You may not have noticed, but the “developing” and “emerging” world is getting increasingly restless over the developed world’s ways of working the international financial system. We have reported on the BRICS Bank concept which is one articulation of the concern that the Bretton Woods institutions are not working for most non-rich countries. And last week, the UN General Assembly – by an overwhelming majority – voted a resolution (backed by the G77 and China group of states) calling for a new international legal framework for sovereign debt restructuring, and condemning vulture funds. For a summary, here is the UN press release.The text includes the following:
“Recognizing the sovereign right of any State to restructure its sovereign debt, which should not be frustrated or impeded by any measure emanating from another State,
Recognizing also that a State’s efforts to restructure its sovereign debt should not be frustrated or impeded by commercial creditors, including specialized investor funds such as hedge funds, which seek to undertake speculative purchases of its distressed debt at deeply discounted rates on secondary markets in order to pursue full payment via litigation,
Noting that private creditors of sovereign debt are increasingly numerous, anonymous and difficult to coordinate and that there are a variety of debt instruments and a wide range of jurisdictions in which debt is issued, thus complicating the restructuring of sovereign debt,
Noting also the concern expressed in the declaration of the Summit of Heads of State and Government of the Group of 77 and China on the theme “For a New World Order for Living Well”, held in Santa Cruz de la Sierra, Plurinational State of Bolivia, on 14 and 15 June 2014, concerning the so-called “vulture funds” and their actions of a highly speculative nature, which pose a risk to all future debt restructuring processes, for both developing and developed countries…
5. Decides to elaborate and adopt through a process of intergovernmental negotiations… a multilateral legal framework for sovereign debt restructuring processes with a view, inter alia, to increasing the efficiency, stability and predictability of the international financial system and achieving sustained, inclusive and equitable economic growth and sustainable development, in accordance with national circumstances and priorities..”
We do not over-rate the prospects for this initiative, given that the resolution was opposed by only 11 states but they comprise USA, UK, German, Japan, Israel, Australia, Canada, Hungary, Czech Republic, Ireland and Finland – representing (if that is the right word) most of the world’s main creditors. (41 states abstained). But the sense around the world of imbalance and infairness is growing, and the hostility to vulture funds – and to Judge Griesa’s legal bias in favour of them – is becoming ever stronger. In reading the Resolution, I realised I had missed what was a historically important event – the 50th anniversary meeting of the G77 group, now 133 countries, which took place in Santa Cruz Bolivia in June. The first G77 ever meeting had taken place in June 1964 at an UNCTAD meeting in Geneva. The Declaration of Santa Cruz is, true to form, lengthy, but the following extract is worth reading in order to see how the non-rich world sees the bastions of finance capital. We would not normally put such a long extract from a formal document before readers, but we too rarely pay heed to how the rest of the world sees things. So do read on!
126. We are concerned that, with the global economic crisis, the economies of increasing numbers of developing countries are being affected and that some countries are becoming more vulnerable to new external debt problems or even crises. Addressing the external debt problems of developing countries is thus an important part of international cooperation and the enhanced global partnership for development.
127. We are of the view that debt crises tend to be costly and disruptive and are usually followed by large cuts in public spending and a decline in economic growth and employment. These crises affect developing countries more deeply and those that are heavily indebted are unable to return to the path of growth without international assistance. We recognize the importance of debt relief, including debt cancellation, debt restructuring, debt moratorium and debt audit procedures.
Debt restructuring processes should have as their core element a determination of real payment capacity so that they may not adversely affect economic growth and the fulfilment of the unfinished business of the Millennium Development Goals, the sustainable development goals and the post-2015 development agenda. In this regard, we reiterate the urgent need for the international community to examine options for an effective, equitable, durable, independent and development-oriented international debt resolution mechanism….
128. We also recall that sovereign debt management has been a crucial issue for developing countries in past decades and recent years. Recently, a new concern has emerged relating to the activities of vulture funds. Recent examples of the actions of vulture funds in international courts have revealed their highly speculative nature. Such funds pose a risk to all future debt-restructuring processes, both for developing and developed countries. We therefore stress the importance of not allowing vulture funds to paralyse the debt-restructuring efforts of developing countries, and that these funds should not supersede a State’s right to protect its people under international law.
129. We express serious concern about the substantial increase in the financial stability risks of many developed economies and, in particular, their high structural fragilities in financing sovereign debt created as a result of transferring private risk to the public sector. In this regard, we call for urgent and coherent solutions to reduce sovereign risk in developed economies in order to prevent contagion and to mitigate its impact on the international financial system and on developing countries.
130. We stress the need to ensure that the economic and monetary policies implemented by developed countries do not affect global aggregate demand and liquidity, owing to the objective of finding surplus in their balance of payments, with negative results in the reduction of global revenues in developing countries.”
Reforming the global financial architecture
131. We affirm the need for reform of the international financial architecture so that we have a financial and monetary system that reflects the realities of the twenty-first century, including a properly regulated international financial sector that reduces and discourages speculative investment, in order for capital markets to be mobilized to achieve sustainable development and play a constructive role in the global development agenda.
132. We also note the continuation of fundamental problems in the global financial and monetary system, including lack of regulation to ensure financial stability, the problems of the reserve currencies, the volatility in currency exchange rates, the speculative and large cross-border flows of capital and the insufficiency or unavailability of liquidity for developing countries in need of financial resources that face foreign exchange shortfalls or require resources to generate sustainable growth and development. We call for a programme of reforms, with full voice, representation and participation of developing countries, to address these problems.
133. We note with concern that financial deregulation and financial liberalization have given rise to the massive expansion of speculative financial flows and derivatives trading. The financial and economic crisis of 2008 has illustrated that international finance has created an economy of its own, which has become increasingly disconnected from the real economy of production, direct investment, job creation and wage growth. The adverse effects of financialization include volatile capital flows, excessive commodity and food price fluctuations, rapid shifts in exchange rates and boom-bust cycles of financial crisis and economic recession.
134. We urge that the reform process of the governance structure of the Bretton Woods institutions be finalized as soon as possible and be much more ambitious, and that an accelerated plan be established for further reforms in representation, participation and parity of voting power for developing countries in the decision-making process within the Bretton Woods institutions and in all discussions on international monetary reform and in the operation of the new arrangements for special drawing rights in the International Monetary Fund (IMF)… In this regard, we call on the General Assembly to launch a process to reform the international financial and monetary system.”