A Law on Principles Applicable to Sovereign Debt Restructuring Was Passed

On November 10, 2015, Law No. 27,207 on Basic Principles on Sovereign Debt Restructuring Processes (the “Law”) was published in the Official Gazette, and this bill was submitted by the Executive Branch of the Federal Government (the “Executive Branch”) on September 18.

The Law declares the Basic Principles on Sovereign Debt Restructuring Processes, which were approved by means of Resolution No. A/RES/69/319 of the United Nations General Assembly ( “Basic Principles” and “Resolution 69”, respectively) on September 10, 2015 and are attached as an Exhibit to the Law, to be public policy.

I. Background

Resolution 69, backed by the so-called “Group of 77 and China”, obtained 136 votes in favor, 6 votes against (United States, Israel, Canada, Japan, Germany and the United Kingdom) and 41 abstentions.

Resolution 69 is preceded by another resolution, adopted by the United Nations General Assembly on September 9, 2014 (A/RES/68/304), whereby it was decided to draft and approve a multilateral regulatory framework for sovereign debt restructuring processes with the aim of, inter alia, “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”.

As a result of this resolution, the United Nations General Assembly decided to establish an Ad Hoc Committee, open to participation by all Member States, to develop the multilateral legal framework referred to above. The Committee's work consisted of three plenary meetings, academic contributions, informal consultations and negotiations related to the Basic Principles that were then approved by Resolution 69.

II. The Basic Principles

Resolution 69 contains nine Basic Principles that are listed in the Exhibit to the Law, and are the following:

1. A Sovereign State has the right, in the exercise of its discretion, to design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures. Restructuring should be done as the last resort and preserving at the outset creditors’ rights.
2. Good faith by both the sovereign debtor and all creditors would entail their engagement in constructive sovereign debt restructuring workout negotiations and other stages of the process with the aim of a prompt and durable re-establishment of debt sustainability and debt servicing, as well as achieving the support of a critical mass of creditors through a constructive dialogue regarding the restructuring terms.
3. Transparency should be promoted in order to enhance the accountability of the actors concerned, which can be achieved through the timely sharing of both data and processes related to sovereign debt workouts.
4. Impartiality requires that all institutions and actors involved in sovereign debt restructuring workouts, including at the regional level, in accordance with their respective mandates, enjoy independence and refrain from exercising any undue influence over the process and other stakeholders or engaging in actions that would give rise to conflicts of interest or corruption or both.
5. Equitable treatment imposes on States the duty to refrain from arbitrarily discriminating among creditors, unless a different treatment is justified under the law, is reasonable, and is correlated to the characteristics of the credit, guaranteeing inter-creditor equality, discussed among all creditors. Creditors have the right to receive the same proportionate treatment in accordance with their credit and its characteristics. No creditors or creditor groups should be excluded ex ante from the sovereign debt restructuring process.
6. Sovereign immunity from jurisdiction and execution regarding sovereign debt restructurings is a right of States before foreign domestic courts and exceptions should be restrictively interpreted.
7. Legitimacy entails that the establishment of institutions and the operations related to sovereign debt restructuring workouts respect requirements of inclusiveness and the rule of law, at all levels. The terms and conditions of the original contracts should remain valid until such time as they are modified by a restructuring agreement.
8. Sustainability implies that sovereign debt restructuring workouts are completed in a timely and efficient manner and lead to a stable debt situation in the debtor State, preserving at the outset creditors’ rights while promoting sustained and inclusive economic growth and sustainable development, minimizing economic and social costs, warranting the stability of the international financial system and respecting human rights.
9. Majority restructuring implies that sovereign debt restructuring agreements that are approved by a qualified majority of the creditors of a State are not to be affected, jeopardized or otherwise impeded by other States or a non-representative minority of creditors, who must respect the decisions adopted by the majority of the creditors. States should be encouraged to include collective action clauses in their sovereign debt to be issued.

Resolution 69 invites all Member States and observer states, international organizations and entities and other relevant stakeholders to support and promote the Basic Principles. In this context, the Federal Executive submitted the bill which gave rise to the passing of the Law.

III. Preliminary Comments

Among the reasons invoked by the Executive Branch for introducing the bill, it is stated that its adoption is based on the invitation made by Resolution 69.

It was also noted that "the support and promotion of these principles not only includes their consideration and implementation in future restructuring of sovereign debt, but also the impossibility of setting the principles aside as a result of the mere discretion of the parties involves in said processes", for the purposes of which the Executive Branch promoted its declaration as public policy rules in the Argentine legal system.

Resolution 69, as adopted by the United Nations General Assembly, has no binding nature in international or domestic spheres, unless it is understood that its provisions reflect international custom or, that after its adoption, it gives rise to customary international law. However, from its publication, the Law is binding in the Argentine legal system and has the nature of “public policy rules”.

For those reasons, it will be interesting to see the potential impact of the Basic Principles, whether in the context of new sovereign debt transactions, measures or agreements involving previously issued government debt, or court rulings or arbitration awards related to this issue as well as the impact that the implementation of the Basic Principles may have on the interpretation and application of the laws regulating the restructuring of sovereign debt, such as the so-called “Lock Law” No. 26,017.