Debt Restructuring and Sovereign Bankruptcy

Efforts to improve the framework for the resolution of international financial crises have been on the policy agenda for several years, but the recent financial crisis has brought new urgency to the issue. The wave of liberalization among developing countries in the 1970s has now left them especially vulnerable to the volatility of financial markets. Most key players now agree on the importance of a new mechanism to resolve sovereign debt insolvency crises, however there is less agreement on how best to achieve this goal.

Changes in the market and the continued cycle of crises have made clear the importance of going beyond macro analysis, to understand the underlying incentives driving different classes of creditors and debtors in devising a sustainable solution. Much of the literature in the 1980s stressed the creditor coordination problem as the crucial reason for market failures and delays in sovereign debt negotiations. Yet the market has changed considerably in recent years, shifting from lending based primarily on syndicated bank loans to traded securities, and the diverse nature of bondholders has exacerbated creditor coordination problems.