A Soft Law Mechanism for Sovereign Debt Restructuring

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By Martin Guzman and Joseph E. Stiglitz

The ultimate goal of sovereign debt restructuring is to restore the sustainability of public debt with high probability[1]. But this is not happening. Since 1970, more than half of the restructuring episodes with private creditors were followed by another restructuring or default within five years[2] — evidence inconsistent with any sensible definition of “restoration of sustainability of public debt with a high probability.” This evidence suggests that relief for distressed debtors is often insufficient for achieving the main goal of a restructuring, delaying the recovery from recessions or depressions, with large negative social consequences.[3]

The lack of a statutory regime for dealing with distressed sovereign debt makes sovereign debt crises resolution a complex process — marked by inefficiencies and inequities that take multiple forms[4]. The current non-system is characterized by bargaining based on decentralized and non-binding market-based instruments centered on collective action clauses and competing codes of conduct. The IMF often plays the role of the facilitator in this process of bargaining between a distressed debtor and its creditors.[5] But it has not always been successful in ensuring that restructuring needs are addressed in a timely way — indeed, it has often failed; and as we have already noted, even when restructuring processes have ultimately been carried out, they have often not been deep enough.[6]Read More »