2011 Reports

How to Resolve Sovereign Debt Crises in the Twenty-First Century

Herman, Barry

A piece of the international financial architecture is missing, one that would facilitate more effective, fair and timely sovereign debt workouts than the ad hoc, inconsistent and sometimes highly political processes that are applied today. While a newly created mechanism should be available to any sovereign government, including in Europe, special concerns have been voiced, as in the convoking of this conference, for improving debt workouts in low and middle-income countries, where crisis-related declines in living standards that are part and parcel of sovereign debt crises are hardest to bear. This paper argues that launching an initiative at this time would be opportune. The ensuing discussion first suggests that while the developing country debt situation is no longer making headlines, it is a good time to consider creating a mechanism for use when the situation becomes less benign. It then reviews the existing mechanisms for sovereign debt workouts and the limited contributions made (and feasible) from voluntary codes of good conduct, and thus why it is appropriate to think about creation of a new mechanism. It goes on to describe the characteristics that an appropriate sovereign debt workout mechanism should have. It should be a single mechanism, available to all countries, albeit with different configurations of creditors engaging in workouts for lowest-income than for other countries. The paper concludes by arguing that there are not only economic systemic and fairness reasons, but also political ones, for launching a new debt policy initiative now.