The spate of financial crises in the 1990s has unambiguously established the heightened vulnerability in the international financial system brought about by widespread financial-sector deregulation and liberalization. Basically, this calls for a thorough revisiting of their neo-liberal macroeconomic policies by the Bretton Woods Institutions (BWIs), which, through one-size-fits-for-all advocacy on continuous market-led trade and financial liberalization, have created unprecedented external vulnerability, economic instability, and human suffering for countries and peoples of the South. However, the multilateral bodies still resist attempts for fundamental changes in their own policies and stick to the ideological frame that supports their adjustment policies.

The problems of financial crisis faced by sovereign borrowers with liberalized financial markets have been exacerbated by the prevailing structure of international financial markets. Ever since the debt crises of the early 1980s, it has become clear that the growth of private lending to developing countries has generated an inherent tendency in global financial markets towards herding and subsequent over-exposure of individual financial institutions in particular emerging markets. It has also become increasingly evident that the conflicts of interests among a growing number of independent private players make it extremely difficult to carry out restructuring of the foreign debt of indebted countries, even in situations of crises.

While this could force debtor nations into default as well as make it impossible for them to remain open to and integrated with the global financial system—an outcome not preferred by either the Fund or the private creditor (financial market players) community—the International Monetary Fund (IMF) has thus far managed to prevent any major default by financing large rescue packages that bail out creditors who had not exercised due diligence when lending to public and private agents in emerging markets. However, given the increased prevalence and severity of crises in recent years, and the large and increasingly unfeasible debt workouts that the IMF has had to coordinate and part-finance consequently, the IMF has been proposing a Sovereign Debt Restructuring Mechanism (SDRM), to enable a prompt and equitable debt restructuring for countries in financial crisis.

The central challenge to successful sovereign debt restructuring has been pointed out as the failure of collective action by the sovereign's diverse creditors, which complicates and delays the process of finalizing a restructuring agreement, causing economic havoc to the debtor country and eroding the value of the creditors' claims in the process. The intention behind the calls for an international insolvency procedure is such that a framework has to be put in place, which would enable rapid and orderly debt restructuring and help the country to arrive at a sustainable debt situation, so that the unnecessary costs of the present drawn-out debt workouts can be averted and the debtor country can be brought back to a path of economic recovery and development. In fact, debt analysts have since long been calling for such a procedure, and the IMF has been ignoring it, until 2001.

By focusing its discussions currently on the need for an international framework for sovereign debt workouts, it appears that the IMF is attempting to divert the attention of the international community from the calls for structural reform of the international financial architecture, inclusive of itself. Following the economic havoc wrought by a series of financial crises and the inability of Fund policies to prevent and subsequently handle these crises, such calls had been gathering widespread momentum by the end of the millennium. Increasingly, concerns were raised about the need for financial market regulation and there has been emerging consensus on at least the need for controls on short-term capital flows.

By narrowing down the discussion on financial and debt crises to the problems linked to the failure of collective action of a diverse range of creditors in the context of sovereign debt restructuring, the Fund is shutting out the debate on the underlying causes of financial crisis and the need for change in its financial sector and macroeconomic policy framework. The discussion on the proposed SDRM enables the Fund to evade the fundamental need to address the underlying weaknesses in the current international financial architecture, including the need to regulate capital flows, to help prevent crises in the first place. Meanwhile, the evolving debate on the SDRM to address issues in debt restructuring reveals that even the long overdue attempts of the Fund to deal with crisis resolution (within the existing global financial architecture) are also predisposed.

Any reasonable and just debt-workout framework has to consider both irresponsible borrowing by the sovereign as well as irresponsible lending by the creditor community. While imprudent borrowing and corrupt practices of governments of borrower countries cannot be legitimized, equally and more crucially, allowing irresponsible lenders to get away with virtually no costs to them from a debt restructuring, only leads to moral hazards in the sovereign debt market and encourages further imprudent lending. Past debt management practices have mostly been unsuccessful predominantly because creditors have failed to accept the credit risk associated with their lending decisions and also refused to accept their share in the responsibility for unsustainable debt accumulation. A future international debt-workout mechanism should therefore be centred on a neutral international arbitration body, which can ensure that a debt restructuring process will balance the rights and obligations of both the lender and the borrower.

In order to facilitate this, the creditor community needs to acknowledge that sovereigns can become insolvent and that bankrupt sovereigns cannot be made to go on paying as long as they exist, by allowing some temporary reprieve in repayments, meanwhile lending new money or/and capitalizing interest arrears. Apart from adding on to the existing debt stock and postponing the inevitable slide into an unsustainable payment situation at a yet higher level of debt, this approach does not serve to solve the debt problem. The dismal record of the multilateral bodies (BWIs) and the creditor community in handling debt management in the previous decades has been precisely owing to their refusal to acknowledge sovereign insolvency and grant adequate debt relief.

Past debt management has also adequately established that debt relief which does not include the claims of the BWIs would not lead to a sustainable debt situation for indebted countries. Such difficulties in achieving adequate inter-creditor equity have also inhibited creditors from accepting proposed restructuring arrangements, thereby prolonging the process and exacerbating the costs involved for the debtor, creditors, international financial institutions and the international economic community at large.

In fact, as debt analysts have pointed out for years, the resistance of creditors (including the BWIs) to grant adequate debt relief where needed, in blatant neglect of the serious developmental concerns of debtor countries, has been a patent reflection of the self-interest of creditors in obtaining continuous interest payments. Thus, while principal and interest arrears keep accumulating on paper, indebted countries often end up repaying amounts several times the original credit taken by them, at severe costs to their developmental concerns.

This kind of debt management and restructuring, along with the attached conditionalities and economic policy prescriptions by the official and multilateral creditors, have not only failed to restore sustainability to indebted countries, but have often caused additional economic damage and human suffering in the countries concerned. The experiences with the HIPC-I and the HIPC-II initiatives taken by the creditor community under the aegis of the BWIs also corroborate this.

Given that debt management led by the creditor community has been unsuccessful, an international insolvency procedure to be developed therefore should balance the considerations of both the creditor community as well as the debtor country. The creditor community needs to break loose from the illusion that debts postponed are debts repaid, and allow for meaningful debt relief in a debt restructuring agreement, if and where necessary. At the same time, while the debtor country undertakes a restructuring of its unsustainable debt, there should be no attached conditionalities to impose rapid and severe economic adjustment on the country.

A key issue is allowing for the sovereignty of the borrowing country. While the debtor country may well require to undertake some economic restructuring to bring the country back onto the path of economic recovery, it should have the flexibility to decide its policies and priorities, not only in the longer-term, but also in the short-term period required for economic stabilization following a payments crisis. During the stabilization period and afterwards, this would involve the ability of the sovereign to introduce or retain capital controls necessary to protect its financial stability.

An international insolvency procedure should also explicitly address the requirement of the debtor country to address the legitimate developmental needs of its population during the debt restructuring and economic stabilization phases, and later on as well. This necessarily means that conditionalities imposing drastic downward adjustments in the borrower government's fiscal expenditures cannot be a justifiable part of the legitimate sovereign debt restructuring programme. Only such an approach will guarantee that the basic human needs of the sovereign debtor can be ensured. Accepting the sovereign nature of nations also means that unlike in the case of corporate insolvency, a sovereign's assets are not available to be called upon to meet its unsustainable external payment obligations.

All these clearly mean that creditor intervention in the governmental sphere of borrower countries, such as those that often take place in developing countries, cannot be a part of a fair and equitable sovereign debt workout mechanism. In this context, it has been suggested that it would be useful to consider an international equivalent of the Chapter 9 of the US Bankruptcy Code dealing with insolvent US municipalities, which rules out creditor interventions in a municipality's governmental sphere as unconstitutional.

In a nutshell, an international insolvency framework to enable prompt and orderly restructuring of sovereign debt has to necessarily and most fundamentally balance the interests of the sovereign debtor and its creditors, maintain the debtor's developmental needs and protect the borrowing country's sovereignty. In the light of past debt restructuring experiences, this calls for a comprehensive approach allowing symmetrical treatment of various debts and orientated towards a truly sustainable debt level for the borrower, via a neutral mediation or an arbitration process.

However, the ongoing discussions by the IMF on its proposed international insolvency framework, the SDRM, seem to have degenerated into attempts by the Fund to consolidate its own role in global finance and in the financial affairs of the debtor countries, and to tilt the balance once again totally in the interests of creditors. This section provides papers looking at the debate that is currently in focus.

• IMF's SDRM Proposals: An Updated Critique of Conceptual Issues
  Smitha Francis
  While the IMF's SDRM proposal was originally guided by the central tenet that the international financial system lacks a strong legal framework for the predictable, rapid and equitable restructuring of sovereign debt, subsequent evolution has seen it reduced to a shadow of its original intentions, and the balance has now tilted entirely in favour of the interests of the creditor community. At another level, the Fund's discussion has degenerated into attempts to consolidate its own role in global finance and in the financial affairs of the debtor countries.
   
  
• SDRM: Debt Restructuring or Liquidation?
  C.P. Chandrasekhar, Jayati Ghosh & Smitha Francis
  Even as the Bretton Woods Institutions are opposed to  reform of the international financial architecture to prevent crises, they are ardently searching for ways to deal with the fallout of crises on sovereign debt. C.P. Chandrasekhar, Jayati Ghosh and Smitha Francis examine the Sovereign Debt Restructuring Mechanism (SDRM) advocated by the IMF, discuss the factors that motivate those advocating it and assess the likely consequences of its implementation.
   
  
• Some Reflections on SDRM
  Yilmaz Akyuz
  Contributing to the ongoing debate on SDRM, the author argues that the seemingly evolving IMF-proposal on the international bankruptcy procedure still does not address the fundamental problems connected with financial and currency crises.
   
  
• The Final Demise of Unfair Debtor Discrimination? Comments on Ms Krueger's Speeches
  Kunibert Raffer
  There is a strong and convincing case to demand one specific type of insolvency appropriate for sovereign debtors, a process based on the principles of the US Chapter 9. However, no creditor must be allowed to exert decision power, whether openly or in a hidden way. This paper prepared for the G-24 Liaison Office also makes the case for immediately implementing both the Fair and Transparent Arbitration Process (FTAP) mechanism and some of the IMF's proposals.
   
  
• More Writings on International Insolvency Procedures