UNCTAD Virtual Institute for Trade and Development
GDS logo
Debt Sustainability Analysis (DSA): An E-Learning Training Course
I.Official Debt Restructuring:
(i) Paris Club
(ii) HIPC
II.Private Debt:
(i) London Club.
(ii) CACs/SDRM
III.Case Studies
(i) Korea
(ii) Argentina
Useful links


Debt default and debt restructuring are as old as debt itself. The first recorded default goes back to the 4 th century B.C. when Greek provinces defaulted on the Delos Temple.1 Why do debt crises occur in the first place? There are many reasons. These can be explained in terms of the 'willingness' to pay or 'ability' to pay problems. Both are, in fact, linked to each other, whereby the 'willingness' to pay is affected by the 'ability' to pay and vice-versa.

Debt crises can occur due to several reasons, of which:

  • Currency crisis, which, in the presence of foreign currency debt, leads to a jump in the debt-to-GDP ratio, potentially making a country's debt no longer sustainable.
  • Terms-of-trade shocks affecting the debt-to-GDP ratio and/or debt-to-export ratio.
  • Interest rate shocks.
  • Large adverse shocks to economic fundamentals.
  • Excessive borrowing or sub-optimal borrowing inconsistent with economic fundamentals.
  • Sudden capital flows reversals and contagion effects.

When a debt crisis occurs, there is a need for debt restructuring. In this module, we look at different debt restructuring mechanisms.2 Debt restructuring is a central component of the discussion on external debt but it can only be seen as an exceptional instrument in the debt's general management over the medium term.

A fundamental difference between sovereign and corporate debts is that the former entails no contractual enforcement mechanism. Two general approaches for dealing with the developing countries' debt problems are:

  • Continued reliance on a case-by-case negotiation.
  • Global plans for fundamental restructuring the terms of lending and repayment.

Experience shows that both approaches have precedent. The broader question that arises in the context of the current international financial architecture is whether the existing set of practices for dealing with a country's debt problem is rational and efficient.

Section I of this module briefly reviews the background and solutions to sovereign debt restructuring with (i) official bilateral creditors through the Paris Club and its various terms of treatments and (ii) official multilateral debt restructuring for HIPC countries.

In Section II, we look at (i) the private commercial bank lending debt restructuring through the London Club and (ii) the bond lending restructuring mechanisms through the IMF's Sovereign Debt Restructuring Mechanism (SDRM) project and Collective Action Clauses (CACs) approach.

In Section III, we present two case studies of debt restructurings, Korea in 1997-1998 and Argentina, in 2001.


1Winkler (1933) in Sturzenegger & Zettelmeyer (2006).

2Debt and costs of default are not treated in this course. For more information on debt defaults, see Dooley (2000) on cost of default; SZ (2006), on debt default and sovereign restructuring; IMF (2002), on the close association between sovereign defaults and domestic banking crises; Borensztein and Panizza (2006), on sovereign debt default and trade sanctions, economic recessions and the impact on politics.

Next/ I >>