EURODAD, the European Network on Debt and Development, has published a new set of parameters for the operation of a Debt Tribunal. The ten principles are summarised below, with the full document available also for download here :

1. Creation of a body independent of creditors: the sovereign debt work-out procedure must be independent of any creditor institution or body. This is essential to secure a level playing field and international support for the mechanism. This means that – as creditors – the International Monetary Fund and/or World Bank cannot host such a procedure because they would not been viewed as impartial decision-makers (they have an interest in recovering their claims). This
body may be permanent, for example under the auspices of the UN, or it may be ad-hoc and convene only to examine particular cases on demand. There should be the opportunity to go to mediation as a precursor to a binding arbitration procedure.

2. Independence of arbitrators: decision-makers should be neutral and independent from the
parties involved.

3. Mandated to verify the vailidity of individual claims based on any allegations of illegitimacy: the independent arbitrators will decide on the (il)legitimacy of individual credits based on precedent and clear indicators/criteria of illegitimate debt. For example, has the ex ante loan contraction process closely followed the principles outlined in EURODAD’s Charter on Responsible Financing? EURODAD believes that a sovereign debt work-out procedure must be
able to deal with issues related to the (il)legitimacy of debt, otherwise it cannot be considered a truly fair and comprehensive mechanism. Important gaps will exist.

4. Mandated to deal with generalised sovereign debt repayment problems: independent arbitrators will decide if individual credits are valid. Legitimate creditors’ claims will then be dealt with in one comprehensive process and all creditors will be treated equally and fairly. This will avoid the free rider problem evident from initiatives such as the HIPC Initiative where there is a perverse incentive to hold out. It will also help prevent vulture fund litigation because
it will, as a matter of principle, function on the basis of equal treatment of all creditor claims.

5. Process may be initiated by borrower or lender and the institution of automatic stay will apply: there will be a standstill on all external debt repayments in cases of sovereign debt default or on the individual (il)legitimate loan under dispute while the case is heard.1

6. Assessment of the indebted country’s economic situation by a neutral body: in cases of sovereign debt default, a debt sustainability analysis should be carried out by an independent body, such as a United Nations agency. This means that the IMF and World Bank – as creditors – cannot provide the only assessments of the country’s economic situation, although their databases will certainly be drawn upon by the independent body. The analysis should guide
arbitrators’ decisions on how far each legitimate creditor should take a haircut.

7. Protection of the basic obligations of the state to meet the essential needs and services of its citizens: the state must be assured the resources it needs to carry out its basic duty of care. Both domestic commercial and individual insolvency procedures, as well as Chapter 9 of the US-insolvency code which refers to the insolvency of municipalities, provide examples how”essential means” can be protected during any insolvency procedure.

8. Transparency: sovereign debt negotiations must be public and the results and agreements made must also be made public.

9. Participation: the procedure must be participatory and all stakeholders have the right to be heard. This includes borrowers, lenders and individuals/organisations which represent citizens in the debtor nation affected by decisions taken by the arbitration panel. All must argue, prove and document their points (rather than quibble between themselves which is the current situation). As a rule, proceedings should take place in the debtor country’s capital.

10.  Enforceability: all parties must respect the decision of the independent arbitrators. An international treaty establishing a sovereign debt work-out mechanism ratified by most nations would be extremely helpful; however is not a prerequisite for progress in this area. Current sovereign debt mamangement procedures (such as the Paris Club and HIPC Initiative) also function without any basis in international law. Instead they are based on the political will of of
creditors and the lack of alternative solutions. This underscores why an international sovereign debt work-out procedure must be independent of any creditor institution in order to ensure
broad-based support.