On international financial markets, the war in Georgia has rendered Russian debt and bonds toxic. Interest rates on Russia s bonds have risen by 2 3 percentage points, and many Russian creditors no longer have access to international capital markets.

For countries seeking re entry into international financial markets after the debt crisis, higher real interest rates and a stable exchange rate were prerequisites.

Options include international debt financing, domestic tax revenue and user fees, borrowing in domestic capital markets, and public private partnerships for water related investments.

In the case of sovereign debt, however, there is no binding international law that permits bankruptcy. Though some routine practices have emerged as international capital markets have grown, they remain ad hoc.

See IMF Reviewing the process for sovereign debt restructuring within the existing legal framework, Policy Development and Review, International Capital Markets, and Legal Departments, 1 August 2003.

A voluntary code of conduct was also developed by the Institute of International Finance, which proposed the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets.

How vulnerable are emerging economies because of all this dollar debt? Optimists like to point out that emerging markets have accumulated a huge stock of international reserves since 2010, enabling them to self insure against a run on their currencies or their foreign debt.

Moreover, some debtor countries which have gone through debt restructurings soon resumed their access to capital markets.

Lower interest rates on loans are available in capital markets to borrowers who have ample debt service coverage , which is defined as total revenues available for debt service as a percentage of the required debt service.

Nonetheless, Argentina s latest debt trauma shows that the global system for sovereign debt workouts remains badly in need of repair. Deepening domestic debt markets and perhaps change along the lines proposed by the IMF is sorely needed.

It was the liberalization of international financial markets.

Moreover, a debt reduction in the form of further interest rate reductions and maturity extensions on foreign government held debt would not hurt financial markets. But debt held by the European Central Bank and the IMF could pose a problem.

That left individual eurozone members exposed to brutal pressure by financial markets at a time when excessive private debt was turned into unsustainable public debt. Suddenly, the eurozone had become a straightjacket.

That ended in 2010, after Greece admitted that it had lied about its budget deficits and debt. Financial markets responded by demanding much higher rates on the bonds of countries with high government debt ratios and banking systems weakened by excessive mortgage debt.

That can never be achieved through promises, but through a clear implementable international strategy based on debt cancellation, provision of development aid and unrestricted access to world markets for the exports of developing and least developed countries.

With governments around the world (including Germany s) accumulating unprecedented levels of peacetime debt, markets are worrying about sustainability. Some crisis prone countries such as Latvia are already unable to sell any more debt.

Further, debt sustainability is about a country's ability to pay in the context of becoming an active partner in global capital markets.

As a result, competitiveness in international markets would be reduced.

The global partnership for development launched at Monterrey demands that the industrialized countries first increase flows of international funds for development secondly, open their markets thirdly, strengthen financial and technical cooperation fourthly, provide external debt relief and fifthly, promote consistency in the financial system and in international trade.

Fifth, persistent QE can lead to asset bubbles both where it is implemented and in countries where it spills over. Such bubbles can occur in equity markets, housing markets (Hong Kong, Singapore), commodity markets, bond markets (with talk of a bubble increasing in the United States, Germany, the United Kingdom, and Japan), and credit markets (where spreads in some emerging markets, and on high yield and high grade corporate debt, are narrowing excessively).

Its objective is to facilitate international trade and access of developing countries to international OA markets.

Broad access to deep and liquid international debt markets has enabled policymakers to bypass some of the most challenging aspects of democratic governance. Rather than tackle thorny questions about how to allocate limited resources, democratic governments seem to believe that they can have it all low taxes and ample debt finance to fund wars or electorate pleasing programs.

Local currency government debt markets have performed fairly well during the crisis, while local currency corporate debt markets have played a more modest role as a vehicle for longer term finance. This suggests that domestic reforms aimed at reducing issuance costs, improving disclosure requirements, enhancing creditors rights frameworks, and tackling other inhibiting factors could bring high returns.

The international community has, so far, failed to develop effective and equitable arrangements for restructuring sovereign debt, despite the clearly dysfunctional and problematic consequences of past international public debt crises. This prevents timely debt workouts when needed, effectively impeding recovery.

Regrettably, those efforts are being hampered by limited access to the markets of developed countries, low disbursements of development assistance and the debt burden.

This is evident in two key areas, debt and international trade.

Group of 77 (core groups on debt and international financial systems)

Assist small island developing States in enhancing their competitiveness in international markets.

These include full and unrestricted access for those economies to international markets.

Beginning in September 1931, the markets became nervous about the US, causing large outflows from American banks and thus from the dollar. The Depression had rendered capital markets incapable of absorbing large quantities of government (or, indeed, any other) debt.

Some might assume that bond markets are shielded from the effects of climate change, ecosystem degradation, and water scarcity. With more than 40 trillion of sovereign debt in global markets at any given time, that is a very high risk game.

In these circumstances, it is not surprising that financial markets have returned to extreme volatility. The expenditure cuts mandated by the outcome of the debt ceiling debate will reduce economic activity, thereby undermining growth and making debt reduction even more difficult.

The major question today should be whether the failure of capital markets (and the implications for government debt) after 2007 has been as severe as during the Great Depression. At the moment, there has not been widespread revulsion against all government debt, and some countries today clearly have better access than others to capital markets, enabling them to finance their deficits externally.

It does, however, require more than just international aid or debt relief.

ICTs are expanding the possibilities of developing economies to participate in international markets.

In August 1982, Mexico shocked the world by declaring that it was unable to service its debt. For most of that summer, Mexico, with a projected fiscal deficit of around 11 of GDP, was still borrowing on international financial markets, though at an increasing premium.

That is why, for domestic debt disputes, countries have bankruptcy laws and courts. But there is no such mechanism to adjudicate international debt disputes.

The debt burden adjustment must continue to be applied as a mark of the international community's solidarity with countries burdened by debt, particularly LDCs.

Debt markets would also benefit from such an initiative. Blurring the line between the private and the state owned sectors would, over time, reduce the latter s privileged access to and overuse of bank financing, leading to the expansion of corporate bond markets.

These negative transfers have persisted, despite the commitments made by the developed countries to increase official development assistance, to reduce debt and debt service payments, to open their markets to the products of developing countries, and to encourage private investment in developing countries.

If Europe could show in the worst possible scenario of sovereign default how such a process might operate, uncertainty would be reduced and markets would be reassured. And, in the longer term, we would have a viable international model of how to tackle severe sovereign debt problems.

Banks also provide critical services to governments and business, by providing direct access to global buyers of debt and equity, and by establishing large, consistent markets of buyers and sellers. Some characterize these activities as speculative trading, and even caricature financial markets as casinos.

Greece s nominal debt stock will matter only once the country re enters the debt markets and becomes subject to market, not concessional, borrowing terms. In the meantime, Greece must implement the structural reforms needed to restore the country s long term growth prospects and thus to strengthen its capacity to repay its creditors without a large nominal debt reduction.

The persistence of debt crises underscores the need to reform the international financial system.

This is how the Latin American debt crisis of the 1980s, the Mexican Tequila crisis of 1994, the Asian debt crisis of 1997, and the Russian crisis of 1998 unfolded. It was also how the financial crisis of 2008 2009 transmitted itself to emerging markets.