Argentina debt crisis
Demonstrators beat drums near US flags, demonstrating against US District Judge Thomas Griesa's ruling at the centre of Argentina's debt battle with holdout investors. Reuters

A United Nations (UN) committee has adopted nine principles to create a global bankruptcy process for countries, moving a step closer to putting in place a global system of debt restructuring as many countries face worrying levels of debt distress.

The UN Ad Hoc Committee on Sovereign Debt Restructuring, which was established by the General Assembly last fall, has voted to adopt the principles, aimed at enhancing "predictability and stability" in the global financial system.

Similar to US Bankruptcy Chapter 9 or 11 laws, the UN principles include good faith engagement by borrowers and lenders, transparency, impartiality and equitable treatment for all investors.

The current international debt restructuring system suffers from problems of fragmentation, inefficiencies and protracted negotiations, according to the committee. Countries currently cannot access bankruptcy protection when they face an economic crisis.

The principles agreed are expected to contribute to enhancing the efficiency, stability and predictability of the international financial system and promote the achievement of sustainable growth and development, in accordance with national priorities, and respect for human rights, according to the committee.

Principles on Sovereign Debt Restructuring Processes

1. A Sovereign State has the right, in the exercise of its discretion, to design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures. Restructuring should be done as the last resort and preserving at the outset creditors' rights.

2. Good faith by both the sovereign debtor and all its creditors would entail their engagement in constructive sovereign debt restructuring workout negotiations and other stages of the process with the aim of a prompt and durable reestablishment of debt sustainability and debt servicing, as well as achieving the support of a critical mass of creditors through a constructive dialogue regarding the restructuring terms.

3. Transparency should be promoted in order to enhance the accountability of the actors concerned, which can be achieved through the timely sharing of both data and processes related to sovereign debt workouts.

4. Impartiality requires that all institutions and actors involved in sovereign debt restructuring workouts, including at the regional level, in accordance with their respective mandates, enjoy independence and refrain from exercising any undue influence over the process and other stakeholders or engaging in actions that would give rise to conflicts of interest or corruption or both.

5. Equitable treatment imposes on States the duty to refrain from arbitrarily discriminating among creditors, unless a different treatment is justified under the law, is reasonable, and is correlated to the characteristics of the credit, guaranteeing inter-creditor equality, discussed among all creditors. Creditors have the right to receive the same proportionate treatment in accordance with their credit and its characteristics. No creditors or creditor groups should be excluded ex ante from the sovereign debt restructuring process.

6. Sovereign immunity from jurisdiction and execution regarding sovereign debt restructurings is a right of States before foreign domestic courts and exceptions should be restrictively interpreted.

7. Legitimacy entails that the establishment of institutions and the operations related to sovereign debt restructuring workouts respect requirements of inclusiveness and the rule of law, at all levels. The terms and conditions of the original contracts should remain valid until such time as they are modified by a restructuring agreement.

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

9. Majority restructuring implies that sovereign debt restructuring agreements that are approved by a qualified majority of the creditors of a State are not to be affected, jeopardized or otherwise impeded by other States or a non-representative minority of creditors, who must respect the decisions adopted by the majority of the creditors. States should be encouraged to include collective action clauses in their sovereign debt to be issued.

"These principles provide a basis for greater financial stability and the ability to reduce poverty," said Eric LeCompte, executive director of Jubilee USA Network, a religions organisation advocating global economic reforms.

"With so many countries facing debt crises, we urgently need solutions to protect investors and poor people," noted LeCompte, who is participating in the UN meetings.

"The UN's work is a step in the right direction, but we still have a lot of work to do if we want a legally binding process."

Charity groups and governments across the Caribbean, Greece and Argentina that face huge debt obligations have been calling for the creation of a bankruptcy process for countries.

Pope Francis also endorsed a global bankruptcy process while speaking to reporters in Latin America. "If a company can declare bankruptcy," the Pope asked, "why can't a country do so?"

The World Bank notes that 49 countries face worrying levels of debt distress and the International Monetary Fund says debt is the root cause of inequality.