Spring 2022
Sovereign Debt Architecture, Suspended

Print Friendly, PDF & Email



Sovereign Debt Architecture, Suspended

Prompt for Discussion

Guest editors: Anna Gelpern (Georgetown Law) and Stephen Park (University of Connecticut)

Contributors: Daniel Bradlow, Aitor Erce, Kevin Gallagher, James Gathii, Rosa Lastra, Odette Lienau, Layna Mosley and Peter Rosendorff, Stephen Nelson, Ugo Panizza, Avinash Persaud, Mark Weidemaier and Mitu Gulati, Elya Zhang

The drawn-out COVID-19 shock is fueling an explosion in public and private debt stocks across the national income spectrum. It has disrupted nominally risk-free government debt markets, triggered massive capital flight from vulnerable countries, and sent central banks on an unprecedented asset-shopping spree, but has yet to trigger the widely predicted avalanche of sovereign defaults. We may be standing at the edge of a 1980s-level default cliff, or crying wolf in a global liquidity glut. As between the two and anywhere in-between, it’s anyone’s guess. For scholars and practitioners, this is a rare and awkward moment of abeyance, an opportunity to prepare for the inevitable…well, what, exactly?

The start of 2022 marked the end of a 20-month debt payment suspension for low-income countries against the background of a still-mutating virus, persistent vaccine disparities, and new climate disasters. If the world’s poor reaped some collateral benefit from the extraordinary domestic stimulus in rich economies, they stand to lose disproportionately from its unwinding. As the Federal Reserve, the European Central Bank, and others raise interest rates, the worst-case scenario for the rest of the world would bring more capital flight, spiking foreign debt payments, depreciating currencies, stalled growth, and millions more people in poverty.

The crisis revealed a fraying institutional architecture for debt crisis management, anchored in 20th century international organizations and dangerously exposed to public health, climate, and financial shocks. Large-scale capital flows no longer come bundled with 20th century transatlantic norms and practices—China may be the world’s largest creditor, and more countries issue tradable debt at home and abroad—yet fragmentation, power imbalances and enforcement challenges persist, with no new consensus in sight.

A government debt crisis is necessarily a systemic financial crisis in the borrowing country and, more often than not, vice versa. When low and middle-income countries ramped up domestic borrowing in 2020, they bought a measure of policy flexibility at the risk of shifting future debt crisis costs onto local banks and pensioners. At the other end of the national income spectrum, investors in U.S. Treasury securities hoarded cash and briefly made the world’s most liquid market act topsy-turvy, prompting a new round of reforms to shore up the Treasuries’ reserve asset status. The pandemic accelerated the drive for a euro-area safe asset in the face of political ambivalence, re-energized initiatives to create money-like regional debt instruments in Africa, and spurred efforts to design scalable climate finance instruments and restructuring techniques.

This roundtable considers the implications of the COVID-19 shock for the international debt architecture. What has the crisis revealed about existing institutions? What reforms should we prioritize to meet the challenges ahead? What risks and opportunities come with the growing diversity of lenders, borrowers, and instruments?

Contributions

April 8, 2022
The Big Disconnect
Ugo Panizza, The Graduate Institute Geneva and Centre for Economic Policy Research

April 12, 2022
I Will Survive: the Domestic Politics of Debt
Layna Mosley, Princeton University & Peter Rosendorff, NYU

April 20, 2022
Russia’s Perplexing Sovereign Bonds
Mark Weidemaier, University of North Carolina – Chapel Hill & Mitu Gulati, University of Virginia School of Law

April 22, 2022
No Time for Lost Decade: Why Debt Restructuring Must Be Linked with Climate and Development Goals
Kevin P. Gallagher, Boston University

May 13, 2022
Sovereign Debt as a Mode of Colonial Governance: Past, Present and Future Possibilities
James Thuo Gathii, African Sovereign Debt Justice Network

May 20, 2022
A Proposal for a New Approach to African Debt
Daniel Bradlow, University of Pretoria