A combination of multiple shocks—chief among them the COVID-19 pandemic and increased interest rates—has left over 50 lower- and middle-income countries in “debt distress,” according to the UN: struggling to repay money borrowed to fund vital projects, or to import food and other essentials. If debt repayments become impossible, a government typically has to “declare default,” letting its creditors know that further repayments under the original terms are no longer possible. Debt defaults cause substantial and long-lasting economic damage—damage that continues until a country’s finances are straightened out. But currently, the global system for doing that also needs fixing.
What happens when a country defaults?
For…