Sovereign Debt: Notes on Theoretical Frameworks and Policy Analyses

Bankruptcy is one of the central institutions of capitalism. Without bankruptcy, limited liability firms could not have arisen; and arguably, without limited liability firms, capitalism, at least as we know it, could not have developed.1  In spite of its importance,
the subject has, until recently, received scant attention either from micro-economists or macro-economists.2  Arguably, one of the reasons for the dismal performance of IMF policies in the East Asian crises was their failure to take into account adequately the
implications of those policies for bankruptcy, and the implications of bankruptcy for both aggregate demand and supply. 3  In the context of that crisis, it was argued that more extensive reliance on bankruptcy and standstills would have been more effective than the
big bail-outs; indeed, it was only with the “forced” roll-over of Korean loans (equivalent to a standstill) that Korea’s exchange rate stabilized. Such measures might have reduced capital outflows out of the country, and this in turn would have led to a strengthening of
the exchange rate. 4