Why the Code of Conduct for Resolving Sovereign Debt Crises Falls Short

Herman, Barry

What process should be followed to help governments with foreign debts that they can no longer service move to a more sustainable situation? Multilateral institutions and governments adopted the Heavily Indebted Poor Countries (HIPC) Initiative, supplemented by the Multilateral Debt Relief Initiative (MDRI), as an approach for the poorest countries. However, they offered only the most general guidance for how the governments of countries that borrow primarily from private foreign sources should resolve a debt crisis. In essence, the international official sector says, "the parties should work it out." And they have, sometimes in an orderly and smooth way, and sometimes not. Numerous authors have proposed policy initiatives to bring more predictability and fairer outcomes into sovereign debt workouts for non-HIPCs (in some cases also aiming to improve on the HIPC process), ranging from sovereign bankruptcy regimes modeled on national corporate bankruptcy systems, to arbitration processes, to standing availability of mediation services (see Kaiser, 2008). Others have proposed informal guidelines or a "code of good conduct" to which debtors and creditors might subscribe as a way to reduce uncertainty about how debt restructuring would proceed. The latter will be the focus of this paper.


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February 2, 2010


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