Sovereign Debt Update - November-December 2014

Author:Jones Day's Business Restructuring & Reorganization Practice
Profession:Jones Day

On September 26, 2014, the United Nations Human Rights Council passed a resolution (A/HRC/27/L.26) condemning "vulture funds" like Argentina's holdout bondholders "for the direct negative effect that the debt repayment to those funds, under predatory conditions, has on the capacity of Governments to fulfill their human rights obligations, particularly economic, social and cultural rights and the right to development." Among other things, the resolution expresses concern regarding "the voluntary nature of international debt relief schemes which has created opportunities for vulture funds to acquire defaulted sovereign debt at vastly reduced prices and then seek repayment of the full value of the debt through litigation, seizure of assets or political pressure." It also notes that:

vulture funds, through litigation and other means, oblige indebted countries to divert financial resources saved from debt cancellation and diminish the impact of, or dilute the potential gains from, debt relief for these countries, thereby undermining the capacity of Governments to guarantee the full enjoyment of human rights of its population.

The resolution, which was proposed by Argentina, Brazil, Russia, Venezuela, and Algeria, passed in the 47-member council with 33 votes in favor. Nine member states abstained, and five—the Czech Republic, Great Britain, Germany, Japan, and the U.S.— opposed the text. The U.S. was highly critical of the resolution, with U.S. representative Keith Harper warning the council that it could lead states "to use debt distress as an excuse for human rights violations." He also stated that "[t]he state's responsibility for promoting and protecting human rights and fundamental freedoms is not contingent on its sovereign debt situation." Harper emphasized that "[i]f not handled appropriately, [the discussions] risk creating uncertainties which could drive up borrowing costs or even choke off financing for developing countries."

On October 6, 2014, the International Monetary Fund ("IMF") released a series of new proposals entitled "Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring," available at . The proposals include reforms to sovereign debt agreements, including strengthened collective action clauses and modification of pari passu clauses akin to the provision relied on by holdout bondholders in Argentina's long-running...

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