Creating a Framework for Sovereign Debt Restructuring that Works
Debt matters. In recessions, high uncertainty discourages private spending, weakening demand. Resolving the problem of insufficient demand requires expansionary macroeconomic policies. But “excessive” public debt may constrain the capacity for running expansionary policies." Evidence shows that high public debt also exacerbates the effects of private sector deleveraging after crises, leading to deeper and more prolonged economic depressions (Jordà, Schularick, and Taylor, 2013).
Even if programs of temporary assistance (e.g., from the International Monetary Fund) make full repayment of what is owed possible in those situations, doing so could only make matters worse. If the assistance is accompanied by austerity measures, it would aggravate the economic situation of the debtor. 2,3
Distressed debtors need a fresh start, not just temporary assistance. This is in the best interests of the debtor and the majority of its creditors: precluding a rapid fresh start for the debtor leads to large negative-sum games in which the debtor cannot recover and creditors cannot benefit from the larger capacity of repayment that the recovery would imply.
About the Authors
Initiative for Policy Dialogue (IPD)
Joseph E. Stiglitz is co-President of the Initiative for Policy Dialogue, and Chairman of the Committee on Global Thought at Columbia University. He is University Professor at Columbia, teaching in its Economics Department, its Business School, and its School of International and Public Affairs. He chaired the UN Commission of Experts on Reforms of the International Monetary and Financial System, created in the aftermath of the financial crisis by the President of the General Assembly. He is former Chief Economist and Senior Vice-President of the World Bank and Chairman of President Clinton’s Council of Economic Advisors. He was awarded the Nobel Memorial Prize in Economics in 2001.
Associate Research Scholar
Graduate School of Business
Martin Guzman is a Associate Research Fellow at Columbia University Graduate School of Business and an Associate Professor at Universidad de Buenos Aires.
He is a co-chair of Columbia University Initiative for Policy Dialogue's Taskforce on Debt Restructuring and Sovereign Bankruptcy, and a member of the INET Research Group on "Macroeconomic Externalities” chaired by Professor Joseph Stiglitz. He is also a Senior Fellow in CIGI’s Global Economy Program. He is an Editor of the Journal of Globalization and Development.
He holds a PhD in Economics from Brown University. His research fields are Macroeconomics and Economic Development.