End the Sovereign Debt Trap (in the Global South)

Economic experts, civil society, trade unions, international organizations, and political decision-makers around the world are all working to find a new international debt management consensus that will relieve the burden on affected countries. Good initiatives abound – sovereign insolvency proceedings, reform of debt sustainability frameworks, even visions of a grand bargain among MDBs, private sector and national governments for debt relief and growth – these and more proposals are on the table. There is no need to reinvent the wheel!

However, a robust and inclusive approach to the problem – one that serves both low-income and middle-income countries, one that addresses the plight of countries facing insolvency as well as those facing illiquidity, one that addresses the complex landscape of lenders, and perhaps most importantly, one that takes not just an economic approach to the problem but that also deals with the complex politics – this kind of solution is not yet within reach.

Countries that find themselves in critical over-indebtedness or even default often face the challenges of such a situation alone. Governments must manage difficult negotiations with the international financial institutions and/or bilateral lenders, on both the private and public side, while at the same time trying to ensure that their citizens still trust in their ability to provide social protection and maintain social cohesion.

With a legally binding international sovereign debt workout mechanism out of reach, the debate on the potential of national legislation to support enforce the equal comparable treatment of creditors has gained new momentum. The aim is to make restructuring negotiations of critically unsustainably indebted states more successful and efficient by preventing uncooperative behavior of creditors. Based on a number of background papers and expert discussions examining experiences in both – creditor and indebted countries – the project is elaborating policy recommendations.