Human Rights and Sovereign Debt Restructurings: A Proposal for an Optimal Outcome

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I am very pleased to host Danny Bradlow’s exposition of his Dove Principles.  Danny has used his vast experience to design these principles.  This blog piece was commissioned and edited by Sandhya Drew and Felogene Anumo for the Blog of the Business and Human Rights Journal but an IT blip on the CUP website is delaying publication, and so I have seized this opportunity. This piece will be crossposted by the BHRJ Blog too at a later date.

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Daniel Bradlow, University of Pretoria

Zambia defaulted on its debt in November 2021 but has not yet reached an agreement with its creditors. Its president recently warned that this situation is hurting its citizens and undermining its democracy because “you cannot eat democracy”.

Given their adverse economic, social, and political impacts, it should be expected that human rights considerations would play an important role in sovereign debt restructurings. Unfortunately, this is not the case, even though all negotiating parties have human rights responsibilities or obligations.

It is unclear why these actors pay so little attention to human rights in the sovereign debt restructuring context. One possibility is that they are not sure how to incorporate human rights into their transactions.

This should not be surprising. It is difficult to understand the causal linkages between a sovereign debt crisis and the deteriorating human rights situation that follows.  There can be multiple such linkages and the lines of causation can run in different directions.

Consequently, a human rights consistent debt restructuring will be fact and context specific and will require the parties to understand their role in both creating the situation and in mitigating or eliminating the adverse human rights impacts.

This requires the parties to have a common approach to analysing the debt crisis and its anticipated economic, financial, human rights, environmental, social and governance impacts. Thus, they could benefit from having a mutually acceptable set of principles that incorporates all these issues.

In 2021, I received a grant from the Open Society Initiative for Southern Africa to explore the feasibility of my proposal to establish a DOVE (Debts of Vulnerable Economies) Fund. This fund would buy the debts of sovereigns in distress and state that it would only support sovereign debt restructurings that were consistent with widely accepted international norms and standards, My work on this project revealed shortcomings with all the existing international standards and led me to develop the DOVE Fund Principles.  The principles are based on 20 existing international norms and standards developed by states, international  organisations, industry associations and civil society organisations. They can provide a common framework for the negotiations between states and their creditors.  They are now set out and explained.

The DOVE Fund Principles

Principle 1: Guiding Norms: Sovereign debt restructurings should be guided by the following 6 norms: Credibility, Responsibility, Good Faith, Optimality, Inclusiveness, and Effectiveness.

• Credibility: The Negotiating Parties and the Affected Parties are confident that the restructuring process can produce an Optimal Outcome. The “Negotiating Parties” are the sovereign debtor, its creditors and their advisors. The “Affected Parties” are the residents of the debtor country and those individuals whose savings either directly or indirectly finance the debt being restructured.
• Responsibility: The Negotiating Parties seek an agreement that respects their respective economic, financial, environmental, social, human rights and governance obligations and/or responsibilities.
• Good Faith: The Negotiating Parties intend to reach an agreement that takes account of all their rights, obligations and responsibilities.
• Optimality: The Negotiating Parties seek an “Optimal Outcome”, that addresses the circumstances in which the transaction is being negotiated, the parties’ respective rights, obligations and responsibilities, and offers them the best possible mix of economic, financial, environmental, social, human rights and governance costs and benefits.
• Inclusiveness: All creditors can participate in the restructuring process and the Affected Parties are able to make informed decisions about how it will impact them.
• Effectiveness: The Negotiating Parties should seek an Optimal Outcome in a timely and efficient manner.

Principle 2: Transparency: The Negotiating Parties and the Affected Parties should have access to the information that they need to make informed decisions regarding the debt restructuring.

The creditors have access to sufficient information that they can make informed decisions about the scope of the sovereign’s debt problems, the options for their resolution and their potential economic, financial, environmental, social, human rights and governance impacts. The Affected Parties should also have access to sufficient information, subject to appropriate safeguards, that they can make informed decisions about how the restructuring may affect their rights and interests.

The creditors should inform the debtor and the Affected Parties about their environmental, social, and human rights obligations and responsibilities.

Principle 3: Due Diligence: The sovereign debtor and its creditors should each undertake appropriate due diligence before concluding a sovereign debt restructuring process.

The Negotiating Parties should utilize a debt sustainability analysis which credibly determines the sovereign’s debt restructuring needs and their impacts.

Principle 4:  Optimal Outcome Assessment:  At the earliest feasible moment, the Negotiating Parties should publicly disclose why they expect their restructuring agreement to result in an Optimal Outcome.

An Optimal Outcome requires the Negotiating Parties to assess the expected impacts of their proposed agreement on the economic, financial, environmental, social, human rights and governance condition of the sovereign borrower and the Affected Parties.

Principle 5: Monitoring: The restructuring process should incorporate credible mechanisms for monitoring the implementation of the restructuring agreement.

The Negotiating Parties should audit the financial aspects of the agreement and monitor its economic, social, environmental, human rights and governance impacts. This information should be published periodically.

Principle 6: Inter-Creditor Comparability: The restructuring process should ensure that all creditors make a comparable contribution to the restructuring of the sovereign’s debt.

 The process should give creditors the confidence that all other creditors are making comparable contributions to an Optimal Outcome.

Principle 7: Fair Burden Sharing: An Optimal Outcome should share the burden of the restructuring fairly between Negotiating Parties and should not impose undue costs on any of the Affected Parties.

Both the debtor and the creditor bear some responsibility for causing debt crises and should absorb some of the restructuring costs. Moreover, they should seek to limit how much of the restructuring costs the Affected Parties will have to bear, considering their relative wealth and ability to absorb losses.

Principle 8: Maintaining Market Access: The restructuring agreement, to the greatest extent possible, should be designed to facilitate future market access for the borrower.

It is an unfortunate reality that debtor countries must seek financing from international financial markets. Thus, the Optimal Outcome should help the debtor regain access to financial markets as quickly as possible.

As the Zambian case demonstrates, the current arrangements for restructuring sovereign debt are sub-optimal. The DOVE Fund Principles seek to overcome this problem by offering both Negotiating and Affected Parties a common conceptual framework that facilitates a fair resolution of the crisis incorporating all its social, environmental, human rights, economic, financial and governance impacts. They therefore can promote an Optimal Outcome.

For further information on this ongoing project, contact: danny.bradlow@up.ac.za

Business and Human Rights Journal articles for further reading:

1) Social Bonds for Sustainable Development: A Human Rights Perspective on Impact Investing

Stephen Kim PARK

Journal: Business and Human Rights Journal / Volume 3 / Issue 2 / July 2018

pp. 233-255

2) The Record of International Financial Institutions on Business and Human Rights

Jessica EVANS

Journal: Business and Human Rights Journal / Volume 1 / Issue 2 / July 2016

pp. 327-332