Is Aggregation a Problem for Sovereign Debt Restructuring?

Reform of the mechanisms and procedures through which problems of sovereign debt sustainability are resolved is at the center of the effort to make the international financial system more resilient and less crisis prone. Governments that default on their debts must embark on lengthy and difficult negotiations. Lenders and borrowers, uncertain of one another's willingness to compromise, may engage in costly wars of attrition, delaying agreement on restructuring terms. Even if disagreements about the debtor's willingness and ability to pay are put to rest, dissenting creditors may continue to block agreement until they are bought out on favorable terms. In the interim, the creditors receive no interest, and the borrowing country loses access to international capital markets. The exchange rate may collapse, and banks with foreign-currency- denominated liabilities may suffer runs. To avert or delay this costly and disruptive crisis, the International Monetary Fund will come under intense pressure to intervene, provoking all the controversy that IMF intervention typically entails. Officials of the borrowing country, for their part, will go to great lengths to avoid seeing the country placed in this difficult situation. They may raise interest rates, run down their reserves, and put their economy through a deflationary wringer, all at considerable cost to society. These costs could be reduced, the implication follows, if countries with unsustainable