Means of Solving Debt Crises

If a country can simply default on its debt and not go bust, then many people wonder why countries do not do it even more often. The reason is that defaulting does have consequences, the extent of which varies depending on how and why a country defaults. A debt restructuring is successful when it provides the right amount of debt reduction and does not drag on too long. To achieve this, there is a need for a sense of inter-creditor fairness, speed, coordination, and dialogue. If any one of these elements is missing, then a timely debt restructuring is unlikely. Despite the lack of a formal system, the norms that have evolved for the restructuring of international bonds have been effective. However, if many countries defaulted at once, then it could overwhelm the norms. A systemic crisis would require a formal rescue package.