Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises

The Initiative for Policy Dialogue (IPD) at Columbia University brings together academics, policymakers, and practitioners from developed and developing countries to address the most pressing issues in economic policy today. IPD is an important part of Columbia’s broad program on development and globalization. The Initiative for Policy Dialogue at Columbia: Challenges in Development and Globalization book series presents the latest academic thinking on a wide range of development topics and lays out alternative policy options and trade-offs. Written in a language accessible to policymakers and students alike, this series is unique in that it both shapes the academic research agenda and furthers the economic policy debate, facilitating a more democratic discussion of development policies.

The current non-system for resolving sovereign debt crises does not work. Sovereign debt restructurings come too late and too little. This imposes enormous costs on societies: restructurings are often not deep enough to provide the conditions for economic recovery, as the Greek debt restructuring of 2012 illustrates, impeding debtors in distress from escaping from recessions or depressions. Furthermore, if the debtor decides to play hardball and not to accept the terms demanded by the creditors, finalizing a restructuring can take a long time and, as the case of Argentina illustrates, be beset with legal challenges, especially from a small group of non-cooperative agents that have earned the epithet “vulture funds.”

A fresh start for distressed debtors is a basic principle of a well functioning market economy. The absence of a fresh start may lead to large inefficiencies, where both the debtor and the creditors lose. This principle is well recognized in domestic bankruptcy laws. But there is no international bankruptcy framework that similarly governs sovereign debts. These problems are not new. They have been plaguing the functioning of sovereign debt markets for decades.

This book provides a thorough analysis of the main deficiencies of the current non-system for sovereign debt restructuring and of possible solutions. It includes fifteen chapters by world-leading academics and practitioners. Overall, the chapters in this book depict an overwhelming consensus on the need to reform the non-system that governs sovereign debt restructuring. And as this book emphasizes, if there is a better framework for debt restructuring, debt markets will function better, and societies will do better.