There are three reasons for attempting to reach a common understanding of the responsibilities of sovereign borrowers and their lenders. First, the flow of capital to sovereign debtors is exceptionally important to the world economy. Industrialized countries rely on it to finance their budget deficits, these days to a breathtaking extent. Developing countries need it to develop. Misbehaviour, either by the sovereign debtors or by the creditors, destabilizes this key component of the international financial system, making credit less available and more costly. Second, sovereign finance is uniquely unforgiving of mistakes. Unlike corporate or personal debtors, sovereigns do not have access to a formal bankruptcy process in which insupportable liabilities can be adjusted according to pre-established rules. From a legal standpoint, sovereign debts are therefore ineradicable absent the consent and cooperation of the creditors. Unfortunately, the process by which that consent and cooperation must be sought – sovereign debt restructuring – remains unpredictable and disorderly. Third, the human cost of prodigal sovereign borrowing, reckless sovereign lending or incompetent sovereign debt restructuring is incalculable. Perusing a major international newspaper on any day of any year is all that is required to make good this proposition. A consensus about the responsibilities of sovereign borrowers and lenders, together with improvements in the way in which sovereign loans are planned, executed, documented and, when necessary, restructured, will directly affect the lives of most of the people that live on this planet.
Lee C. Buchheit & G. Mitu Gulati, Responsible Sovereign Lending and Borrowing, 198 United Nations Conference on Trade and Development Discussion Papers 1–32 (2010).