Abstract

When can we say that a debt crisis has been resolved fairly? An often overlooked but very important effect of financial crises and the debts that often engender them is that they can lead the crisis countries to increased dependence on international institutions and the policy conditionality they require in return for their continued support, limiting their capabilities and those of their citizens to exercise meaningful control over their policies and institutions. These outcomes have been viewed by many not merely as extremely unfortunate and regrettable, but also as deeply unfair. And indeed, increasingly potent popular movements have pressured governments, financial institutions, and the financial community to seek what they take to be fairer solutions to debt crises. The merits of these programs and proposals for dealing more fairly with sovereign debt remain hotly disputed. In this essay, we try to take a step back from the political fray and examine some more fundamental considerations that seem relevant to assessing the fairness of current arrangements governing economic exchanges related to debt contracts and alternatives that have been proposed to them.Our discussion is organized into seven sections. First, we characterize briefly the concept of fairness and its role in social evaluation. Second, we clarify what sovereign debt is, and, third, the ethical statuses that particular sovereign debts can have. Fourth, we identify and describe the main features of current practices related to sovereign debt. Fifth, we describe an "ideal picture" of creditor/debtor relations. We argue that in such a scenario a broad range of ethical considerations can plausibly be invoked in support of practices that closely resemble those presently governing sovereign debt. Sixth, we draw attention to the many ways in which in reality the relations between sovereign debtors and their creditors differ markedly from the relationships between the creditor and debtor in the ideal picture. Because of this, many of the ethical considerations that would support present practices were relations between sovereign debtors and their creditors to resemble more closely those depicted in the ideal picture fail to do so under present circumstances. We conclude, moreover, that the remaining ethical considerations that might be advanced in support of the present system are at best quite inconclusive. Finally, we describe briefly specific reform proposals to current practices. While we will not attempt to show that these proposals would necessarily make the rules governing economic exchanges relevant to sovereign debt more fair, we conclude, in light of our earlier analysis, that they must be given much more serious consideration than they have so far received in policy circles. Indeed, there are strong prima facie reasons to believe that some combination of these proposed policies might prevent or mitigate some of the most ethically regrettable outcomes of present practices and norms by changing the incentives of sovereign borrowers and those who lend to them.