV. Two possible prisms to approach SDR as a global governance phenomenon

One place to find the basis for legal analysis and for the proper identification of the

phenomenon that needs justification is the legal traditions of public law, 114 that

explicitly address questions of governance and authority. This includes the traditions of

Global Administrative Law (GAL) and International Public Authority (IPA).115 As

suggested by Odette Lienau, the reason for focusing mainly on these two approaches is

that these two approaches "pay special attention to situations in which those most

affected by key decisions are not necessarily the decision-makers themselves, either

directly or through clear lines of representation."116

A. GLOBAL ADMINISTRATIVE LAW

The GAL movement presents a way through which global governance can be

understood; it stands out amongst the various attempts to rest global governance on a

legal basis.117 The approach of GAL is understood to involve "the mechanisms,

principles, practices and supporting social understandings that promote or otherwise

affect the accountability of global administrative bodies".118 Subjects of this area of law

include formal and informal bodies that exercise "transnational governance functions of

particular public significance" and which "regulate and manage vast sectors of

economic and social life through specific decisions and rulemaking".119 Although GAL

has not been linked by the legal scholarship to the SDR phenomenon, this paper aims to

call for further research by suggesting its potential link with SDR.

114 Public law, for the purposes of this paper, adopts the same meaning used by von Bogdandy and Goldmann, namely, that it concerns the tension between unilateral authority and individual freedom and is a necessary requirement for the legitimacy of public authority. 115 While other legal traditions exist as well, such as global constitutionalism, the IPA and GAL schools of thought offer frameworks that are especially pertinent, see: Lienau, Odette. "Legitimacy and Impartiality in a Sovereign Debt Workout Mechanism." Cornell Law Faculty Publications, Paper 1110 (2014). 116 Ibid. 117 See, Kennedy, David. " The Mystery of Global Governance." Ohio NUL Rev. 34, 827 (2008). 118 Kingsbury, Benedict, Nico Krisch and Richard B. Stewart. "The emergence of global administrative law." Law and contemporary problems, vol. 68, 15-61 (2005), 17. 119 Ibid.

27 In the case of SDR and as illustrated generally in this paper, many informal bodies

(i.e. the Paris Club, London Club) as well as other more formal ones (i.e. the IMF or the

ECB) perform administrative and regulatory functions through a number of different

forms, as stated by Nico Krisch and Benedict Kingsbury, "ranging from binding

decisions of international organizations to non-binding agreements in intergovernmental

networks and to domestic administrative action in the context of global regimes".120

Hence, the decisions undertaken by bodies such as the IMF when imposing harsh

austerity measures upon a defaulting State or by a domestic court upholding holdout

behaviour constitute to certain extent administrative and/or regulatory functions

exercised in the global administrative space.121 Further, if these actors are exercising a

degree of public authority in the global administrative space, it raises questions on how

to hold these actors accountable.

GAL draws from domestic law principles to argue that bodies and activities subject to it

should meet adequate standards of transparency, participation, reasoned decision and

legality and should also allow for effective review of resulting rules and decisions.122 As

stated by Nico Krisch, "Global administrative law seeks to explore these questions from

the angle of accountability; it asks whether and to what extent ideas from domestic

administrative law can help us solve accountability problems in global governance".123

In the case of SDR, relevant bodies and international networks involved in SDR are

deeply embedded in this form of global governance and the outcome of these practices

and decisions certainly has a broad public impact. As such, sovereign debt issues may

very well be understood to implicate global administrative law.

B. INTERNATIONAL PUBLIC AUTHORITY

120 Kingsbury, Benedict and Nico Krisch. "Introduction: global governance and global administrative law in the international legal order." European Journal of International Law 17.1 (2006): 1-14, 3. 121 As named by Kingsbury and Krisch. 122 Ibid, p 4-5. 123 Krisch, Nico. "The pluralism of global administrative law." European Journal of International Law 17.1 (2006): 247-278, 248.

28 Proponents of IPA movement assert that the concept of global governance does not

allow for the identification of what the focus of a legal discourse should be, that is,

“those acts by which unilateral authority is exercised”.124

In contrast to the GAL scholarship,125 the IPA approach has explicitly posited the link

between SDR and global governance by suggesting that SDR processes need to be

framed by public law in order to ensure their legitimacy.126 Von Bogdandy and

Goldmann make an important contribution by linking SDR with a public law approach,

arguing that many SDRs as agreed between defaulting states and their multilateral,

bilateral, or private creditors constitute exercises of international public authority.127

Public authority in this framework is understood to exist when "any authority is

exercised on the basis of a competence instituted by a common international act of

public authorities, mostly states, to further a goal which they define and are authorized

to define, as a public interest".128

In other words, this approach claims that the existing informal arrangements for the

restructuring of sovereign debt can and should be considered as exercises of

international public authority. Ultimately this claim leads to a reconstruction of informal

sovereign debt restructurings in light of basic principles of public law, suggesting that

they need to conform to a minimum of procedural and substantive standards.129 Hence,

this approach suggests an emerging promissory avenue with respect to the global

regulatory authority exercised either by domestic and international tribunals as well as

124 Ibid, 4. 125 Although the proponents of the IPA movement, share the aim to better understand and develop the law relating to international governance activities with the GAL movement, as well with the constitutionalization of international law movement, the IPA movement holds that "(…) a synthesis of these approaches is best suited to provide a meaningful framework for analysis and critique. The legal framework of governance activities of international institutions should be conceived of as international institutional law and enrieched by a public law perspective, i.e. with constitutional sensibility and openness for comparative insights from administrative legal thinking", in Von Bogdandy, Armin, Philipp Dann and Matthias Goldmann. "Developing the publicness of public international law: towards a legal framework for global governance activities." In THE EXERCISE OF PUBLIC AUTHORITY BY INTERNATIONAL INSTITUTIONS. Springer Berlin Heidelberg, (2010), p. 6. 126 Von Bogdandy, Armin and Goldmann, Matthias. "Sovereign Debt Restructurings as Exercises of International Public Authority: Towards a Decentralized Sovereign Insolvency Law." (2013) available at: http://ssrn.com/abstract=2089480. 127 Ibid. 128 Von Bogdandy, Armin, et al. "THE EXERCISE OF PUBLIC AUTHORITY BY INTERNATIONAL INSTITUTIONS: ADVANCING INTERNATIONAL INSTITUTIONAL LAW", 13 (2010). 129 Ibid.

29 other international bodies when imposing harsh austerity measures upon sovereign

debtors.

Although using these prescriptions or traditional legal tools to address the core

problems represented by a global governance phenomenon such as SDR might sound

normatively desirable, (particularly because they imply a major shift in legal thinking

about sovereign debt restructuring, by transforming and moving from the traditional

private law oriented approach to one of public law) they are still limited in their scope

to address adequately SDR as a global governance phenomenon.

On the one hand, the fact that SDR is a fragmented phenomenon challenges whether

GAL results an adequate tool to address the concerns posed by this global governance

phenomenon. As recognized by Nico Krisch on the PLURALISM OF GLOBAL

GOVERNANCE, "accountability mechanisms modelled on domestic administrative law

may have an uneasy place in more fluid settings."130 Hence, we might have to recourse

to alternative forms for addressing the persistent accountability, legitimacy,

transparency and other administrative public standards of the rules and decisions the

actors involved in SDR make. Moreover still to be seen is how GAL scholarship is

going to develop in-depth analysis towards SDR particularly.

On the other hand, with respect to the IPA approach, although it provides an interesting

conceptualization of SDR as an exercise of international public authority, it flattens the

division between developed and developing countries. By drawing the attention solely

on the powers exercised by certain specific actors it disguises other effects of SDR

amongst its stakeholders, as well as obviates other institutions or subjects who do not

necessarily exercise public authority in the strict sense, but who are certainly

influencing said regulatory authority exercised.

Hence, although both GAL and IPA approaches to global governance serve as tools that

provide a legal perspective on how to approach this global governance phenomenon,131

130 Ibid. Krisch sees the shape of accountability mechanisms in global governance centrally determined by a contest of different constituencies – national, international and cosmopolitan – over who should be entitle to control regulatory outcomes. 131 Particularly because they overcome the traditional private law oriented approach on SDR, by enlighten the global regulatory dynamics surrounding SDR.

30 these two approaches are still limited, as they do not offer a satisfactory

comprehensively response to solve this fragmented phenomenon.

The following section presents the undergoing debates on how to address SDR and

eventually on how to create a multilateral treaty to finally regulate this phenomenon. It

enquires whether the recent initiatives that seek to regulate (or frame) SDR constitute a

desirable path which parallels the approach suggested here.

V. Are the current initiatives addressing SDR conceiving a global governance approach?

This section analyses to what extent current initiatives, such as the recent soft-law

initiative lead by the UNCTAD with its Principles on Responsible Sovereign Lending

and Borrowing (hereinafter “UNCTAD Principles”), as well as the multilateral

framework suggested by the UN General Assembly, conceive SDR as a global

governance phenomenon.

A. THE UNCTAD PRINCIPLES ON RESPONSIBLE SOVEREIGN LENDING AND BORROWING

Recently, due in part to the widespread negative effects of current debt crises,

particularly in the European context, the UNCTAD was prompted to launch an initiative

to promote responsible sovereign lending and borrowing practices.

What is different in the case of this normative contribution is that instead of providing a

legal framework for a sovereign debt restructuring, the main purpose of UNCTAD's

initiative is to provide a forum for debate on responsible practices and to develop a set

of commonly accepted principles and practices relating to sovereign debt issues.132 For

example it proposes certain practices encouraging responsible sovereign borrowing and

lending practices.133

132 “The UNCTAD Principles hope to encourage all UN member states to implement them in accordance with their national laws and domestic requirements. Currently, UNCTAD is preparing a set of detailed guidelines analysing the various contexts in which the Principles have been implemented successfully so as to provide guidance to member states upon request. These guidelines are drafted in collaboration with a broad range of stakeholders as well as the Expert Group.” See: UNCTAD, Principles on Responsible Sovereign Lending and Borrowing (2012) available at: http://unctad.org/en/Docs/gdsddf2011misc1_en.pdf 133 “The normative contribution of these Principles lies not in the creation of new rights nor obligations in international law but in identifying the basic principles and best practices applied to sovereign lending and borrowing and in elaborating the implications of these standards and practices for lenders and borrowers.” Ibid.

31 In particular, principle 7 recognises the lack of a non-universal sovereign debt

restructuring mechanism and suggests that: “In circumstances where a sovereign is

manifestly unable to service its debts, all lenders have a duty to behave in good faith

and with cooperative spirit to reach a consensual rearrangement of those obligations.

Creditors should seek a speedy and orderly resolution to the problem.” Furthermore,

this principle does also address the holdout problem (as discussed above).134 Likewise,

Principles 11 and 13 address issues of transparency and disclosure in restructuring

processes.135

Robert Howse, highlights two major contributions of the UNCTAD Principles: first, the

qualification of a sovereign debtor’s obligation to repay the debt in full in situations of

economic necessity; and secondly, the reconsideration of the odious debt doctrine by

establishing the purposes of serving the public good and transparency as criteria for

valid sovereign debt obligations. Howse136 believes that the Principles offer "new and

well-grounded normative tools for reshaping legal relations between sovereign debtors

and both official and private creditors in the absence of a centralised international

institution or tribunal".137

In light of the above, it seems that these principles pretend to create a standard at the

international level. In that sense they might have started to fill the current legal vacuum

in the international financial architecture caused by the lack of institutions to promote

responsible financing, as discussed in this paper.138 "The UNCTAD Principles might be

considered then as the first step towards the construction of a new legal regime, they

make clear that state officers dealing with debt (borrowing or lending) are agents of 134 Ibid. The explanatory commentaries of Principle 7, suggest: “A creditor that acquires a debt instrument of a sovereign in financial distress with the intent of forcing a preferential settlement of the claim outside of a consensual workout process is acting abusively”. 135 Likewise, Principle 15 states that the rescheduling itself should also be transparent. In contrast, the Best Practices for Formation and Operation of Creditor Committees elaborated by the Institute of International Finance requires a high level of confidentiality from committee members. See: IIF. "Principles for Stable Capital Flows and Fair Debt Restructurings". Report on implementation by the Principles Consultive Group, (2011), p. 39. 136 In line with the ideas offered by Anna Gelpern, Matthias Goldmann, Juan Pablo Bohoslavsky and Carlos Espósito. 137 See: Chapter 17, in SOVEREIGN FINANCING AND INTERNATIONAL LAW: THE UNCTAD PRINCIPLES ON RESPONSIBLE SOVEREIGN LENDING AND BORROWING, Oxford University Press (2013). 138 “It is not surprising that, in 2012, UNCTAD established a new initiative on Debt Restructuring Mechanism.” see: Norway Pledges Financial Support for UNCTAD’s Project on Responsible Sovereign Financing’, UNCTAD press release, Geneva, 25 October 2012, available at: http://www.unctad.info/en/Debt-Portal/News-Archive/Our-News/Norway-Pledges- Financial-Support-for-UNCTADs-Project-on-Responsible-Sovereign-Financing-25102012.

32 citizens and obliged to act as such, in an accountable and transparent manner." They

also promote the principle of co-responsibility of both parties (debtors and creditors) for

prevention and solution of debt crises that can result from irresponsible lending. As

such, the UNCTAD principles constitute a step forward when compared to the debt

management work done by other ad-hoc approaches discussed above, as well as when

compared to international financial institutions "who tend to put the blame for

wrongdoings on the borrower side and make their populations pay the price for

adjustments".139

However, the scope of the UNCTAD Principles remains narrow, as they cover just

sovereign loans, ignoring private finance.140 Significant questions remain unsolved, for

instance in the area of effective debt workout mechanisms. Implementation will be a

challenge as so far neither hard nor soft accountability mechanism exist that would

drive their implementation. Just 13 of the 193 UN Member States have so far formally

endorsed the Principles and even their actual compliance remains unclear because it is

not yet monitored. Moreover, one of the main weaknesses of this initiative is its status

as soft law.141

Thus, while the UNCTAD Principles as a soft-law proposal signify an important step

forward on the path to responsible financing, much work remains to be done to be

considered as a promising alternative to set a standard of correctness in behaviour and

practices,142 particularly when it seems that it does that not encompass comprehensively

a global governance approach as suggested in this paper.

B. TOWARDS A MULTILATERAL LEGAL FRAMEWORK FOR SOVEREIGN DEBT RESTRUCTURING PROCESSES

139 Eurodad briefing paper, “The UNCTAD principles on promoting responsible sovereign lending and borrowing” (2013) available at: http://www.eurodad.org/Entries/view/1545448/2013/05/22/Eurodad-briefing-paper-The-UNCTAD-principles-on-promoting-responsible-sovereign-lending-and-borrowing. 140 Ibid. 141 Abaclat et al. v. Republic of Argentina, Decision on Jurisdiction and Admissibility 2011 ICSID ¶40; UNCTAD, Principles on Responsible Sovereign Lending and Borrowing (2012) Principle 7, 9 [hereinafter “UNCTAD Principles”]; GA Res. 66/189 (2012), External debt sustainability and development; GA Res. 55/2 (2000), United Nations Millennium Declaration ¶¶15, 16, 28; Matthias Goldmann, Responsible Sovereign Lending and Borrowing: the View From Domestic Jurisdictions, Max Planck Inst. for Comp.Pub.Law and Int.Law, at 38-39 (2012). 142 See: Li, Yuefen. “Ad hoc Committee on a Multilateral Legal Framework for sovereign debt restructuring processes. First Working Session”, New York, (3-5 February 2015) Speech.

33 Recent debt crises and the protracted holdout bondholder litigation against Argentina

have led to intensified international debate on the need for a sovereign debt

restructuring mechanism.

More recently, in 2014, the General Assembly143 adopted the Resolution 68/304 titled

“Towards the establishment of a multilateral legal framework for sovereign debt

restructuring processes”.144 The operative part of the Resolution, inter alia, emphasizes

the special importance of a “timely, effective, comprehensive and durable solution to

the debt problems of developing countries in order to promote their inclusive economic

growth and development.”145 This top-down approach undertaken directly from States

constitutes not only a remark of the urgent need of a legal framework but also of how

not having said framework would represent political, economic and social losses to

develop and developing countries alike.

A global agreement under the UN umbrella (as arguably the most representative and

democratic world forum) might sound promising, however the question remains if in

fact this is the right forum from where to address this issue and whether a future

consensus will materialized.146

Although a draft of this multilateral treaty has not yet seen the light of the day,147

Schwarcz proposed in 2012 a "Model Sovereign Debt Restructuring Convention",148

143 With 124 votes in favour, 11 votes against and 41 abstentions (it must be noted that those 52 States that abstained or voted against were mostly developed economies). 144 G.A. Document A/68/L.57/Rev. 145 G.A., Res. 68/304 of 2014. What triggered this initiative was basically the outrageous condemnation that followed after the actions developed by vulture funds, as the Secretary-General’s latest report (A/69/167) indicates, “the recent debt crises and the protracted holdout bondholder litigation against Argentina have led to intensified international debate on the need for a sovereign debt restructuring mechanism that can help improve efficiency, fairness and coordination in restructuring sovereign debt.” Introducing the draft resolution, Sacha Sergio Llorentty Solíz (Bolivia), speaking for the “Group of 77” developing countries and China, said the text stressed the importance of timely, effective, understandable and lasting debt restructuring solutions for developing countries that would promote growth in an inclusive manner. 146 Particularly when there is a strong opposition coming from capital exporting countries, in its intervention before the UN General Assembly, Terri Robl (on behalf of the United States), speaking in explanation of vote, stressed that she could not support a statutory mechanism for sovereign debt restructuring as such a mechanism was likely to create economic uncertainty, in her opinion, "that uncertainty could impact upon the provision of financing to developing countries", she also stressed that "in the past, market-oriented approaches had been preferred and work was ongoing in the International Monetary Fund (IMF) and elsewhere. Furthermore, not only had the resolution presupposed a final outcome, which inhibited proper discussion, it had been snuck onto the docket at the very end of the session, establishing a costly mandate and asking Member States “to write a blank cheque”. 147 In December 2014, the UN General Assembly passed a resolution to establish an Ad Hoc Committee on sovereign debt restructuring. The Ad hoc Committee was established pursuant to General Assembly resolution 69/247 of 29

34 whereby he envisaged a multilateral framework where a Contracting State may

invoke application of said Convention by filing a voluntary petition for relief with the

Supervisory Authority (either the IMF or other neutral multilateral organization).149

Hence, although the content of this proposal is uncertain and its scope is yet to be seen,

the initiative is without doubt a promising step forward in finding an arguably global

solution. However, as suggested here, a multilateral framework will only be effective to

the extent that it acknowledges a global and comprehensive approach to SDR able to

overcome the failures of the traditional private law oriented approach.

V. Conclusions

This paper has asserted that the traditional approach to SDR obscures concerns of public

law by arguing that this private law oriented understanding of SDR must be abandoned

and a more comprehensive and public law oriented approach should be preferred

instead, such as the one proposed here, namely an approach that understands SDR as a

global governance phenomenon.

Understanding SDR as a global governance phenomenon brings a broader perspective

on addressing SDR, this approach, as suggested in this paper, offers a wider standpoint

that better identifies the complex public concerns involved in the restructuring of

sovereign debt.

Although qualifying SDR as a global governance phenomenon is not an end in itself, it

aims to contribute with a different and a broader perspective to a debate that has been

primarily guided by a private law approach. It enlightens the necessity of adding a December 2014. UNCTAD is supporting the work of the Bureau to the Ad Hoc Committee. See: Work of the Ad Hoc Committee here http://www.unctad.info/en/Debt-Portal/Events/Our-events/GAG77-events-on-Legal-Framework-for-Debt-Restructuring-Processes/Ad-hoc-committee-and-informal-substantive-sessions/ (accessed on May 2, 2015). 148 For Steven L. Schwarcz "Whatever example is used, any such convention should have at least two primary goals: a mechanism to penalize creditors (such as vulture funds) who strategically hold out from fair settlements, hoping that the imperative to settle will persuade others to grant the holdouts more than their fair share; and an incentive to attract sufficient voluntary funding to enable the settlement to work." See: Schwarcz, Steven L. "Towards a “Rule of Law” Approach to Restructuring Sovereign Debt". HLS Program on Corporate Governance. Web 2 January 2015. < http://corpgov.law.harvard.edu/2014/10/14/towards-a-rule-of-law-approach-to-restructuring-sovereign-debt/> 149 Ibid, what is worthy to highlight is the approach taken by this proposal, where the burden of submitting a Plan to its creditors at any time (or alternatively to submit other Plans) is on the head of the Debtor-State. Moreover, it also suggests the inclusion of a dispute settlement mechanism. Schwarcz insinuates that this model could follow the model of ICSID’s convention, except that States ratifying this Convention would thereby subject themselves and their nationals to submit all disputes arising under the Convention to the jurisdiction of the adjudicatory tribunal.

35 public law perspective to the current discussions on how to regulate SDR and

challenges not only the traditional approach to SDR, but also the current legal traditions

addressing global governance, such as GAL and IPA, with the aim of further developing

their reach, particularly with respect to the SDR phenomenon.

Without doubt the complexities around SDR raises several questions on how to better

address this phenomenon, however that fact that SDR has not been already regulated

may perhaps be seen as an opportunity to integrate all these debates for the sake of a

better and more comprehensive SDR mechanism (or debt workout mechanism),

particularly for one that addresses issues of legitimacy, transparency and accountability,

among other public law concerns. While some substantive issues require a political

decision, the economic and legal events since the 2008 financial crisis have brought

about more convergence to this phenomenon. The acknowledgment of this issue as a

global governance phenomenon has then taken a stronger hold.

Whilst this paper does not suggest a specific SDR mechanism, ideally, for the sake of

the progressive development of international law, a comprehensive and orderly SDR

mechanism able to capture the complexities in dealing with sovereign debt, namely: the

plurality of actors involved; the increasing variety of financial instruments involved; the

wide range of the legal jurisdictions in which debt is issued; and capable of addressing

the rights and interests of States, citizens and other stakeholders affected by SDR

processes will closely have the characteristics of a global governance approach. Without

doubt, debt-restructuring processes will need to be inclusive and will require the active

engagement of States, the international financial institutions, civil society and all

stakeholders.

This paper has been conceived therefore to call for further research in this area, not only

with respect to the SDR phenomenon, but also for rethinking the current legal

approaches to these types of global governance issues.

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