Leading economists have demanded that Britain and the EU back a proposal to the UN that aims to protect heavily indebted countries including Argentina and Greece from predatory hedge funds, which they claim bring already struggling nations to their knees.

The former Greek finance minister Yanis Varoufakis, the Texas University professor James Galbraith and Martin Guzman, a specialist in sovereign bankruptcy at Columbia University, are among the signatories to a letter in the Guardian calling for rules that would also have prevented Brussels from forcing Athens to accept harsh austerity without offering substantial debt relief.

The economists said that without widespread backing for the UN’s nine-point code, heavily indebted countries would continue to be at the mercy of unforgiving creditors.

“The Greek crisis has made clear that individual states acting alone cannot negotiate reasonable conditions for the restructuring of their debt within the current political framework,” they said.

“Throughout its negotiations with creditor institutions, Greece faced a stubborn refusal to consider any debt restructuring, even though this refusal stood in contradiction to the IMF’s [International Monetary Fund’s] own recommendations.”

The UN proposal follows a string of disputes between indebted countries and their creditors that critics argue have been derailed by demands for repayments that would lead to bankruptcy.

It calls for greater transparency in dealings between indebted countries and creditor banks, hedge funds and official organisations such as the IMF, which want to retrieve loans often running into billions of pounds.

The nine-point plan, tabled by South Africa, states that debtor nations should not be forced to accept punitive terms that would prolong debt repayments. The UN scheme would also prevent individual courts taking on the role of arbitrators, when they can be accused of bias in favour of hedge funds that often buy sovereign debt cheaply before demanding repayment in full.

“Sovereign immunity from jurisdiction and execution regarding sovereign debt restructurings is a right of states before foreign domestic courts and exceptions should be restrictively interpreted,” says the draft resolution.

Last year, a long-term deal struck by Argentina with more than 90% of its creditors was scuppered by a New York court that took on the role of the lawsuit’s arbitrator. The judge in the case, which was brought by a prominent “vulture fund”, sided against Argentina, forcing it to repay a portion of its debts in full or see the whole deal collapse.

In the summer, the judge Thomas Griesa allowed other hedge funds to join the lawsuit, increasing the debt demand from $1.6bn (£1.04bn) to $5.4bn.

The proceedings follow a decade of legal battling between Paul Singer, the boss of hedge fund Elliott Management and leader of a group of creditors known as NML, and Argentina. Argentina says NML should take a 70% haircut on the debt the country owes, in line with more than 90% of other creditors.

The economists said Brussels and the IMF, which were the main creditors to Greece, also exploited their position to make unreasonable demands. “The Greek drama that unfolded over the summer makes clear that there is no time left to dither,” they said.

“This summer’s sham negotiations have caused many Europeans to retreat into nationalism and express defiance towards international institutions. However, Europeans must reaffirm that democratic rights, rather than the dictates of the market, are at the heart of international governance. We therefore call all European states to vote in favour of this resolution.”