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BPEA Article

Debt Restructuring: Evolution or Revolution?

Abstract

The papers by Bulow, Sachs, and White illustrate the interconnections
inherent in most important economic policy issues, not least those concerning
the structure of the international financial system. One of the
most timely of these issues is whether there should be an international
bankruptcy court for sovereign debt. Two of the three papers in this symposium,
those by Bulow and Sachs, provide brief answers to that question
within a more expansive essay on what is wrong with the international
financial system. Both argue that a thorough reform of the system is
needed; a bankruptcy court is an important side issue in Sachs’ view and
a distraction in Bulow’s. There are some similarities in their critiques, but
they differ fundamentally on the central issue of sovereign debt. Sachs
wants governments to provide more financial resources to heavily
indebted countries, including through the international financial institutions
(IFIs) and streamlined debt relief, to give those countries a fresh
start. Bulow wants governments and markets to provide fewer resources
because national and international institutions have squandered what has
been provided in the past, and he argues further that those institutions
should first be largely privatized. Sachs and Bulow cannot both be right
in their prescriptions for the international financial system. My judgment
is that they are both mostly wrong, but that is for another day.

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