This essay characterizes the main actors and how they operate during a buildup of government foreign debt and after a default on payments. These actors are the borrowing governments, domestic and foreign commercial banks, purchasers of government bonds, other governments lending to the debtor, and multilateral institutions (the International Monetary Fund and development banks). As there is no international sovereign analog to national court-supervised bankruptcy in the case of countries, the workout from crises, mainly hitting poorer economies, occurs without legislated rules or an enforcement mechanism, although the IMF (sometimes with the World Bank) serves as an informal umpire for the global financial community.

Present arrangements governing the accumulation and discharge of debt by states are difficult to justify fully on the basis of underlying normative considerations. States are different from individuals in important respects, and the deontological justifications that explain why individuals have a strong burden to abide by promises to repay do not straightforwardly apply to countries. Consequentialist considerations must play a central role in determining what norms should govern the accumulation and discharge of sovereign debt. Modified background norms for the accumulation and discharge of international debt which permit countries’ repayments to be made formally contingent on specific circumstances and the reasons that these circumstances have arisen are more likely to be morally justifiable than the existing rules, which in general require countries to repay their debts according to an inflexible schedule. Modified rules for the accumulation and discharge of international sovereign debt can codify the moral and legal basis for existing ad hoc deviations and present a justifiable framework within which international lending and borrowing can take place.

Odious debts are debts incurred by a government without either popular consent or a legitimate public purpose. There is a debate within academic circles as to whether the successor government to a regime that incurred odious debts has the right to repudiate repayment. In the real world, however, repudiation is not currently an option granted legitimacy by either global capital markets or the legal systems of creditor states. There are, thus, compelling reasons to reform the law of odious debts to allow for such repudiation in strictly limited circumstances. Beyond the moral problem of requiring the formerly captive citizens of a tyrant to repay their oppressor's personal debts, the burden of odious-debt servicing can perpetuate the cycle of state failure, which has direct national security consequences. In addition, a properly designed odious debt reform could function as an alternative punitive mechanism to trade sanctions with fewer harmful implications for the general population of the targeted state. Classical proponents of odious debt reform advocate for recognition of a legal rule under which successor governments could challenge the validity of debts incurred by prior regimes against the odious debt legal standard in a judicial-style forum. I make the case for an alternative “Due Diligence Model” of reform that provides far greater ex ante certainty for lenders, both as to which debts might be classified as odious debts and what steps the lender must take to protect its investments from subsequent invalidation. The Due Diligence Model also solves certain time-consistency problems inherent to the Classical Model.

The Highly Indebted Poor Countries (HIPC) initiative is the largest multilateral effort aimed at providing debt relief. In this essay, we address the question of whether this program is consistent with a view of justice commonly known as liberal egalitarianism. We argue that the HIPC initiative violates two basic liberal egalitarian principles. More generally, we show why the debate on debt relief must move beyond a discussion of whether or not countries should be held responsible for their sovereign debt. We urge a more careful and broader classification of which of the factors affecting a country's situation it should be held responsible for and which it should not. While there are good arguments for sometimes not holding poor countries responsible for their sovereign debt, it is hard to see why the same arguments should not also apply to many other factors that affect a country's net disposable income.

Risk and liability change the initially stipulated terms of contracts, overruling their otherwise binding nature. Risk encourages careful assessment of debtors' abilities to service debts. Errors and negligence in assessment, and even external shocks, make creditors suffer losses. Disregarding one's duty of care or professional standards, or engaging in tortious or illegal behavior makes actors liable to compensate for any resulting damage—a necessary systemic element of the framework markets need to function well. Neither mechanism was allowed to work properly in sovereign lending.

This essay analyzes why risk and liability are necessary mechanisms of well-functioning markets, and discusses how risk can be handled. In the United States, inappropriate regulatory norms hindered providing against risk in the case of sovereign debt. The absence of liability—a market imperfection—has produced debts no decent legal system would recognize as legitimate domestic debt, thus aggravating the sovereign debt problem, and giving rise to concepts such as criminal, odious, and illegal debts. Discriminating sovereign debtors and disobeying the rule of law caused market distortions, resulting in not only grave damages to debtors, but also losses to creditors that the mechanisms risk and liability would have avoided. Finally, I briefly present proposals to repair these shortcomings in order to avoid the disasters of the past.

Since the late 1970s, an increasingly global coalition of churches and nongovernmental organizations has pressed for reduction if not outright cancellation of the foreign debt of highly indebted poor countries, because of its deleterious impact on poor people. The movement achieved limited yet substantial success in the Jubilee 2000 campaign. In it, the movement invoked a biblical prescription of periodic debt relief to urge the international community to mark the millennium by recognizing a period of “jubilee” for heavily indebted poor countries, in which government debts would be cancelled and freed up resources used to alleviate poverty. The Catholic Church made a crucial contribution to the movement, through the involvement of its personnel, justice and peace offices, social service agencies, academic and research institutions, national bishops’ conferences, Vatican agencies, and Pope John Paul II. The essay traces the moral arguments the church made for debt relief, with a particular focus on two influential statements: those of the Vatican's Pontifical Justice and Peace Commission in 1987, and the U.S. Catholic bishops’ conference in 1989. By stimulating discussion of the ethics of debt among senior policymakers, the church's efforts strengthened the legitimacy of the claim that excessive debt servicing was unjust. Zambia is offered as a case study of church and coalition efforts to press not only for debt cancellation, but also for measures to ensure that freed-up resources be used effectively for poverty reduction, and that debtor governments contract new debt in a transparent manner.

The Argentine debt crisis of 2001–2002 and its aftermath are examined in the light of the moral framework of Catholic social teaching on the debt problems of poor countries. The author, a former practitioner in emerging-markets finance, seeks to bring together and interpret the church's teaching (which was mostly worked out in the 1980s) in the particular economic and social circumstances of Argentina in the early 2000s. The key question is how closely the outcome of the debt crisis in Argentina conformed to what social justice, in the Church's interpretation, would have required. The main conclusion is that the resolution of the crisis was broadly consistent with that teaching. The crisis was managed with pragmatism rooted in shared (by debtor and creditors) concerns for social justice—more so than had been possible in the earlier Latin American debt crises in the 1980s, which the author had also witnessed. For that, many factors are responsible, including the emergence of civil society in Argentina and changes in the system of emerging markets finance. The author argues, however, that the moral framework of the Catholic Church on matters of international debt may deserve some of the credit.