Guide to an alternative resolution to sovereign debt

Added 11 Oct 2010

At a side event to the World Bank and IMF annual meetings this weekend, Eurodad member  Erlassjahr together with  Friedrich Ebert Stiftung launched the study “Resolving Sovereign Debt Crises -Towards a Fair and Transparent International Insolvency Framework”.  The report aims at guiding governments, parliamentarians, and members of the public concerned about debt in the South, towards debt workout procedures that offer an alternative to existing mechanisms.

Due to the global financial crisis, a broad range of countries are experiencing increased and critical levels of sovereign debt. European high-income countries, middle-income countries, especially in the Caribbean , and low-income countries are at risk of new waves of debt distress. Even countries that have obtained debt relief through existing multilateral debt relief mechanisms are once again on the verge of  debt distress .

Despite long-standing experiences with sovereign insolvencies, however, no fair and comprehensive mechanism exists to deal with the complex debt structures that many countries have. Existing debt workout procedures such as the Paris Club, the Highly Indebted Poor Countries initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI) have either been one-off exercises not intended to be applied as a permanent mechanism, or they reinforce collective action problems by being piecemeal in character and leaving out large groups of creditors.

The study by Erlassjahr and Friedrich Ebert Stiftung therefore argues that principles and procedures of domestic insolvency should be applied to sovereigns in order to reach  a fair and sustainable debt workout . It explains the principles of an ad-hoc or an institutionalised framework, and describes the possibilities for obtaining political support and technical advice for countries that may find themselves in need of an orderly debt workout process. The study also presents and analyses existing debt relief mechanisms and their shortcomings, and the resulting need for reform. It also gives an overview of the ongoing political debates on the issue and points to relevant online resources.