Running Head: GLOBAL DEBTS IN ADVANCED ECONOMIES 1

Global Debts in Advanced Economies

Student’s Name

Institutional Affiliation
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Global Debts in Advanced Economies

Debt Restructuring as a Policy Option

Debt Restructuring as a policy refers to a debt that has become large and uncontrollable

for the borrower to handle and thus, there needs to be a reorganization of that debt. In addition, it

can be defined as the exchange of current instruments of sovereign debts such as bonds or loans

for cash or other instruments by following a legal process. Reorganization can be achieved by

increasing the time period the debt was to be paid, provision of lenient conditions concerning the

debt payments, or even decreasing the interest rates of the loan. In addition, debt restructuring

can be accomplished by reducing the outstanding amount of debt the debtor owes the owner.

Practically this means that the owner receives less money than what he had offered and the

agreement they had come up with in terms of payments.

Despite the creditor coming to a settlement concerning the debt settlement, the creditor

still has the alternative of considering a better deal being proposed or taking their chances of

suing the government in a court of law. However, despite this discussion the policy of debt

restructuring is not a common policy practiced in advanced economies as it is considered as

derailment to the growth of the economy. Moreover, it is important to note that debt restructuring

vary from one creditor to another as some can be bilateral, bondholder, commercial or

multilateral.

Pros and Cons of Debt Restructuring Policy

Pros

The policy acts as a means of the government to reducing its accumulated debt while

being lenient to the measures imposed to the citizens concerning payments. The policy ensures
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that it pushes the debt reduction cost from the borrower to the onto the private creditors which is

highly blamed on the concept of the owner expecting greater interest from the debtor.

Cons

The policy is considered as a threat to economy as the concept of the borrower and not

being able to pay the debt in full amount results to a major setback to the owner. The policy

places the government at risk of having domestic backlash. In cases where the government fails

to use austerity measure, when imposing losses to the private creditors since most governments

of advanced economies are known to domestically holds a large share of debt (Nelson, 2013).

Also, in scenarios where the government has used applied debt restructuring policy, they find it

difficult to borrow loans from capital markets. Therefore, this will result to the government

cutting on their budgets expenditures or even seeking money of higher interest rates which will

make it more costly to even pay that debt. Moreover, this policy can be undesirable as can result

to anxiety of the investors and send distress to other countries in partnership with them.

Implication of Debt Restructuring

Political Implication

The impact has enabled the government to spend the extra funds to protect the interests of

specific groups that are in need rather than focusing their energy in loan payments. The reduction

of debts has enabled the government to use this money in election campaigns in inciting its

citizens on improved infrastructure and growth of the economy. Political implication is

experienced when the government unable to pay the debt in full and therefore, forces the private

creditors to incur losses in the long run (Ferry,2020).

Economic Implication
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The policy enables the government to use the excess funds that was to be used in debt

payment for economic growth. According to Ferry (2020), this debt reduction has impacted the

government in a way that they can undertake new investments and expansion of infrastructures

thus result in to flow in payments of obligation.

Security Implication

Debt restructuring has resulted to many insecurities as investors and other countries fear

to take part in business with the government for fear of incurring losses due to debt restructuring.

Comparison of debt restructuring policy and fiscal consolidation policy.

Debt restructuring policy is considered as the process in where the government has large

debts and are incapable of fully paying it and therefore negotiates the reduction of debts by

private creditors in order to meet the state’s needs. Whereas fiscal consolidation, is referred to as

the process in which the government tries to minimize its debt accumulation and government

deficit by cutting on their expenditure and increase tax collection in commodities to meet their

needs (Nelson, 2013). In addition, debt restructuring places the government in a state of threat as

investors fear to take part in countries with this policy while fiscal consolidation encourages

investors partner with them as they show an initiative of finding means to deal with their debts

without involving external parties. Debt restructuring is not considered as an ideal method of

debt settlement as it results to losses to the private creditors in comparison to fiscal consolidation

where, the government is committed to reduce its expenditure in order to settle their debts

increases the investors’ confidence them (Antelo & Peon 2014).

Ideally, fiscal consolidation is considered as a better option as it ensures that it settles its

debt by cutting on its expenditure or increase in tax, thus ensuring that there is a steady growth in
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economy (Antelo & Peon 2014). In contrast to debt restructuring, where, they focus on finding

means of their debt being waived thus resulting to losses to the private creditor which eventually

affect the growth of the economy as investors do not want to take part in for fear of losses.
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References

Antelo, M. & Peon, D. (2014). Fiscal Consolidation and the Sustainability of Public Debt in the

GIPSI Countries. Economics Notebook, 37(103), pp.52-71. Retrieved from

https://www.elsevier.es/en-revista-cuadernos-economia-329-articulo-fiscal-consolidation-

sustainability-public-debt-S0210026613000320

Ferry, L. (2020). The political Economy of Sovereign Debt Restructuring Negotiations.

Retrieved from https://www.citationmachine.net/apa/cite-a-website/search?q=https%3A

%2F%2Fwww.peio.me%2Fwp-content%2Fuploads

%2F2020%2F01%2FPEIO13_paper_97.pdf&style=apa

Nelson, R. M. (2013, October 28). Sovereign Debt in Advanced Economies: Overview and

Issues for Congress. Congressional Research Service, pp. 12-13. Retrieved from

https://fas.org/sgp/crs/misc/R41838.pdf