Skip to main content
Return to Brookings Papers on Economic Activity
BPEA Article

Sovereigns in Distress: Do They Need Bankruptcy?

Abstract

SHOULD THERE BE a sovereign bankruptcy procedure for countries in
financial distress? This paper explores the use of U.S. bankruptcy law as a
model for a sovereign bankruptcy procedure and asks whether adoption of
such a procedure would lead to a more orderly process of sovereign debt
restructuring. It assumes that a quick and orderly debt restructuring
process is more efficient than a prolonged and disorderly one, because a
lengthy process of debt restructuring takes a high toll on debtor countries’
economies as well as harming creditors in general. I concentrate on three
goals for a sovereign bankruptcy procedure: preventing individual creditors
or groups of creditors from suing the debtor for repayment, preventing
groups of creditors from strategically delaying negotiations or acting
as holdouts, and increasing the likelihood that private creditors will provide
new loans to sovereign debtors in financial distress, thus reducing the
pressure on the International Monetary Fund (IMF) to fund bailouts. I
conclude that nonbankruptcy alternatives are less likely to accomplish
these goals than a sovereign bankruptcy procedure.

Author

Get daily updates from Brookings