Sovereign debt was eventually restructured through the creation of Brady bonds.

It is no secret that sovereign bonds carry significantly higher borrowing costs than concessional debt does.

And the preferential treatment received by the ECB on its Greek bonds will discourage other investors from holding sovereign debt.

But how can debt relief be achieved for the sovereign without imposing massive losses on Greek banks and foreign banks holding Greek bonds?

This rendered potentially insolvent commercial banks, whose balance sheets were loaded with such bonds, giving rise to Europe s twin sovereign debt and banking crisis.

In the eurozone, banks are vulnerable to sovereign debt crises because they hold a lot of government bonds frequently issued by their country of origin.

Finally, GDP indexed bonds and other tools for dealing sensibly with unsustainable debt could be applied exclusively to member states debt not covered by the program and in line with international best practices for sovereign debt management.

But these critics overlook his role in helping to fight that decade s sovereign debt crises, and his insistence that the US begin issuing inflation indexed bonds.

Sovereign Debt at Square One

WASHINGTON, DC The eurozone crisis unfolded primarily as a sovereign debt crisis mostly on its southern periphery, with interest rates on sovereign bonds at times reaching 6 7 for Italy and Spain, and even higher for other countries.

How to Default on Sovereign Debt

Sovereign debt no longer looks stable.

Sovereign debt restructurings with private creditors

Investors were not worried about default risk on Spanish or Irish sovereign debt, or about Italy s chronically large sovereign debt.

A New Approach to Eurozone Sovereign Debt

The sovereign debt crisis is well known.

The Root of All Sovereign Debt Crises

A Grexit would hit European banks that hold peripheral eurozone countries sovereign bonds.

The sovereign debt and banking crises have become even more closely interlinked as banks bought greater amounts of their home countries sovereign debt.

And, because eurozone banks hold a substantial part of their assets in the form of eurozone sovereign bonds, the sovereign debt crisis became a potential banking crisis, worsened by banks other losses, owing, for example, to the collapse of housing prices in Spain.

Bank bonds could also be reduced and converted into equity, which would both avert a government takeover of banks and prevent socialization of bank losses from causing a sovereign debt crisis.

Amazingly, global financial markets ignored the credit risks of this sovereign debt, requiring only very small differences between interest rates on German bonds and those of Greece and other peripheral countries.

Prior to its 2005 sovereign debt exchange, its legislature enacted a lock law, which barred the way to any future offers to holders of bonds on which Argentina defaulted in 2002.

To avoid such an internal sovereign debt crisis, China s Budget Law, adopted in 1994, forbade local governments from borrowing autonomously, either by issuing bonds to the public or by getting credits from banks.

This means no cross border sovereign debt (or esoteric instruments, such as collateralized debt obligations).

There would be worries that adding cocos to sovereign bonds might raise governments borrowing costs.

The country s sovereign debt should have been restructured without delay.

The link between sovereign debt and bank debt has to be broken once and for all.

So the only realistic and sensible solution is an orderly and market oriented but coercive restructuring of the entire Greek public debt. But how can debt relief be achieved for the sovereign without imposing massive losses on Greek banks and foreign banks holding Greek bonds?

The ECB s announcement of a new program to purchase sovereign bonds has lowered market interest rates.

In these cases, debt restructurings produced a haircut on exchanged bonds.

Greek sovereign debt has been downgraded to below that of Egypt.

Table 3 Recent sovereign debt restructurings with private creditors main features

With the onset of the European sovereign debt crisis in 2010, banks appetite for public debt fell again.

And the evidence confirms that the euro crisis is not really about sovereign debt, but about foreign debt.

During the single currency s first decade, private investors belief in the equality of all eurozone sovereign bonds kept interest rates low in the peripheral countries, even as their governments ran up large deficits and accumulated massive debt.

Prices of bank shares and the Euribor OIS spread (a measure of financial stress) signal a profound lack of confidence in the sovereign debt of distressed countries, with yields on ten year Greek bonds recently hitting 25 .

Currently, they are wrestling with widening sovereign debt problems and high unemployment.

Interest rate spreads on Italian sovereign debt have widened, but not sharply.

In Europe, risks spreads are rising on Italian and Spanish sovereign debt.

So governments bailed out banks and economies, producing a sovereign debt crisis.

Sovereign obligations, such as bonds, are commonplace in the capital markets, and demonstrate strong investor demand and confidence.

A sovereign default () is the failure or refusal of the government of a sovereign state to pay back its debt in full.

More likely would be an IMF organized restructuring of the existing debt, swapping new bonds with lower principal and interest for existing bonds.

Nonetheless, Argentina s latest debt trauma shows that the global system for sovereign debt workouts remains badly in need of repair.