Original article – As written for the Financial Times
Sir, Martin Wolf is right to assert that a world of global capital flows needs a workable mechanism for restructuring sovereign debt (Defend Argentina from the vultures, June 24). The problem is that most governments don’t agree: neither advanced countries nor emerging markets (not even Argentina) are any more willing in 2014 to cede power to a supranational bankruptcy court than they were in 2003 when they rejected the International Monetary Fund’s proposal to create a “sovereign debt restructuring mechanism” (SDRM).
After the SDRM’s failure, sovereign debt restructuring became the third rail of international policy making. We can’t afford to let this happen again: after years of fiscal stimulus, public debt burdens are at record levels and both secular stagnation and ageing populations threaten to make them worse. More sovereign debt crises are coming.
We need to move step-by-step to make sovereign debt restructuring easier. A number of sensible incremental proposals are already under discussion: the IMF is pondering changes to the way it lends to make its financing more helpful to countries in distress; investors, legal experts and policy makers are working on changes to the boilerplate language of bond contracts to make it simpler to complete a restructuring once terms have been agreed; the Banks of England and Canada have revived the notion of writing sovereign bonds so that obligations on them vary automatically up and down with a country’s macroeconomic health; and at the Centre for International Governance Innovation we’ve put forward a plan for a standing sovereign debt forum to ease negotiations between debtor countries and their creditors.
Unlike a sequel to the SDRM, none of these proposals would require laborious negotiations, an international consensus, changes to the IMF’s Articles of Agreement or comprehensive treaties to be implemented. They just require a few key countries to act together and take the lead.
Brett House, Senior Fellow, Centre for International Governance Innovation (CIGI), Montreal, QC, Canada