The global debt crisis of the 1980s is generally thought to have begun on August 22, 1982, when Mexico formally requested its commercial bank lenders to begin rolling over the maturing principal of their loans to Mexican public sector borrowers. There have been three periods of intense intellectual activity in the field of sovereign debt management since that date.
The first period lasted from 1982 to 1985. The issues of the day were how to restructure billions of dollars of commercial bank credits in a way that would not threaten the balance sheets of the affected banks. How could the restructuring of private credits be coordinated with debt relief from multilateral and bilateral sources? Was it, as the banks then claimed, really an exercise in which every affected creditor must either play its assigned part or else all creditors would refuse to play? And most important, was sovereign debt restructuring a game limited exclusively to deferring the repayment of the principal of the loans, or would there ever come a time when some of that principal would be written off or the interest rate reduced?
The second burst of intellectual activity surrounded the implementation of the Brady initiative (1) in the period from 1990 to 1993. The vexing question of whether sovereign debt could ever be reduced, as opposed to just rescheduled, was at this point answered--in the affirmative. (2) But the price of the commercial banks' willingness to write off a portion of their loans was their insistence that the remaining debt stock be transformed into freely tradable debt securities (Brady bonds). When these bonds were sold into the broader market, a new species of investor--the bond investor--was introduced to the rewards, and to the risks, of lending to foreign sovereign borrowers.
Bondholders were initially allowed to nurture two comforting myths about their new investments. The first suggested that sovereign debt restructurings were like a case of chicken pox; once having been through one, a country could confidently be viewed as inoculated against a further outbreak for at least a few decades. The second held that the very nature of sovereign bonds--tradable, widely-disbursed, often in bearer form, sometimes held by astonishingly naive investors--rendered them practically, if not legally, immune from mandatory restructuring exercises. "Inviolable" was the word used to capture this idea.
Bond investors were not disabused of these myths in the 1990s. The practice of giving official sector bailouts to distressed sovereign debtors to allow uninterrupted servicing of existing bond indebtedness (starting with Mexico in 1995 and spreading quickly to Thailand, Indonesia, South Korea, Brazil and even, for a short time, Russia) sidestepped the lurking questions of whether sovereign bonds could ever be restructured and, if so, how. …