Europe needs fair and transparent debt work-out mechanisms: lessons from the Icelandic case

Debt difficulties currently faced by Iceland and other European countries give rise to new debates among European decision-makers on how to identify causes and responsibilities in the context of sovereign debt crises and how to find efficient solutions to the problems arising. There currently exists no orderly procedure to ensure an efficient and fair solution to sovereign debt difficulties.

The lack of such procedure is costly both to the country in question – and most importantly, to the country’s most vulnerable social sectors – and to its creditors. An insolvency procedure needs to be set up to deal with sovereign debt disputes.

The procedure must be independent, fair and comprehensive, treating all creditors equally. A debt work-out mechanism is needed which assesses the underlying causes of the distressed debt, taking creditors’ responsibilities into account. Only by holding creditors, as well as borrowers, to account for irresponsible behaviour could new debt crises be avoided.