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This chapter suggests investigating a new bankruptcy approach for resolving sovereign debt crises. While some of the basic ideas have been presented in other papers, the innovation introduced here is to put the IMF at its center. One key to the proposal is that instead of the IMF lending only its own funds to the distressed sovereign, which it can no longer do in amounts sufficient to counter international financial market panics, it would also be empowered to authorize private creditors to extend new credits that would have higher repayment priority than already outstanding debt, as is done in corporate bankruptcy cases. It is envisaged that amounts of such credit above some modest level would have to be approved by the defaulted creditors and that contributing private creditors would also need to be brought into the negotiations over the rescue package.

This chapter focuses on what lessons might be drawn for sovereign insolvency from the principles underlying national policies for corporate or personal bankruptcy. It then develops a framework to analyze alternative mechanisms for sovereign debt restructuring. It draws parallels between private and government bankruptcy and finds that the special nature of governments makes it complicated, but not impossible, to define an attractive sovereign counterpart to national bankruptcy laws. It notes that different processes for dealing with insolvency, as well as their outcomes, can be more or less efficient and fair. It argues that countries adopt domestic bankruptcy laws for both efficiency and equity reasons, and that the goal of an effective bankruptcy regime should therefore be both ex ante and ex post, efficient and equitable

This introductory chapter lays out the premise for the rest of the volume which addresses whether or not a more comprehensive, timely, effective, and fair mechanism ought to be in place to handle whatever sovereign debt crises do arise, not only over the next year or so, but over decades to come. We believe that the international community can design a superior mechanism to handle such crises more efficiently and humanely. Many countries have designed national insolvency regimes for corporations that not only wind up hopelessly bankrupt entities, but also seek to salvage firms that with reduced debts can survive as going concerns. The objective in the latter cases, as with insolvent sub‐sovereign entities or households (which cannot be ‘wound up’), is to give a second chance, a ‘fresh start’, and a ‘clean slate’. The ad hoc, partial, and at best loosely coordinated system for addressing sovereign debt crises does not deliver such outcomes.

In this chapter, the editors conclude the book by recognizing that the burden of this book is to demonstrate that an important piece of the international financial architecture is missing and that its absence has been felt in protracted and economically painful workouts from sovereign insolvencies. As the sovereign debt workout processes are political at their core, they tend to benefit the powerful at the expense of the powerless. The editors also emphasize that principles for effective and fair bankruptcy systems for private entities if applied to the sovereign case could better balance the costs and pains of government insolvencies, except that the very nature of sovereignty precludes their direct application. But while there is no global government to enforce any sovereign bankruptcy law, there are various ways that governments can cooperatively formulate and operate a sovereign bankruptcy regime. The concluding chapter of this book suggests two modalities by which such a system might operate.