The World Bank and the IMF have vast experience with countries in debt distress, and in recent years have increasingly recognized that partial default is often the only realistic option, a point we stressed in much of our earlier work on external debt. It is a great tragedy that, following the 2008 global financial crisis, the eurozone failed to find a way to restructure Southern Europe’s debts beyond the Greek case – a course of action we strongly advocated at the time. Trying to enforce regular debt payments in highly irregular times can only lead to deeper and more protracted recessions than need to happen.
Of course, a debt moratorium will require the US, which wields effective veto power at the IMF, to get on board. But so, too, must China.
In the past two decades, more and more developing countries turned to China for loans (which are typically collateralized and carry market interest rates). Although China is now a major creditor in about 40 countries and an important one in scores more, it has so far refused to join the Paris Club (which coordinates rescheduling of sovereign debts) and insists on pursuing its own bilateral closed-door approach.
What can be done? The IMF and the World Bank have the capacity and expertise to coordinate a debt moratorium if the US and other major players conclude that a such a move is in their national interest. Private creditors will have relatively little choice but to cooperate in the short run. Many emerging and developing economies will soon stop paying their debts, anyway. The world needs to get in front of the problem.
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Carmen M. Reinhart is Professor of the International Financial System at Harvard University's John F. Kennedy School of Government.
Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.