Restructuring Sovereign Debt: The Case for Ad Hoc Machinery

The Western powers established the International Monetary Fund (IMF) and the World Bank after World War II as "permanent machinery" to anchor the Bretton Woods system. When developing countries began experiencing debt problems in the late 1960s, the Paris Club took shape as "ad hoc machinery" to restructure debt from export credit agencies. A decade later the London Club process emerged to handle workouts of commercial bank debt. Restructuring debt in the form of bonds became an issue in the late 1990s in Argentina and several other nations, and the IMF recently proposed a permanent mechanism to deal with that challenge. Restructuring Sovereign Debt explains why ad hoc machinery would function more effectively in the Bretton Woods system.

By describing in detail the origins and operations of the London Club and Paris Club, Lex Rieffel highlights the pragmatism and flexibility associated with ad hoc approaches. He also recalls earlier proposals for creating permanent debt restructuring machinery and the reasons why they were not adopted. Recognizing that the issue of sovereign debt workout is complex, Rieffel has provided a comprehensive and detailed exposition of this important policy issue.

Rieffel's book is an important tool for policymakers and the public, particularly as the global community seeks to resolve the debt problems of countries as diverse as Argentina, Iraq, and Côte d'Ivoire.

Viewing current controversies over bond restructuring in the international financial system as the fourth major debate about the machinery for sovereign debt workouts since the advent of the Bretton Woods system, Rieffel (a former officer of USAID, as well as the IMF) argues that the creation of the Paris Club in the 1950s for the restructuring of debt owed to government agencies and the 1970s London Club for restructuring debt owed to commercial banks offer examples of why ad hoc machinery is a better idea than attempted permanent fixes. This stands in distinct contrast to what the IMF is currently advocating in the form of the proposed Sovereign Debt Restructuring Mechanism. Annotation ©2004 Book News, Inc., Portland, OR

Foreign Affairs

In recent decades, countless governments have borrowed too much abroad and subsequently had to reschedule or scale back their payments to foreign creditors (Argentina being only the most recent in a long list). As a result, there have been various suggestions for streamlining, formalizing, and legalizing the procedures for dealing with sovereign debt problems. But in fact, reasonably orderly procedures have developed on an informal basis as collective experience builds. In this useful reference, Rieffel, for many years an official at the U.S. Treasury, provides a thorough account of the post-1950 evolution of procedures for dealing with sovereign debt owed to both official and private creditors. After critically examining proposals for major institutional overhauls, he vigorously defends the ad hoc, evolutionary approach, while offering his own recommendations for modest improvements on current practices.

Lex Rieffel is a nonresident senior fellow in the Brookings Institution's Global Economy and Development Program.