This paper builds on the emerging consensus in the development literature that the enhanced HIPC initiative does not fully remove the debt overhang in many poor and highly indebted countries. It examines the six most crucial problems of the enhanced HIPC Initiative and presents specific suggestions on how the framework of the HIPC Initiative would need to be changed in order to provide a better basis for long-term debt sustainability. However, even after the adoption of such changes, the long-term debt sustainability of HIPCs would remain fragile. The paper thus addresses some of the key issues related to a new aid architecture and the structural transformation HIPCs must undergo to achieve long-term debt sustainability.

A positive future for foreign private lending to developing countries requires reducing perceived risk through mechanisms for more permanent debtor-creditor “conversation” and an accepted and effective “bankruptcy” approach to orderly workouts from unavoidable sovereign defaults. Developing countries fear that current reform proposals, particularly the Sovereign Debt Restructuring Mechanism of the International Monetary Fund, would increase uncertainty and borrowing costs, and certain revisions are suggested here. Most importantly, however, premature closure around any controversial proposal could rob the international system of measures for increasing investor and citizen confidence. Further consideration of the matter in all relevant forums is an urgent priority.

The new Basel Accord framework relies on markets and supervisors to discipline banks. Yet both markets and supervisors fail, and more so in developing countries than in highincome countries. Therefore, the new Accord is not, as its designers claim, suitable for wide application. Nevertheless, developing country policymakers have little choice but to implement it in part or in whole. Hence there are problems of governance in international regulation. I offer seven general principles for the design of a prudential regime more robust to government and market failure. Four alternative capital regimes are evaluated in the light of these principles. Simpler and harsher regimes are likely to achieve greater safety with a given level of resources.