Sovereign debt restructuring: an IMF persepctive

I wanted to quote a speech from the IMF's first deputy managing director Anne O Kreuger notably section V:

"Let me now conclude. Unsustainable debts have to be restructured, one way or the other. The only question is at what cost. Adam Smith wrote that "when it becomes necessary for a state to declare itself bankrupt ... a fair, open and avowed bankruptcy is always the measure which is both least dishonorable to the debtor, and least hurtful to the creditor."

A more orderly process will be to almost everyone's benefit. The fact is that both the debtor country and its creditors stand to gain from a restructuring of unsustainable debts before the country has exhausted its reserves and condemned itself to a deeper economic downturn than necessary. At present, the threat of a disorderly workout means that the value of creditor claims falls more sharply on the secondary market when a country gets into trouble than it would likely do in a more predictable environment. A framework that allows creditors to preserve better the value of their claims and debtors to minimize output losses during the restructuring period helps both creditors and debtors. I have no doubt that they will increasingly come around to that view."

It seems the ECB are on course to continue trying to protect their reputation by attempting to justify policies which are obviously failing. Further cuts may be sensible routes to lower debt to GDP ratios in an accounting sense but in an economic sense their knock on effects might lead to a worsening of the situation and no doubt there is no question of borrowing for a stimulus to help out grow our debts.

A Sovereign Debt Restructuring programme would no doubt come with serious pain for all involved but maybe it is time we (and the EU/ECB) changed tack and accepted we may not be able to pay off our debts in full. Mr's Kreuger's advice on "unsustainable debts" could be our only route in the not too distant future.