Chapter 15 provides a nutshell exposition of both the type of rationale that could justify a bankruptcy court-type institution at the international level, and a potential risk of creating such an institution. It elegantly simplifies, concentrating on the basic logic of the cases for and against. Weighing benefits and risks, Eaton concludes that a bankruptcy mechanism, if executed well, would be a useful addition to the international financial architecture. I agree with this view. He ends with two practical suggestions: first, the idea that the debtor moral hazard problem associated with a bankruptcy court might be reduced by requiring the debtor to make escrow payments that could be seized by creditors in the event of a stand-still; and second, a lending tax on private creditors to reduce the moral hazard problem of official bail-outs. I will briefly return to these below.
Perhaps inevitably, simplicity comes at a price. Eaton's approach is to justify an international bankruptcy court as an extension of the idea of payments standstills to prevent "country runs". The link between the two is that, because of debtor moral hazard, it cannot be efficient to allow a debtor to unilaterally declare a standstill - hence the need for a neutral court. This is quite removed from the current policy debate, in which an international insolvency regime is proposed primarily as a way of restructuring unsustainable debt, not preventing self-fulfilling runs. That said, Eaton's country runs could be viewed as symbolic of a larger class of collective action problems that arise in the context of debt restructuring as well as liquidity crises, such as the creditor holdout problem and the underprovision of new financing.
Similarly, the institutional solution suggested by Eaton should probably be viewed as one example among several possible solutions. To the extent that the underlying inefficiency is some kind of co-ordination failure across creditors, as suggested by Eaton, resolving it does not really require an international court. A mechanism which forces the creditors to take decisions collectively will do. For example, the Sovereign Debt Restructuring Mechanism (SDRM) recently proposed by IMF management and staff (IMF 2002b) does not assign much of a role to an international court, but instead gives the power to impose a stay on litigation, adopt a debt restructuring plan, and exempt new financing from the restructuring to the creditors collectively.