Sovereign debt restructuring and the missing international coordination

Absent a formal bankruptcy mechanism for sovereigns, sovereign debt restructurings have come too late and provided too little relief to facilitate the exit from crises. The absence of a more effective framework makes the prospects for overindebted economies worrisome. Against this background, the chapter first overviews the historical incidence of sovereign default, and describes the sequencing of decisions needed to conduct a sovereign debt restructuring: (i) announce the process and manage upcoming payments; (ii) determine whether to engage the IMF; (iii) set the perimeter of debt affected and the amount of relief required; and (iv) negotiate with creditors. Next, it summarizes the evolution of the international financial architecture for managing sovereign debt crises and describes the existing architecture. The chapter closes with a critical overview of proposals to minimize the occurrence of sovereign debt crises, including enhancing global policy coordination and promoting counter-cyclical and state-dependent financing instruments.