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When a country's sovereign debt becomes unsustainable and it can no longer repay its public debts it cannot simply declare bankruptcy as a private entity would do. Before reaching that moment of debt distress, the country's government has very few options to avoid default: keep borrowing, raising taxes and mobilising other domestic resources to have more revenue to keep paying, or cutting public spending to free up resources to pay back its creditors. This last option comes at the expense of impacts on human rights, particularly women's rights. All these alternatives generally end up delaying default, but not avoiding it. The country could also try a pre-emptive debt restructuring (to avoid default), but most countries avoid that option out of fear of rating downgrades by credit rating agencies and loss of market access.

Once default happens, the government needs to start a restructuring process, meaning renegotiating the contract terms of its debt with its creditors.

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An alternative to the maze

The debt restructuring process is chaotic, costly, long, and difficult to understand, particularly for ordinary citizens that suffer the consequences. Additionally, success is determined by the calibre of lawyers a country can afford to hire, as well as the willingness of a government to refuse to pay if creditors do not agree to an acceptable deal. Powerful creditor countries maintain the current lack of a system because it enhances their power, and that of their private companies, in debt negotiations. Furthermore, debtors today have to navigate new instruments, creditors, innovations and interests, which greatly complicate the restructuring process. 

In opposition to this chaos, the offspring of an almost 80-year-old agreement, we propose a systemic reform of existing debt architecture. It is time to update the debt resolution frameworks to adapt to the new world we live in and, most importantly, to the needs of global south countries and their people. We need a permanent rules-based multilateral debt resolution framework that provides fair, timely and comprehensive debt treatment from all lenders and for all countries according to their needs. We need a mechanism that does not rely on creditors' will, nor is defined solely by creditors. We propose a debt workout mechanism hosted under the auspices of the United Nations, since the UN is currently the only forum in which all countries have equal say and is neither a creditor nor a borrowing institution