Debt Restructuring Mechanism

While the international community has witnessed recurring debt crises for hundreds of years, there is still no international mechanisms to deal with these crises. As a result, countries experiencing a debt crisis must try to negotiate with its creditors in a situation where the balance of power is very asymmetric, and where there is no independent body that can secure a just and lasting solution to the crisis. Often, the results of this has been limited debt cancellation compared to what is needed, and a prolonged crisis with all the social and economic consequences it entails.

The debt relief initiatives of the World Bank and the IMF for the poorest countries have entailed debt cancellation of $120 billion for the 30 poorest countries of the world, making funding for investments in health and education possible in these countries. Still, these initiatives were only available for the poorest countries, and the initiatives ended in 2014. New debt relief initiatives are necessary, and the debt crisis in Europe has put the issue of sovereign debt high on the international agenda. In the spring of 2013, the United Nations Conference on Trade and Development (UNCTAD) launched a project, financed by Norway, to examine how a just and predictable debt restructuring mechanism could look like. In 2015, The UN General Assembly adopted the Basic Principles on Sovereign Debt Restructuring Processes.

What should a just and independent debt restructuring mechanism look like?

A new international debt restructuring mechanism must be completely independent, so that a country experiencing a debt crisis can reach a solution that is just for all parties involved. A new mechanism must cover all the sovereign debt of a country, to secure a comprehensive and lasting solution on the crisis.

It is also important that the legitimacy of the debt is reviewed, and that it is uncovered whether parts of the debt can be traced back to authoritarian regimes or not. Illegitimate debt should not be repaid and should be cancelled, while legitimate loans should be a part of the process. This kind of review would entail differentiating between creditors that are being responsible lenders, and creditors that contribute to illegitimate debt burdens. This will create better incentives for future loans, because it will pay off to be a responsible lender.

When deciding how much of the debt that needs to be cancelled for the remaining debt burden to be sustainable, one should consider how much economic resources the country needs to fulfill its obligations to ensure its citizen’s fundamental human rights. The goal of an independent and just debt restructuring mechanisms is to give both the country in crisis and its creditors a just solution to the debt crisis.


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