When it comes to personal debt or corporate debt, there exist rules in many countries (albeit highly flawed rules in some cases) for what happens when a person or corporation can’t repay a household mortgage, or can’t service its debts.
These range from debt restructuring procedures, to personal insolvency, to examinership, receivership or bankruptcy. In many cases, it is also set out in law which creditors are paid first, and what obligations creditors may have to accept write downs on the debts they are owed. There are many flaws with these systems.
But there is generally, at a minimum, an agreed system which all creditors (and debtors) are obliged to follow. When it comes to sovereign debt, however, no such set of rules exists. Instead, sovereign debt crises and debt distress are handled in an ad hoc rather than systematic manner, following norms and customary practices which have developed in response to past sovereign debt crises.
However, the ad hoc approach shouldn’t mislead us into thinking debt crises and debt restructurings are a rare occurrence. There have been over 600 restructurings of sovereign debt, involving 95 debtor countries, since 1950, so restructurings happen, albeit in a particular manner.
