A business is insolvent when it can't pay off its debts. So what is international insolvency? How do countries go broke? Why does it keep happening? Who should bear the cost?

The sovereign debt crises in Greece, Spain and Ireland have emphasised the urgency of the issue, but the phenomenon of countries repeatedly going broke (i.e. unable to meet their financial obligations) has a long history. This paper aims to answer the questions above by examining this history and the key patterns that have emerged.
The paper begins in Chapter 1 – Sovereign Debt Crises with a summary of the last three decades of global financial problems, first discussing the developing-world debt crisis, followed by the more recent financial and sovereign debt crises in Asia, Latin America and Europe.
Chapter 2 – The Existing Framework for Sovereign Debt Management analyses the dominant perspective on resolving sovereign debt payment. It argues that creditor governments and international institutions interpret the problem as one of economic inefficiency and of imprudent borrowing. The section then canvasses the key actors in the existing framework, with particular emphasis on the role of the Bretton Woods Institutions, the International Monetary Fund and the World Bank.
Chapter 3 – The Case for a New Approach argues for a system of international insolvency to solve shortcomings of the current system. Current mechanisms for resolving debt cause unacceptable suffering for people in indebted countries, do not address the moral hazards of lending, and privilege the role of the Bretton Woods Institutions despite their history of poor policy advice and financial mismanagement.
Chapter 4 – An International Arbitration Mechanism outlines a proposal to introduce insolvency into the international financial system. This approach reduces risk, fosters efficiency, and ensures maximum return to creditors, while protecting the basic rights of debtors. The section ends with a discussion of the broader implications and challenges to implementing this new approach to resolving debt.
This policy paper was inspired by ‘The Bankruptcy of Nations: An Idea Whose Time Has Come’, an article by Professor Ross Buckley in the Fall 2009 edition of The International Lawyer.
We would like to thank the Australian Council for International Development (ACFID), without whose generous support this research would not have been possible.
Image: Cover photo:Laguna de Bay, Philippines after typhoon Ondoy caused fatal flash flooding throughout Metro Manila in September 2009. (Photo: Chih Yung Jon Fang)

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