Restructuring public debts : CADTM International has debt auditing at the core of its A & B Plans

25 September 2015 by CADTM International

On 10 September 2015, The General Assembly of the United Nations adopted, by a substantial majority (136 votes in favour, 6 against and 41 abstentions), a resolution on the nine principles to be followed in public debt restructuring. A restructuring usually means either a rescheduling of maturity or debt relief.

The UN objective is to set up an international legal framework for debt restructuring and thus counter the strategy of vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
. These private investment funds Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
take advantage of this legal vacuum to reclaim from states in national courts the full repayment, plus the interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. , of debts they had bought at heavily discounted rates on the secondary market Secondary market The market where institutional investors resell and purchase financial assets. Thus the secondary market is the market where already existing financial assets are traded. .

The vulture funds are assisted in their opposition to such a multilateral framework, by six of the most powerful States which voted against the resolution (the United States, Canada, Germany, Japan, Israel, the UK) and the abstentions of all the other EU countries including Greece.

The governments of those countries use two arguments to account for their position. First, they claim that the principles in the resolution (impartiality, transparency, good faith, fair treatment, sovereign immunity, legitimacy, sustainability, implementation of the majority rule, sovereignty) are not coherent with international law. The UN expert on debt, Juan Pablo Bohoslavsky, claims on the other hand that these principles do not create any new obligation for the States and only codify existing rules in international law. Their second argument is that the UN is not the proper place to discuss sovereign debt Sovereign debt Government debts or debts guaranteed by the government. issues that should be the exclusive domain of the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
or the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.


Let us keep in mind that the Paris Club is an informal group that brings together the richest twenty creditor states and that not one of them voted in favour of the resolution; that the US still have a veto right within the IMF and that this institution has always been chaired by an EU personality (currently Christine Lagarde). These two organizations thus exclusively represent the interests of Western creditors and serve the interests of the financial sector. Indeed this is precisely what accounts for their hostility towards a debt restructuring in the democratic framework of the UN general Assembly where every state has one vote.

History shows that debt restructuring has always been used by creditors who only accept rescheduling or relief in exchange for conditionalities against the interests of the people in the indebted country. This is what happened in hundreds of debt restructuring plans on countries of the South that were organized by the IMF and the Paris Club. It was again the case with the restructuring of the Greek public debt organized by the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
, European Commission and IMF) in 2012, which was agreed under condition of tougher austerity policies in direct and intentional violation of the basic rights of the population, thus leading to a spiralling debt. This is one of the points made in the preliminary report of the Truth Committee on the Greek public debt that was set up by the President of the Greek Parliament Zoi Konstantopoulou and includes several members of the CADTM network. The Committee examined an internal IMF file dated March 2010, that plainly shows the creditors were perfectly aware that imposing austerity measures would result in an economic and social disaster while inevitably increasing the Greek public debt.

The report also recalls that vulture funds as well as some twenty Greek and foreign banks (mostly French, German and Dutch) that had speculated on the Greek debt before 2010 were fully repaid thanks to the Troika’s loans. Restructuring only occurred two years later, once the private creditors were high and dry. Those who had to bear the brunt of the 2012 restructuring were the Greek pension funds Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
and the citizens who held debt securities.

The auditing process makes it possible to identify illegal, illegitimate, odious and unsustainable debts and is thus a genuine political weapon in the hands of a government determined to negotiate a debt reduction. It also lays the ground – in a most likely negative outcome of negotiations with creditor States that are opposed to the UN resolution – for a unilateral decision to repudiate illegal, illegitimate, odious and unsustainable debts.

Such decision, which is vindicated by imperative considerations of fairness and justice, can also rely on notions of sovereignty, self-determination and self-defence. Indeed when a country is the target of creditors’ acts that are detrimental to the living conditions of its people, the State can legally resort to counter-measures, on customary international law grounds and of articles 49, and following, on a State’s responsibility for internationally wrongful acts. Such counter-measures can actuality consists of repudiating debts. They must of course go hand in hand with other measures such as monitoring the banks so that they serve the general interest, ensuring tax justice, etc.

Let us remember that Ecuador carried out an integral audit of its public debt in 2007-2008 and that on the basis of its results the government took the sovereign decision not to repay the part of its external trade debt that was illegitimate. The creditors had no choice but to accept the decision and the money saved was invested in the social sector.

To put an end to the creditors’ hold on the fate of people in indebted countries, to their using debt as a blackmailing tool in order to impose anti-social policies and weaken democracy, the international CADTM network:

  1. supports any international initiative on debts provided it occurs in a democratic context such as the UN general Assembly and provided it puts human rights before creditors’ interests;
  2. insists that it is right to add to the nine principles in the UN resolution, the unalienable right of the states to carry out an integral audit of their debts and suspend repayment while restructuring is negotiated. The right to carry out audits is already acknowledged in many international documents such as the Guiding Principles on Foreign Debt and Human Rights, adopted by the UN Human Rights Council on 18 July 2012.2 Suspending debt repayment relies on the primacy of human rights, in accordance with article 103 of the UN Charter and with the argument of the state of necessity as recognized both by customary international law and by jurisprudence.
See also : Initial reflections on the UN decision to establish a multilateral legal framework for the processes of public debt restructuring

Translated by Christine Pagnoulle and Mike Krolikowski

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