And debt and deficit concerns will remain, with the virtual certainty of at least one sovereign debt restructuring in Europe.

Restructuring Debt Restructuring

Indeed, restructuring undermines the foundation of the entire financial system the safe asset role of sovereign debt.

After the Argentine crisis, President George W. Bush s administration vetoed proposals to create a mechanism for sovereign debt restructuring.

O. Sovereign Debt Restructuring and Dispute Resolution, speech by Anne Krueger, First Deputy Managing Director of the International Monetary Fund, 6 June 2002.

The international community has, so far, failed to develop effective and equitable arrangements for restructuring sovereign debt, despite the clearly dysfunctional and problematic consequences of past international public debt crises.

A significant sovereign debt restructuring there would bring down European banks and potentially damage US banks as well as financial institutions around the world.

Devaluation and debt restructuring worked.

Proposals on debt restructuring frameworks

European policymakers, for their part, worry that a sovereign debt restructuring will damage the financial system and be a black mark for their monetary union.

Absent external assistance and a credible plan for restoring fiscal order, Greek sovereign debt could not be rolled over, forcing a default, probably in the form of a restructuring of Greek debt.

But internal devaluation requires debt restructuring.

See IMF Reviewing the process for sovereign debt restructuring within the existing legal framework, Policy Development and Review, International Capital Markets, and Legal Departments, 1 August 2003.

Sovereign Debt at Square One

The Lethal Deferral of Greek Debt Restructuring

The mechanics of debt restructuring are straightforward.

Calls for immediate debt restructuring went unheeded.

The most noteworthy was the IMF sovereign debt restructuring mechanism,29 which suggested some core features majority rule in restructuring decisions, a legal stay against claims by creditors, protection of creditors' interests, seniority of new money and a dispute resolution forum.

Some sovereign debtors and private creditors have been attempting to develop voluntary Principles of stable capital flows and fair debt restructuring in emerging markets , but progress has been slow.

How to Default on Sovereign Debt

Sovereign debt no longer looks stable.

Sovereign debt restructurings with private creditors

Securitization made debt restructuring difficult, if not impossible.

Alternatives to a debt restructuring are fast disappearing.

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

Some believe that this vacuum is the primary difficulty with the international debt system. Ambitious proposals to redress it, such as a Sovereign Debt Restructuring Mechanism (SDRM) housed at the International Monetary Fund, have always run into political roadblocks.

There have been many proposals on debt restructuring mechanisms.

A New Approach to Eurozone Sovereign Debt

The sovereign debt crisis is well known.

The Root of All Sovereign Debt Crises

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

Coercive restructuring of insolvent banks unsecured debt would be next.

So the need for debt restructuring is an unavoidable reality.

More importantly, through its numerous rescues of sovereign states, the IMF has acquired expertise in debt restructuring, while developing a reputation for toughness and impartiality, which would be very useful in these situations.

26 The risk of litigation has increased with the emergence of vulture funds that would buy distressed sovereign debt on the secondary markets and then sue for full repayment once restructuring negotiations commenced.

If this principle prevails, no one would ever accept debt restructuring.

There is a simple way to deal with a debt overhang reduce payments by restructuring the debt.

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?

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

But, as we know from experience, there is life after debt restructuring.

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.

Unfortunately, however, ideas for debt restructuring mechanisms remain just that purely theoretical constructs.

The most recent debt restructuring of Argentina illustrated well the conditions described above.

Fifth, debt burdens that cannot be eased by growth, savings, or inflation must be rendered sustainable through orderly debt restructuring, debt reduction, and conversion of debt into equity.