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Debt court idea for bankrupt states gathers pace

Protesters against harsh cuts imposed on Greece by foreign creditors targeted the economy ministry during strikes on October 5 Reuters

Cabinet has been asked to consider a proposal that would see it advocate the setting up of an international framework for dealing with bankrupt states.

This content was published on October 7, 2011 - 08:32
Sophie Douez, swissinfo.ch

A group of 28 Swiss parliamentarians are supporting a motion that calls on the cabinet to present a proposal for a “fair and independent” insolvency framework for states.

The motion says such a mechanism would contribute to avoiding a future debt crisis and to ensuring the stability of the monetary and financial systems.

“Moreover, the government has to advocate for the international support and implementation of this proposal,” the motion demands.

The proposal is the initiative of Radical Party senator for canton Zurich Felix Gutzwiller, and adds momentum to efforts by non-government organisations to put the issue on the international agenda.

According to Gutzwiller, the lack of international mechanisms to deal with bankrupt states feeds uncertainty in financial markets, as evidenced by current market volatility resulting from speculation about the ability or not of Greece to pay back its debts.

“If those that lend money don’t know what kind of procedure is used if a state goes bankrupt, this adds to a level of uncertainty which can be quite dangerous,” Gutzwiller told swissinfo.ch.

“You can reduce uncertainty with clear cut and defined procedures and that in itself is an important task and in the interest of any major economic power in Europe or abroad.”

Close to home

Switzerland first raised the proposition of establishing international rules for dealing with insolvent states with international partners in the 1990s, but dropped the idea when it was clear there was little international support.

And in the wake of Argentina’s bankruptcy declaration in 2001, the International Monetary Fund (IMF) tried and failed to garner support for a sovereign debt restructuring mechanism (SDRM) to be included in its treaties.

Managing director of non-government organisation Aktion Finanzplatz Schweiz (Action Finance Place Switzerland) André Rothenbühler said the situation in Greece had led to renewed support for establishing international insolvency rules.

He said Norway was already advocating such a plan, and several key players in Germany, including Chancellor Angela Merkel, agreed with the broad principal of instigating international rules for bankrupt states.

“This idea has become very much part of the international debate and awareness of the issues is certainly much stronger than it was in the 1990s,” Rothenbühler told swissinfo.ch.

“The possibility of a state defaulting on its debt is now happening in Europe and not somewhere else, it’s in our neighbourhood.”

Debt court

Rothenbühler said proposals for an insolvency framework included establishing an “informal” independent arbitrator in the first instance, before evolving the system into a more formal international debt court to negotiate debt restructuring between states and their creditors.

He said the process should include establishing criteria that must be met by states before independent arbitration procedures are commenced. The rules should ensure that states in default remain able to provide citizens with essential services.

“In the past or today when a country has difficulty to repay its debt, it is in most cases at the mercy of the creditors,” Rothenbühler said.

Gutzwiller said that he expected a positive response to the plan from most private lenders. But he said some hedge funds and other investors with interests in vulnerable African countries would resist such proposals, preferring to remain “more free to exercise pressure than in the context of an international framework”.

“Probably the most difficult aspect is whether you find an international consensus around this debate,” Gutzwiller said.

Swiss influence

Clearly, getting international support for such a mechanism in the first instance, and then gaining consensus on how such a process should operate will be the biggest challenges to establishing an international structure for bankrupt states.

But Gutzwiller and Rothenbühler argue that Switzerland’s role as a leading financial player and its membership of international organisations such as the Financial Stability Board, the World Bank and the United Nations means it is ideally placed to advocate the scheme on the international stage.

“Switzerland is very well positioned in some of the organisations that should push the issue,” Gutzwiller said, adding that he was optimistic that the cabinet would adopt his motion to take up the issue before the end of the year.

“As an important financial centre of the world, it would be a good proposal for Switzerland to distinguish itself.”

Gutzwiller motion text

“The Federal Council [cabinet] is mandated to present a proposal for a fair and independent international insolvency framework for states, which also involves private investors and contributes to avoid future debt crises and to ensure and to ensure the stability of the monetary and financial systems. Moreover, the Federal Council has to advocate for the international support and the implementation of this proposal.”

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Defusing debt

Aktion Finanzplatz Schweitz is one of several non-government organisations participating in the global “Defuse the Debt Crisis” campaign.

The campaign calls for the establishment of a fair and independent Debt Court that would establish the legitimacy of debt claims on bankrupt states, and arbitrate debt restructuring agreements.

The campaign says arbitration should cancel unjust debt or debts which prevent countries from providing essential services to citizens.

Current action includes petitioning French President Nicolas Sarkozy, as chair of the G20 in 2011 on the issue. 

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