Overcoming the Collective Action Problem in the Common Framework

Abstract

Since the approach envisaged under the Common Framework attempts to bring together a larger and more diverse group of creditors than usually observed in sovereign debt restructurings, consistent with the Theory of Collective Action, additional measures may be required to compensate for the added complexity and incentive issues. To address this de facto collective action problem, the paper proposes a modified framework that is based on: (1) simplicity and speed with elements of coercion and enticement, (2) improved coordination based on a more prominent role for the US and China, (3) a more nuanced treatment of domestic debt within the restructuring perimeter, and (4) a modified “comparability of treatment” principle. While multilateral debt will not be restructured under the proposed approach, the International Financial Institutions with exposure to sample countries are expected to contribute to safeguarding financial stability of domestic financial sectors.