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Human Rights Due Diligence by Corporate Creditors in Sovereign Debt Restructurings – A Great Missing Link

Published online by Cambridge University Press:  14 August 2023

Juan Pablo Bohoslavsky Open the ORCID record for Juan Pablo Bohoslavsky [Opens in a new window] ,
Francisco Cantamutto  and
Lucas Castiglioni
Juan Pablo Bohoslavsky*
Affiliation:
Researcher, National Scientific and Technical Research Council (CONICET), the Interdisciplinary Centre on Rights, Inclusion and Society Studies, Universidad Nacional de Río Negro (UNRN-CIEDIS), Patagonia, Argentina. UN Independent Expert on Debt and Human Rights from 2014 to 2020
Francisco Cantamutto
Affiliation:
Researcher, Instituto de Investigaciones Económicas y Sociales del Sur (IIESS), Universidad Nacional del Sur (UNS)-CONICET, Bahía Blanca, Argentina
Lucas Castiglioni
Affiliation:
Professor, Facultad de Ciencias Humanas (FCH), Universidad Nacional del Centro de la Provincia de Buenos Aires (UNICEN), Tandil, Argentina
*
Corresponding author: Juan Pablo Bohoslavsky; Email: juanpablobohos@gmail.com
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Abstract

This article studies human rights due diligence by private corporate creditors in the context of sovereign debt restructurings. First, the legal bases of this specific due diligence are presented and systematized. Then, by providing empirical statistical evidence, the article analyses whether haircuts applied by creditors across countries regularly consider the social and economic human rights situation of the debtor countries in question, as part of creditors’ due diligence. Also, the main characteristics of bond markets that contribute to understanding the asymmetric power relationship between private lenders and sovereign borrowers are described. Finally, Argentina’s latest debt restructurings are studied in depth to determine whether human rights were taken into account when agreeing on the size of haircuts. From quantitative and qualitative data, this article concludes that the haircuts agreed by creditors are regularly not sensitive to the social and economic human rights situation of debtor populations or to the impact that debt agreements could have on them.

Keywords

debt restructuringsdue diligencehaircutshuman rightsprivate creditors
Type
Scholarly Article
Information
Business and Human Rights Journal , Volume 8 , Issue 2: Special Issue: Beyond human rights due diligence: What else do we need? , June 2023 , pp. 213 - 236
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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References

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8 But see Bradlow, Daniel, ‘Can Parallel Lines Ever Meet? The Strange Case of the International Standards on Sovereign Debt and Business and Human Rights’ (2016) 41:2 Yale Journal of International Law 201, 239Google Scholar.

9 Private creditors have little interest to change the present situation; however, opposition by the public creditors can be even stronger as they can combine debt relief with economic concessions and increased political influence.

10 Considering, for example, the voting patterns in the Special Procedures’ mandate on debt and human rights, industrialized countries voted systematically against (or abstained) regarding all normative production coming from this mandate, even when discussing its renewal every six years.

11 UNHRC A/HRC/17/31, 21 March 2011, Annex, Guiding Principle 11 at p 13, and Guiding Principle 17 at p 16. The third draft (2021) of the ‘Legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises’ also builds on the notion of business due diligence. See https://www.ohchr.org/sites/default/files/LBI3rdDRAFT.pdf (accessed 27 June 2023).

12 Working Group on the issue of human rights and transnational corporations and other business enterprises, ‘Report’, UN Doc. A/73/163, 16 July 2018, para 2.

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18 See UN Guiding Principles on Human Rights Impact Assessments for Economic Reform Policies, A/HRC/40/57 (19 December 2018); Human Rights Council Resolution, A/HRC/RES/40/8 (21 March 2019), specifically Principles 12 and 15.

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21 This financial jargon is used to denote a reduction in the amount to be repaid to creditors, or a reduction in the face value of a troubled borrower’s debt.

22 It has been found that ‘almost all jurisdictions recognize that there is a structural information asymmetry between consumers and financial institutions, which justify requiring diverging forms of due diligence from lenders’, Matthias Goldmann, ‘Responsible Sovereign Lending and Borrowing: The View from Domestic Jurisdictions. A Comparative Survey’, Working Paper, UNCTAD and Max Planck Institute for Comparative Public Law and Institutional Law (2012), 15–17.

23 On the hard law roots of some of these initiatives, see for example Nolan, Aoife and Bohoslavsky, Juan Pablo (eds.), Human Rights and Economic Policy Reforms (Abingdon: Routledge, 2022)Google Scholar, and Espósito, Carlos, Li, Yuefen and Bohoslavsky, Juan Pablo, Sovereign Lending and Borrowing. The UNCTAD Principles on Responsible Sovereign Lending and Borrowing (Oxford: Oxford University Press, 2013)CrossRefGoogle Scholar.

24 See Grygoriy Pustovit, ‘Bond trustees and debt sustainability in sovereign debt restructuring,’ PhD thesis, Goethe University Frankfurt (2020), at https://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/71333 (accessed 27 June 2023).

25 For the legal development of borrower states’ obligations to conduct debt sustainability analyses taking into account human rights, see next footnote, in particular Principles 2, 11 and 12.

26 UN Independent on Debt and Human Rights, A/HRC/40/57 (19 December 2018); Human Rights Council Resolution, A/HRC/RES/40/8 (21 March 2019).

27 Res. 69/319 (29 September 2015).

28 Available at https://unctad.org/topic/debt-and-finance/Sovereign-Lending-and-Borrowing (accessed 27 June 2023).

29 UN Independent on Debt and Human Rights, A/HRC/20/23 (10 April 2011).

30 On creditors’ HRDD, see also Principle 3 of the Dove Fund Principles, Daniel Bradlow, ‘A Proposal for a New Approach to Restructuring African Eurobonds: The DOVE Fund and Principles,’ Southviews No. 42, South Centre, Geneva (November 2022).

31 According to World Bank data.

32 Bohoslavsky, Juan Pablo and Goldmann, Matthias, ‘An Incremental Approach to Sovereign Debt Restructuring: Sovereign Debt Sustainability as a Principle of Public International Law’ (2016) 41:2 Yale Journal of International Law 13, 43Google Scholar.

33 A/HRC/40/57, Principle 12; A/HRC/20/23, para 65.

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37 See, for instance, the Directive on corporate sustainability due diligence adopted in 2022 by the European Commission, available at https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-sustainability-due-diligence_en (accessed 27 June 2023).

38 Christina Laskaridis, ‘Debt sustainability: Towards a history of theory, policy and measurement’, PhD thesis, SOAS University of London, 2021; Guzmán, Martín and Heymann, Daniel, ‘The IMF Debt Sustainability Analysis: Issues and Problems’ (2016) 6:2 Journal of Globalization and Development 387–404 CrossRefGoogle Scholar.

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40 World Bank, International Debt Statistics (2020).

41 David Beers, Elliot Jones, Zacharie Quiviger and John Walsh, ‘BoC–BoE Sovereign Default Database: What’s New in 2021?’ (2021), Bank of England Staff Analytical Note, 2021-15. Since the 1980s, most restructurings have proceeded without the declaration of default. Ross (2019) identified different enforcement mechanisms used by financial power to prevent debtor countries from defaulting on their sovereign debt (such as the market discipline, the conditional lending, and the bridging role of domestic elites).

42 Institute of International Finance, ‘COVID Drives Debt Surge – Stabilization Ahead?’, Global Debt Monitor (17 February 2021).

43 Julian Schumacher, Christoph Trebesch and Henrik Enderlein, ‘Sovereign Defaults in Court’ (2018), ECB Working Paper, Series No 2135. Given the referred absence of such a mechanism, some national courts have increased their importance – in particular, London and New York. See below the case of Argentina against vulture funds in the New York Courts.

44 Reigner, Michael, ‘Legal Frameworks and General Principles for Indicators in Sovereign Debt Restructuring’ (2016) 41:2 Yale Journal of International Law 141, 175Google Scholar.

45 Fang, Chuck, Schumacher, Julian and Trebesch, Christoph, ‘Sovereign Defaults: The Price of Haircuts’ (2013) 3:5 American Economic Journal: Macroeconomic 85, 117Google Scholar; International Monetary Fund, ‘Sovereign Debt Restructuring – Recent Developments and Implications for the Fund’s Legal and Policy Framework’ (26 April 2013); International Monetary Fund, ‘The International Architecture for Resolving Sovereign Debt Involving Private-Sector Creditors’ (23 September 2020), https://doi.org/10.5089/9781513557472.007 (accessed 27 June 2023); Sturzenegger, Federico and Zettelmeyer, Jeromin, ‘Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998–2005’ (2008) 27:5 Journal of International Money and Finance 780, 805CrossRefGoogle Scholar; Christoph Schröder, ‘Haircut Size, Haircut Type and the Probability of Serial Sovereign Debt Restructurings’ (2014) Centre for European Economic Research (ZEW), Die Discussion Papers 14, 126.

46 Fang, Schumacher and Trebesch (note 45) used a method similar to Sturzenegger and Zettelmeyer (note 45) and Cruces and Trebesch (2013), but obtained a difference of 1.7 percentage points with the work of Sturzenegger and Zettelmeyer (note 45) and 8 percentage points with the estimates of Cruces and Trebesch (2013). On the other hand, Fang, Schumacher and Trebesch (note 45) applied a different methodology than that of Moody’s (2012), so the difference is greater (13 percentage points). The ‘Sovereign Defaults’ series of Moody’s completed the sovereign bond exchanged database up to the year of the start of the pandemic and complemented the study it undertook on the credit rating agency in 2010 on the causes of default.

47 IMF (2020) analyses thirteen cases of debt restructuring in nine countries.

48 Arms, Baqim, Gellpern and Trebesch (2020) recognized different types of defaults events.

49 Schröder (2014) used a database of 180 sovereign debt restructurings with foreign commercial creditors in 68 countries since 1970, taking data from Cruces and Trebesch (2011).

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51 Fang, Schumacher and Trebesch (note 45). This paper reviewed all sovereign debt restructurings with foreign bondholders from 1994 to 2015. The EBC’s sample includes 23 sovereign debt restructurings by 16 countries.

52 European Central Bank (ECB) working paper compiling 418 instruments in 23 debt-restructuring agreements with external bondholders since 1994. The report does not include debt restructurings denominated in local currencies, such as the cases of Paraguay 2006, Jamaica 2010 and 2013, and Cyprus 2013. It takes as a reference the year 1994, when Panama became the first country to default on sovereign bonds since the 1980s crisis.

53 Ams, Julianne, Baqir, Reza, Gelpern, Anna and Trebesch, Christoph, ‘Sovereign Default’ in Ali Abbas, S, Pienkowski, Alex and Rogoff, Kenneth (eds.), Sovereign Debt. A Guide for Economists and Practitioners (Oxford: Oxford University Press – IMF, 2020), 275, 327Google Scholar.

54 Other restructuring processes may have been undertaken during this period, but we intended to review those that the literature accept as such. The universe of cases is built based on these secondary sources and crossed with new data associated with human rights, taken from comparable datasets (mainly from the World Bank). The bibliographic sources are IMF, ECB, Sturzenegger and Zettelmeyer (2008), Cruces and Trebesh (2014), Moody’s (2020).

55 This problem is beyond the scope of this paper. In this regard, see Roos (note 39).

56 Due diligence is an obligation that concerns the means, not the results. In the context of debt restructurings, due diligence consists of analysing whether, at that time, getting repaid 100% would not most likely entail pushing the debtor population to an even more vulnerable economic and social situation.

57 This might be improved in future research, by collecting further data that allow control of other intervening variables. In the figures: in red the countries that defaulted; in blue, preventive sovereign debt restructurings with private creditors.

58 Martín Guzmán and Domenico Lombardi, ‘Assessing the Appropriate Size of Relief in Sovereign Debt Restructuring’ (2017) Columbia Business Research Paper 18-9, https://www.ssrn.com/abstract=3088081 (accessed 27 June 2023).

59 Stefania Vitali, James B Glattfelder and Stefano Battiston, ‘The Network of Global Corporate Control’ (2011) 6:10 PLoS One e259, https://doi.org/10.1371/journal.pone.0025995 (accessed 27 June 2023).

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64 Haberly and Wójcik (note 60).

65 World Bank (2020).

66 Daniel Munevar, ‘Sleep Now in the Fire: Sovereign Bonds and the Covid-19 Debt Crisis’ (26 May 2021), Eurodad, https://www.eurodad.org/sovereign_bonds_covid19 (accessed 27 June 2023).

67 Ugo Panizza, ‘Long-Term Debt Sustainability in Emerging Market Economies: A Counterfactual Analysis’ (2022). Graduate Institute of International and Development Studies Working Paper, No. HEIDWP07-2022.

68 Braun, Benjamin, ‘Asset Manager Capitalism as a Corporate Governance Regime’, in Hacker, Jacob S, Hertel-Fernandez, Alexander, Pierson, Paul and Thelen, Kathleen (eds.), The American Political Economy: Politics, Markets, and Power (Cambridge: Cambridge University Press, 2021), 270, 294CrossRefGoogle Scholar

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70 Munevar (note 66), p 25.

71 ‘Unfortunately, debt restructurings can become a bargaining game in which the country debtor is often (rightly) willing to exchange higher future debt for lower payments now, fully intending to restructure debt again as necessary … And creditors may often be willing to repeatedly renew (or “evergreen”) debt in order to temporarily make their balance sheets look better’, Jeremy Bulow, Carmen M Reinhart, Kenneth Rogoff and Christoph Trebesch, ‘The Debt Pandemic’ (2020) Finance & Development, IMF, 12, 16.

72 Bohoslavsky, Juan Pablo (ed.), Covid-19 y Derechos Humanos en Argentina. La Pandemia de la Desigualdad (Buenos Aires: Biblos Editores, 2020)Google Scholar.

73 World Bank, Global Economic Prospects (June 2021).

74 Data available at https://www.imf.org/en/About/FAQ/questions-and-answers-on-debt-restructuring-in-lics (accessed 27 June 2023).

75 For example, Kristalina Georgieva and Ceyla Pazarbasioglu, ‘The G20 Common Framework for Debt Treatments Must Be Stepped Up’ (2 December 2021), IMF Blog, https://www.imf.org/en/Blogs/Articles/2021/12/02/blog120221the-g20-common-framework-for-debt-treatments-must-be-stepped-up (accessed 27 June 2023).

76 Again, public creditors do not regularly agree debt reliefs, only debt reprofilings.

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79 Mario Damill, Roberto Frenkel and Martín Rapetti, ‘La Deuda Argentina: Historia, Default y Reestructuración’ (2005) 45:178 Desarrollo Económico 187, 233; Alberto Müller, ‘Default y Reestructuración: ¿Cuál fue la Real Quita de la Deuda Pública Argentina?’, Working Paper 32 (Buenos Aires: CESPA, 2013).

80 UN Committee on Economic, Social and Cultural Rights, ‘Concluding observations on the 4th periodic report of Argentina’, E/C.12/ARG/CO/4, 1 November 2018.

81 International Monetary Fund, ‘IMF Country Report No. 20/83’ (20 March 2020), https://www.imf.org/en/Countries/ARG/summary-of-staff-technical-note (accessed 27 June 2023).

82 Ibid.

83 José Fernández Alonso, ‘El Proceso de Reestructuración de la Deuda Argentina 2020: ¿Demasiado Poco?’, Análisis CIPEI No. 109 (Rosario: Centro de Investigaciones en Política y Economía Internacional, 2020).

84 During negotiations, one of the IMF officers threatened by arguing that they could wait for a Minister of Economy more likely to hear their claims. Alejandro Bercovich, ‘Cruces Internos y Amenazas Externas por la Oferta a Bonistas y el Impuesto Forbes’ BAE Negocios (16 April 2020), https://www.baenegocios.com/columnistas/Cruces-internos-y-amenazas-externas-por-la-oferta-a-bonistas-y-el-impuesto-Forbes-20200416-0136.html (accessed 27 June 2023).

85 Instituto de Estudios Fiscales y Económicos, ‘Informe Mensual No. 189’ (2020), IEFE, La Plata.

86 Actually, data show that after default debt restructurings agreements entail higher haircuts than negotiated pre-emptive ones. This would imply that creditors are more inclined to take financial losses when confronting cease of payments than to rather more dialogue-based mechanisms. This shows that the calculation of haircuts is negotiated/decided on a basis in which human rights are not relevant.

87 Deva, Surya, ‘From “business or human rights” to “business and human rights”: what next?’, in Deva, S and Birchall, D (eds.), Research Handbook on Human Rights and Business (Cheltenham: Edward Elgar Press, 2020), 1–21 CrossRefGoogle Scholar.