Lenders’ Roles and Responsibilities in Sovereign Debt Markets

Abstract

Debates about sovereign debt markets presume these markets are unique, because sovereign governments are unique borrowers. To the extent observers look elsewhere for guidance, it is to corporate debt markets. We argue that this conventional view—though useful to a point—has substantially and unjustifiably limited the academic and policy agenda. Rather than dwell on the unique characteristics of sovereign borrowers, we examine the practices and incentives of lenders. We show that, when viewed through this lender-focused prism, sovereign debt has as much or more in common with consumer than with corporate debt. Using consumer debt as a metaphor, we reveal gaps in the debate over how to reform sovereign debt markets. First, assessments of the sustainability of sovereign debt presently—and unjustifiably—overlook the negative consequences of excessive debt for the borrower’s citizens. Second, reform initiatives designed to promote “responsible lending” lack clearly-articulated goals, an omission that will impair the development of a coherent reform agenda. While not a perfect metaphor, experience with consumer lending and financial regulation can help fill these gaps, producing a clearer vision of the roles and responsibilities of lenders in sovereign debt markets.

Keywords: sovereign debt, responsible lending, consumer debt

JEL Classification: H63