A modern template for the restructuring of poor country debts

The official sector has rung the tocsin as loudly as it can. Both the IMF and the World Bank have warned that fully 60 per cent of low-income countries are in ‘debt distress’ or at high risk of it. Bonds of more than a dozen developing nations now trade at a price below 50 cents on the dollar. The culprits? Unprecedentedly large sovereign debt stocks. Rising interest rates. Depreciating local currencies. Withdrawal of massive liquidity injections by major central banks. Vertiginous leaps in the cost of food, fuel and fertilizer. The year 2022 was a bad year for sovereign debt defaults; 2023 will probably be worse. As the queue of patients in front of the debt-restructuring intensive care ward lengthens, the prospects for a speedy and durable recovery are fading. The traditional machinery employed to resolve sovereign debt difficulties is proving to be inadequate to handle a more diverse set of bilateral and commercial creditors. Moreover, each of the ‘dramatis personae’ in this drama—the debtor, the creditors and the official sector institutions—will have its own reasons for accepting debt treatments that represent only a temporary palliative for the sovereign borrower. This explains the phenomenon of the ‘serial sovereign debt defaulter’ so visible in this century.