From Dr Jerome Booth.
Sir, Robin Wigglesworth (“Creditors likely losers from IMF sovereign rethink”, June 5) writes of the potential comeback of a bad idea – to design a sovereign debt restructuring mechanism (SDRM), or as I call it stalling development through restricting markets.
The current motive for restructuring debt is that heavily indebted developed countries have far too much. Consistent with official sector hubris and strenuous efforts since 2008 to deny the problem’s magnitude, they want to avoid the embarrassment of default. Hence a preference to erode the value of debt by a combination of (eventually) inflation and devaluation and (nearer term) financial repression and renegotiation of contracts – with their own citizens (pensions most obviously) and debt contracts.
Retroactively altering sovereign contracts is an assault on property rights, common law and good sense. Yet only insisting on renegotiable debt contracts for new debt and not the existing stock does nothing to solve the main problem.
In the long term creditors will not be the main losers; borrowing countries will, as they will have to pay more for their development capital. The desire to avoid embarrassment in the north by pretending a default is not a default should not be allowed to wreck future access to capital markets in the south.
When there is no major debt problem nobody suggests SDRM. When there is a debt overhang, proposing SDRM is as useless as the advice in the old joke asking the best way to get somewhere, the answer to which is: I wouldn’t start from here.
Jerome Booth, New Sparta, London WC2, UK
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