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Here’s a much better way for states to declare bankruptcy

Published Last updated This article is more than 2 years old.

Here’s a list of events from the past few years:

1) Greece nearly defaulted on its public debt, forcing European officials to come up with a series of haphazard plans to rescue the country, creating opportunities for speculators without providing a clear path forward for Greece, which sunk into economic malaise. Other European countries, including Italy and Spain, have felt pressure from their creditors.

2) Argentina’s sovereign default in 2001 is still being litigated, ten years after the fact. Hedge funds seized an Argentine naval vessel in Ghana, an American judge nearly forced the country to pay its holdout creditors or default, and now a new set of US legal actions will determine the fate of the country’s borrowing this spring.

3) Developed countries have built up huge loads of debt, from Japan’s over 200% of GDP to America’s 73% of GDP, raising fears that financial crises could occur if fiscal and monetary policy authorities cannot manage pro-growth fiscal consolidation.

These three cases all suggest we need a better way to manage the problem of sovereigns that have borrowed too much. While major sovereign defaults haven’t been common in recent decades, thanks to more sophisticated global cooperation, historically they are frequent. Luckily, there’s a model for this. After the Asian debt crises of the 1990s, the then-head of the IMF, US economist Anne Krueger, suggested that a Sovereign Debt Restructuring Mechanism (SDRM) agreed to in advanced by international institutions could create a systematic way to approach these crises without resorting to ad hoc “programs” or decades of court cases.

Basically, the world needs a way for states to declare bankruptcy or, more like a major bank, go into a kind of receivership. The reasons are the same for countries and banks: to avoid economic disruption and provide fair resolution for borrowers and lenders.

The obvious problem? There are interests at stake here, and the already thorny politics of managing international cooperation are magnified when major lenders have an interest in fighting against a mechanism that would undoubtedly include automatic provisions for debt-relief and whose proposed regularity would reduce opportunities for lucrative speculation. It’s also hard to imagine advanced economies that carry the highest debt loads agreeing to submit themselves to this process.

But the need for a better way to handle these disputes is plain, and now advocates of state bankruptcy may have a venue for practice: the European Union. The challenges of adopting an SDRM internationally may be to much, but working within the EU’s supranational framework might be viable, especially because the region’s politicians understand more than most the demand for such a reform.

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