Norms and Troubled Sovereign International Debt

Troubled sovereign international debt is a global governance challenge, requiring solutions balancing the interests of the global economy, creditors, and debtor nations and their citizens. Unspoken ethical and/or logical assumptions exert subtle influences on sovereign debt debates and negotiations.

A new working paper by Leslie Elliott Armijo and Prateek Sood explores the origins of the major contemporary norm, identified as Sanctity of Contract, and then locates three emerging mental models, each of which implicitly challenges the dominant norm, allowing for alternative priorities, decision rules and ideal allocations of losses to resolve debt crises. The authors designate these reformist rationales Shared Risk, Comparable Treatment and Human Solidarity, and provide brief examples of actual policy reform suggestions that illustrate the thinking found in each set of challenger ideas.

Key findings

• Shared Risk, in common with the dominant norm, founds its arguments in the logic of rational choice economics but argues that private creditors as well as sovereign debtors suffer from “moral hazard.”
• Comparable Treatment is in essence a juridical mental model, endorsing the ethical and practical goal of equal, or at least equivalent, treatment of all actors in a given category under unbiased laws and rules.
• Human Solidarity posits that sovereign international debt workouts should be subject to certain moral absolutes, in common with other institutions regulating human society, including national laws and global governance regimes.

The authors argue that an enhanced understanding of how these norms and mental models operate can help reform advocates to clarify their own preferences and form effective coalitions capable of implementing positive change.