Excessive external debt is one of the main obstacles faced by countries in the Global South in ensuring the full realization of human rights for their people. In this context, governments are forced to carry out repeated sovereign debt restructurings, especially with private creditors, in order to restore debt sustainability. A human rights approach to these restructurings could help protect basic living standards and avoid unnecessary cuts in social, health, and education public spending, but this approach has thus far been missing from the narrative.
In a recent study, we sought to answer the following questions: 1) Do private creditors have human rights due diligence obligations in the context of sovereign debt restructurings? 2) Do private creditors tend to take into account the socioeconomic and human rights situation of debtor countries when agreeing on the size of haircuts—that is, debt write-offs—in debt restructurings? 3) In Argentina’s most recent debt restructurings, specifically, were human rights taken into account when agreeing on the size of haircuts?
First, we sought to identify the legal basis for the human rights due diligence obligations of private creditors in the context of debt restructurings. Private financial investors, specifically those corporations holding sovereign debt securities, are not exempt from complying with the human rights obligations included in the UN Guiding Principles on Business and Human Rights. These obligations include due diligence.
Standards for these obligations have been developed in multiple international documents: the Guiding Principles on Human Rights Impact Assessment of Economic Reform Policies of 2019; the UN Basic Principles on Sovereign Debt Restructuring Processes, adopted by the General Assembly in 2015; the 2012 UN Conference on Trade and Development (UNCTAD) Principles on Promoting Responsible Sovereign Lending and Borrowing; and the 2011 UN Guiding Principles on External Debt and Human Rights. These sources hold that private lenders should assess how their decisions would affect the fiscal capacity of borrower states to meet their domestic human rights obligations.
What happens in practice? When we looked at debt restructurings in the period between two massive crises (2007 and 2020), when the fall in interest rates due to monetary policies of the US and EU made debt cheaper, we found that private creditors did not consider their human rights due diligence. For the 19 national cases with sufficient data, we sought to determine whether the size of the debt write-offs freed fiscal resources in proportion to the magnitude of the crisis in a manner that would respect, protect, and promote economic and social human rights. We found no significant relationship between the relief obtained in the negotiations and the severity of the socioeconomic crises that preceded them. Examining public spending on health and education specifically, we also found no relationship.
Finally, we compared the write-offs with indicators explicitly related to the human rights situation in debtor countries, such as the unemployment rate and variations in the human development index. In general, the data revealed no relationship between the economic and social human rights situation in distressed debtor countries and the size of the write-offs granted by creditors.
In short, private creditors do not seem to consider the socioeconomic situation when restructuring their claims, demanding that debtor states pay until they bleed to death.
The case of Argentina
Argentina’s situation offers an important comparative case. In 2005, Argentina managed to restructure 76% of its bonds ($81.8 billion, equivalent to half of its total public debt). At that time, GDP was growing rapidly at over 8% per year. However, poverty and extreme poverty still affected 38.9% and 13.8% of the adult population, respectively, with an unemployment rate of 13% of the working population. The restructuring agreement was reached after three and a half years of default, achieving a real write-off of between 21% and 36%. However, due to the lack of an enforceability mechanism, a small group of creditors—called “vulture funds”—was able to refuse to participate in the swap and demanded full repayment in US courts. This move opened a long legal process that limited Argentina’s access to international credit markets.
In 2020, Argentina carried out a new foreign debt restructuring process involving a total amount of $66.7 billion. The swap reached in August of that year postponed payments and reduced interest rates. At the time of the agreement, poverty and extreme poverty affected 42% and 10.5% of the adult population, respectively, and GDP was declining at a rate of 9.9%. Yet creditors did not take into account the state’s vital obligation to protect lives in the context of the COVID-19 pandemic and the related economic recession. The public health emergency, the acute social and economic situation, and the recommendations made by official international financial institutions were not considered when calculating the necessary cuts to restore debt sustainability. Without default and in a speedy negotiation of only seven months, the creditors had no incentives to lower their claims. They did not accept any nominal haircuts but agreed to a longer repayment term with lower interest rates.
What can be done?
Private creditors are obliged to consider the socioeconomic situation of debtor states when calculating sovereign debt reduction in the context of public debt restructurings. But reality shows that those factors—intrinsically linked to economic and social human rights—are not regularly taken into account when negotiating and deciding on haircuts for borrower countries with excessive debts. This failure to incorporate human rights concerns explains, to a large extent, the perpetuation of the debt crisis and its devastating effects on the lives of debtor populations. To address this dereliction of duty, private creditors must be pushed to meet their human rights obligations.