Summary of Revisiting Sovereign Bankruptcy

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Recommendation

When people and companies run into deep financial trouble, bankruptcy provides an orderly resolution. For countries in dire financial straits, however, gaining a fresh start through bankruptcy is not an option. Without clearly defined paths for debtor countries, creditors may be relegated to “debt purgatory,” and countries may face complex or unsatisfactory solutions when fiscal trouble strikes. The debt crisis in Greece and the continuing economic threats in Europe underscore a need for more formalized arrangements to protect both debtors and creditors in a sovereign debt crisis. This paper from the independent Committee on Economic Policy and Reform offers valuable insight into the problems and possible solutions surrounding troubled sovereign debt, but you may wonder if nations’ ingrained, sometimes-sloppy borrowing habits can ever change. getAbstract recommends this report to anyone interested in the nuances and dangers of lending to countries that have feasted too enthusiastically at the world’s debt buffet.

About the Authors

The Committee on International Economic Policy and Reform, an unaffiliated group of former central bankers, academics and government officials, studies global economic issues and proposes solutions that “reconcile national interests with broader global interests.”

 

Summary

The Growing Sovereign Debt Dilemma

Over the last few decades, a growing number of countries have gone through sovereign debt crises. To highlight just a few such debacles, remember the Latin American debt crisis of the 1980s, Russia’s nonpayment of its bonds in 1998, and Argentina’s 2001 default on more than $80 billion worth of foreign bonds. More recently, the European Central Bank has taken action to avoid default by recession-ridden, fiscally unsound countries in the European Union. The common theme that underscores all these events is the unique nature of sovereign debt.

Under corporate debt agreements and in other private dealings, creditors have a number of contractual means at their disposal to gain full or partial recovery of their funds, and all bondholders typically must abide by these agreements. Sovereign debt creditors, by contrast, have much weaker and less-clearly defined protections when a country goes into default or is on the brink of doing so. Even when these creditors win courtroom battles, the fact that creditors cannot seize most sovereign assets hampers material recovery. Many sovereign assets enjoy special protections, or courts shield them...


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