Sovereign debt clauses in US BITs discussed by government-appointed committee (December 2009)

Rethinking Bretton Woods | Tue, Dec 1, 2009

By Aldo Caliari

Last summer, at the request of the US State Department and the US Trade Representative, a committee was established to review the US Model Bilateral Investment Treaty. Among other things that the Committee has recommended in its report that “the Administration weigh the appropriateness of including an annex in future BITs on restructuring public debt.” The call is contained in recommendation number 24 (and the last one) in the Report of the Advisory Committee on International Economic Policy Regarding the Model Bilateral Investment Treaty.

Even with the understandable nuance that was expected from a committee whose membership included representatives from the private sector and civil society with, at times, very divergent views, it represents the most significant progress that has been made to date on an issue that had long been the matter of criticism by analysts. 

The problematic trend in US bilateral investment treaties and Free Trade Agreements to extend the application of provisions typically used for investment, such as national treatment and MFN, has been addressed by Center of Concern as far back as 2005. A Center of Concern paper issued on that year analyzes the concerns raised by clauses applying investment treatment to sovereign debt in the context of the then under negotiations Central American Free Trade Agreement.  

That same year, in a paper commissioned by UNCTAD and published later on as part of UNCTAD’s Compendium on Debt Sustainability and Development this author noted that the extension of National Treatment and MFN Treatment to sovereign debt might, among other things,  1) dismantle tools needed by debtor countries in post-crisis recovery of the local economy, 2) prevent the State from paying salaries and pensions in a crisis situation, 3) reduce the leverage of the debtor in negotiation of a debt restructuring. Moreover, sovereign debt restructuring aspects become subject to potential intervention by a patchy array of arbitral tribunals that threatened to undermine the already uncertain situation of sovereign countries undergoing a debt restructuring in a system that lacks rules for sovereign bankruptcy. (read this paper).

Thanks to the relentless advocacy of members of this group who were part of that committee, a recommendation on this matter now has found its way into this potentially pivotal report which will, no doubt, become a useful advocacy instrument in future discussions on US (and other countries)’ trade policy.  One substantial concern that gets noted by the committee and reportedly influenced the opinion in favor of including this recommendation refers to the global financial crisis. “There may be an increased need for negotiated restructuring of public debt, particularly as countries have increased their public debt in recent years, in part to address the current financial crisis,” says the report. 

Download a copy of the full report.