Sovereign Debt Restructuring

After the 1980s crisis, the emerging markets financial crises of the late 1990s have provided further impetus for an intensified search for an orderly approach to sovereign debt restructuring. Important also in this regard is the perception that past efforts to deal with such crises, utilizing policy adjustment and packages of international
support arranged by the IMF have, in fact made the problem more acute by increasing the risk of moral hazard. There is thus an emphasis on the development of an appropriate mechanism within a comprehensive framework in order to strengthen the global financial system’s ability to cope with crises as they arise, and encourage sustainable flows to emerging markets. With a predictable and orderly sovereign debt restructuring mechanism (SDRM) an environment would be created such that investors are able to discriminate between good and bad risks more efficiently. At the same time emerging market economies with stronger policies will then find it easier to access private capital.
In the process, the global financial system will become more stable and efficient as the SDRM implies a move away from debt problems that result in hugely disruptive defaults or necessitate bailing out of private creditors with official funds.