Governments and their multilateral financial institutions enter into the business of lending to developing countries for policy reasons. The private sector does it for profit. Increasingly, people in international financial circles are asking what is the future of private lending to developing countries, and the answer is coming back that, while the earnings have been good overall, the risks were much higher than expected.In the current era, international investors broadly consider themselves exposed to more risk than perceived in the 1990s, owing to recent stock market crashes and the many prominent failures in corporate governance, let alone the current fears of war and uncertain world economic growth. Institutional and individual investors are thus asking whether they want to add more “high-risk” emerging market “paper” to their portfolios. Even where the answer is yes, they ask how much additional yield is needed to compensate for the perceived higher risk.

In what follows, we first situate sovereign default as the culmination of an economic and financial deterioration that might have been stopped at various points but is not and we ask why? This points to the need for mechanisms that create regular opportunities for frank conversations between the government and its creditors, beginning before the crisis threatens. Effective and fair negotiation processes are nevertheless needed to handle the unprevented events of sovereign default. The Sovereign Debt Restructuring Mechanism (SDRM) proposed by IMF has become the obvious starting point for further discussions of such processes. However, significant revisions in its design seem warranted and some are suggested here, affecting both how the mechanism would work in a defaulting country and its international implementation.