IBASD INTERNATIONAL BOARD OF ARBITRATION FOR SOVEREIGN DEBT

1. IBASDINTERNATIONAL BOARD OF ARBITRATION FOR SOVEREIGN DEBT Dr Oscar Ugarteche &Alberto Acosta Instituto de Investigaciones Económicas-UNAM Halifax Initiative Conference Ottawa October 19-20, 2009

2. BACKGROUND • There is evidence that the international financial architecture constructed after 1944 has become obsolete. • The Bretton Woods institutions were designed for a world where fixed parity, with the USD equal to gold, and capital flows from the US to the rest of the world, where the norm. • It was designed when the rich countries were creditors and developing nations, debtors or aid recipients • Today the largest debtors are rich countries and the largest creditors are developing countries

3. AUTHORS ON THE SUBJECT The Board proposed herein is an initiative arising from the historical experience of Latin America’s foreign debt. There are previous debt workout proposals by Schroeder & Berensmann (2005), Anne O. Krueger (2002) Jürgen Kaiser (2002), Kunibert Raffer(1990), Sachs (1989) among the most outstanding. The old debt problem experience (Ugarteche, 1986, Marichal, 1989) is that balance of payments difficulties are generated by drops in export commodity prices which usually go hand in hand with sharp increases in international interest rates and with credit flow reversals.

4. THE IDEA • The International Board of Arbitration for Sovereign Debt (IBASD) is not the first level of negotiation, but the last in a process of debt refinancing. It will be used when the system and instruments are too rigid to reschedule payments or revisit contracts’ validity through a friendly agreement between the parties.

5. EXISTING MECHANISMS • The international system currently has two debt workout mechanisms. One is the Paris Club for official debt created in the 1950’s. • The other is the London Club for bank debt from the 1970’s.

6. WHAT DOES NOT EXIST • There is no mechanism or forum for debt workouts with multilateral lending agencies. It has been argued that market friendly solutions does not require this. Argentina’s legal difficulties proved the opposite, however. • There is currently no mechanism to solve problems with bondholders, because both the United States Council of Foreign Bondholders and Great Britain’s Foreign Bondholders Protective Council, were deactivated. • There is no mechanism to solve the new debt situation of developing countries as creditors. • There does not exist international financial law

7. WHAT IS REQUIRED • An international board of arbitration that is “neutral”, that is, in the spirit of the United Nations and internationally applied. • This neutrality refers to the legal code. To date, applicable private international financial law belongs to creditors and refers mostly to NY and London law - irrelevant in a globalised world. • A space where all creditors, regardless of whether they are G7 or not, may solve the debt payment problems of debtors, regardless of whether they are G7 or LDCs.

8. WHAT ELSE IS REQUIRED • An international financial code (that does not belong to either creditors or debtors, but to all parties) will have to ensure that public and private creditors can collect guarantees, while protecting debtors, be they public or private. • This implies a need for audits to be done on all loans to ensure they were lent in good faith and used properly. If not, the IBASD would have to identify which need to be cancelled unilaterally by the creditors, and which not. It is a procedure analogous to private debt restructuring.

9. THE NEED FOR AN INTERNATIONAL FINANCIAL LAW • The considerations for UNCITRAL, the United Nations Commission on International Trade Law (UNCITRAL) established by the General Assembly through Resolution 2205 (XXI) of December 1966, recognizes that disparities in national laws governing international trade created obstacles to the flow of trade. The same can be argued for finance and its impact.

10. THE PROBLEMS TO BE FACED 1 In case of balance of payments or fiscal problems, do debtor countries want to freely shoulder the additional emergency debt? If the situation is such that they cannot cover quotas of N amount, is it reasonable to expect them to be able to pay quotas of N+ x? Somewhere the debtor should be able to meet its creditors and work out a feasible payback schedule that will allow the economy to recover

11. THE PROBLEMS TO BE FACED 2 • A recurring theme in the last decade’s literature is odious and invalid debts. What makes them so, how can they be recognized, and what about corruption? • Corrupt debts are those violating the criminal laws of the creditor country, the debtor country, or both, and punishable in either judicial jurisdiction. • An illegitimate debt, in turn, is legal, and earmarked for worthy purposes, but is handled fraudulently for improper gain.

12. LOAN AUDITS • The cases mentioned bring foerth the need for audits to be done on all loans to m,ake sure they wqere lent in good faith and used properly. If it was not the case, IBASD would have to identify which have to be cancelled by the creditors unilaterally. It is a procedure analogous to private debt restructuring.

13. WHAT IBASD WOULD DO While reaching payment agreements for debts that qualify, their payback conditions must be negotiated, and linked to economic, social and cultural rights (Ugarteche, 2006) as well as environmental conditions. The new agreement principle is based on economic justice, so we maintain the concept proposed by Raffer (1990, 2000, 2001a, 2001b) that there must be protection for social spending, as provided by Chapter 9 of the US Bankruptcy Law, which regulates municipalities’ bankruptcies, while protecting their governmental power. and advance towards meeting the MDGs.

14. WHAT ELSE • An issue analogous to standstills is the question of who invited creditors to sit down at the negotiation table with the debtor. If the gateway is for example, UNCTAD, a high-level official of that Agency, who will gather the parties so they can choose an arbitration court with an even number of members, will extend this invitation. The chairperson will be chosen by the arbiters and will constitute the tie-breaking odd number.

15. FINALLY • The panel will have the capacity to call a standstill and suspend collection, to protect the assets and spending defined in the new international financial code, as well as creditors’ rights. The main features of this proposal include protection for social spending, automatic standstill once bankruptcy is applied for, and the community’s right to sit in the procedure for restructuring the debt (Raffer, 1990). • Krueger (2002) proposes for the arbitration court to have the power to enforce agreements reached between majority creditors and the debtor on all creditors, to count out free riders. This will eliminate the vulture funds problem.