As with previous sovereign crises, the euro zone crisis has shown the need for a clear framework for dealing with severe sovereign debt crises. This framework must achieve the following targets: setting the right incentives for policy makers by containing moral hazard; clarifying the burden sharing between domestic actors and international lenders; and, ensuring efficient risk pricing through predictability in the restructuring of claims.
In this vein, CIGI’s Management of Severe Sovereign Debt Crises research theme explores some innovative approaches to debt restructuring, leveraging on the incentives that market participants may have in adopting them. Its research agenda also focuses on the reforms required for the lending framework of the International Monetary Fund (IMF), to ensure that its financial assistance is consistent with, and unequivocally signals, the sustainability of the borrower’s policies.
One focus of the research is the articulation of a set of incremental policy proposals that could meaningfully improve efforts to deal with sovereign crises and restore troubled sovereigns to market access and sustained growth. Chief among these is a Sovereign Debt Forum (SDF) that would provide a centre for continuous improvement of the processes for dealing with financially distressed sovereigns and a venue for proactive discussions between debtors and creditors to reach earlier and more effective understandings on the treatment of specific sovereign crises.
Another aspect of the research examines the choices facing the IMF during the euro zone crisis and the actual path taken. It reflects on and proposes institutional arrangements that can best grant the IMF sufficient flexibility to respond quickly to crises and ensure the independence of the IMF in assessing the most efficient way to resolve a future debt crisis.
A third focus is on the background to the 2012 Greek debt restructuring, including the March debt exchange and December debt buyback and the lessons learned on the timing and nature of the restructuring.