Towards a Sovereign Debt Restructuring Mechanism

1. What advantages and disadvantages are associated with the shift in composition of borrowing countries’ external financing from bank loans to issuing bonds? Why is debt restructuring more difficult in the case of bonds?

2. Describe the U.S. Treasury’s proposed approach to debt restructuring. What problems are present under the Treasury’s proposal?

3. How does the IMF’s proposal differ from the Treasury’s? What specific provisions does the IMF proposal include?

4. Do you think adverse selection and moral hazard problems might become more severe if the pain of debt restructuring is significantly reduced? Why?

Source: “Towards a Sovereign Debt Restructuring Mechanism.” Mark M. Spiegel, Federal Reserve Bank of San Francisco FRBSF Economic Letter, No. 2002-19, June 28, 2002, pp. 1-3.