Irish vote against sovereign debt mechanism puzzling

A few weeks ago, the United Nations General Assembly adopted a resolution to establish a new international mechanism to restructure the sovereign debt of bankrupt countries, the noble objective being to prevent any repeat of Argentina’s traumatic debt saga. No fewer than 124 of the UN’s 193 member states endorsed the measure but Ireland did not. Why?

Resolutions of the general assembly are non-binding but carry symbolic political weight in the international setting. The aim of the measure adopted on September 9th is to move from messy “market-based” solutions towards a global legal framework to settle disputes between stricken countries and holders of their debt.

Without any great progress, contentious debate on the need for such a mechanism has been under way for more than four decades. Given Ireland’s near-death encounters on bond markets in 2010 and efforts since to secure bank debt relief from euro zone lenders, this is of more than passing interest.

Even when the local crisis was at its very worst, there was never any serious suggestion the Government or its predecessor would repudiate Irish sovereign bonds. Yet memories are still raw of fruitless attempts to impose losses on senior bank bondholders, and the successful renegotiation of bailout loan terms led to lower interest fees and longer maturities.

In voting against the resolution, however, Ireland aligned itself with a clutch of 10 mostly-wealthy naysayers which included the US, Britain, Israel, Japan, Canada, Australia, Hungary and the Czech Republic. This group also included Germany and Finland, ironic as they were to the fore in the strident euro zone push back against Dublin’s stalled claim for retrospective compensation for rescuing the banks.

So why reject the resolution? In reply to a parliamentary question from Independent TD Maureen O’Sullivan, Minister for Finance Michael Noonan said that the Government had concerns it shared with other EU states.

“Foremost in that regard was the view that the resolution involved a complex proposal which had been presented with great haste, with a pre-determined outcome and without sufficient time for proper consideration by member states.”

Core concerns

Noonan went on to cite an EU statement, which raised serious concerns on the substance of resolution, relayed significant objections on process and bemoaned a lack of information on the proposed framework. “The decision on the relative merits of pursuing a multilateral legal framework requires much deliberation in our capitals and for us collectively within the EU,” said the European statement. “We have not been afforded such possibility, which thus makes it impossible for us to support this resolution.”

Leaving aside the EU countries which rejected the resolution, other member states simply abstained. These included crisis-struck Italy, bank aid recipient Spain, bailout recipients Portugal and Cyprus, and double-bailout recipient Greece, whose second rescue package was accompanied by a huge default on its debts. Iceland also abstained.

Might it have been in order for Ireland too to abstain? Heavily indebted in the aftermath of the crash, the State is in no position to adopt a hard line on the debts of others.

The sorry case of Argentina underscores the need for a new global solution. In the grip of severe financial emergency in 2002, Buenos Aires defaulted on some $100 billion (€80.2 billion) of its bonds. It was ruinous for millions for Argentines. The country defaulted again last summer after “holdout” investors who spurned two subsequent debt swaps secured rulings in the US courts they should be repaid at the same time asrestructured bonds owners.

Still, Argentina baulked at the notion of repaying greedy hedge funds 100 per cent of face value when their bonds were acquired at pennies in the dollar. A US judge then blocked payments on restructured bonds, prompting default.

This was the backdrop to the UN resolution, drafted by Bolivia on behalf of the Group of 77 developing nations and China. It called on the UN “to elaborate and adopt through a process of intergovernmental negotiations . . . a multilateral legal framework for sovereign debt restructuring processes”.

Whether this can work outremains unclear, for it is hard to foresee headway without support from the major global powers. Ireland is no wayward bankrupt, but we’re not quite coming to this debate with an unblemished record.