Creating a Framework for Sovereign Debt Restructuring that Works

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.