Rory Macmillan


In a future sovereign debt crisis, debt restructurings are inevitable simply because there is no alternative. Private lending becomes simply unavailable. The commercial banks were asked to lend to Mexico in early 1995 as part of the U.S. Government rescue plan, but the money never materialized.3 The banks' experience of involuntary lending during the 1980s debt crisis was so unpleasant that they are unlikely to increase exposure to a troubled debtor in a crisis today. Other sources of finance are no more likely to yield support. Mexico was unable to return to the capital markets until six months after the crisis blew up.4 For political and practical reasons, the U.S. government is unlikely to lend again as it did to Mexico. Despite recent increases in the IMF's power to lend to countries in emergencies, multilateral funds remain insufficient to cope with large scale crises. In any case, just as it did in the 1980s, the IMF would probably condition any finance upon some debt restructuring agreement between the debtor and its creditors. Coupled with the absence of new money, this means that countries will have to try to reach some agreement with their creditors. However, the current legal and institutional framework is embarrassingly unprepared to handle a sovereign debt restructuring.