For one, unlike the U.S., the legal framework to compel creditors to accept a Chapter 11-type workout does not now exist on a global scale. In addition, some of the mechanisms that make Chapter 11 work in the U.S., such as the ability of creditors to shut down firms that are not economically viable, may not apply when the borrower is a sovereign nation. Nevertheless, the broad notion of moving toward a formal debt-restructuring system for the global economy is getting a great deal of attention these days. In fact, history suggests that in times of crisis, demanding full repayment of debt can be an enormous mistake. In the 1980s, Latin America struggled for years under debt problems untIl a deal was struck allowing capital to flow in and growth to resume.
Bankruptcy is a way to say to creditors, 'Get real.
The money's not there.''' Perhaps the hardest problem is how to decide when a debt standstill is appropriate. Instead, the IMF should take the lead role in certifying when a country is in deep enough trouble to trigger the restructuring mechanism. Both capital controls and a Chapter 11-type system have pluses and minuses. In the short run, capital controls are clearly an easier policy to adopt. Countries can implement them unilaterally, and they do not require new financing.