“If we’re not careful with these investment treaties, you won’t be able to do a really sound, agreed sovereign debt restructuring, even when a crisis requires that,” Woods warned in an interview with CSW, because countries that “go into a debt crisis are going to find themselves bound up in their investment treaties into allowing ‘vulture funds’ to come after them.”
Trade negotiators are “really enthusiastic about permitting arbitration of private sector grievances against government actions that have impeded their profitability in a foreign country,” she explained, but such a provision would “open a back door and permit distressed asset investors to come in, buy the bonds very cheaply, and sue the government for repayment at full price.” In this case, Woods said, traditional creditors would be unwilling to write down the value of their own assets, whilst national governments could find themselves facing huge claims for damages – rendering bail-outs unviable.
The academic said that hers is not a “critique of all trade and investment treaties”: others, such as the North American Free Trade Agreement, have eliminated the problem by excluding sovereign debt and bonds. But she warned that in the EU-USA discussions, “policymakers haven’t yet linked their negotiations in that sphere with all the negotiations in the finance sphere,” and emphasised the need for national governments to involve their finance ministries in trade treaty discussions.
In the Trans-Pacific Partnership negotiations, she added, there’s a further danger that US pressure will force smaller trading partners to give up the “prudential measures” that protect their economies from rapid in- and outflows of “hot money”
See also: Our full interview with Woods