Michele Wucker is the author of Why the Cocks Fight: Dominicans, Haitians, and the Struggle for Hispaniola (Hill & Wang, 1999).

"Countries do not go bankrupt," Citibank chief Walter Wriston declared in 1982. Wriston's maxim, more eloquent than accurate, rang in a decade of debt crisis that by its nadir in 1990 involved 55 countries foundering with $335 billion worth of defaulted debt, or 31% of outstanding lending to sovereign nations.

Countries may not close their doors and disappear like companies can, but they do indeed go bankrupt -- and with astonishing regularity. Over the last 200 years, the domino effect of collapsing national economies has threatened the world economy five times. Yet there still is no set of international bankruptcy rules -- no Chapter 11 for nations of the world -- that will stave off creditors and find a fair way of getting everyone back on their feet.

This omission is looking increasingly foolhardy. In the last 18 months alone, global finance groaned under the strain of Russia, Mexico, Indonesia, a Brazilian near-miss. Now Ecuador's bankruptcy has brought into relief the omission of an international legal framework for countries going bust.

Faith in miracles

Earlier this month, Ecuador announced a desperate plan to save its foundering economy by scrapping its currency and dollarizing, a scheme met with a mix of outright derision, skepticism and prayers. Within days, President Jamil Mahuad got the boot in a coup prompted by the way he has waffled for months in the midst of deep recession. Last August, with its banking system in tatters and the value of the sucre plummeting, Ecuador failed to make a $96-million interest payment. Ecuador's bankruptcy earned it the dubious honor of becoming the first country to default on Brady bonds -- the miracle securities, brainchild of former U.S. Treasury Secretary Nicholas Brady, that have been credited with ending the 1980s debt crisis.

Demostrators march over bank closing in Ecuador

The Brady Plan gave limited relief from commercial debt (but not from multilateral debt) and backed the old defaulted loans with U.S. Treasury bond collateral to restore confidence in struggling economies around the world. Like Ecuador, 15 countries repackaged their 1980s defaulted loans, creating about $150 billion worth of Brady bonds. Almost overnight, less-developed countries became "emerging markets" riding a global cash wave and frenzied bond trading. Awash in relief and profits, nobody wanted to talk about how to handle the next debt crisis -- or whether the Brady Plan had given enough relief. For many countries, it did, for now at least; Argentina, Brazil and Mexico did so well that they bought back their Brady bonds and, thanks to their now-respectable credit ratings, refinanced them with cheaper borrowing.

But Ecuador was a marginal case even from the beginning. The country has never been a safe bet: from 1800 through 1995, it defaulted four times for an astonishing 115 cumulative years of default. When Ecuador cut its Brady deal in 1994, money was sloshing around the globe, and nobody wanted to think about the boom times ending. This gave banks reason to drive a bargain that turned out to be too hard. A few saw it coming; at the time, a handful of forthright emerging-markets debt traders confided to me that they believed that the only way Ecuador could afford to start re-paying its debt was if the speculative emerging markets bubble did not burst.

The worst-case scenario comes to pass

In late 1997, the Asian economic crisis cut off capital to the once-ballyhooed emerging markets like Ecuador. Commodity prices collapsed, especially for oil, Ecuador's chief income source. By the time Russia defaulted in July 1998, capital markets were all but closed to the barely emerged countries.

Ecuador's government did not help matters. During his short-lived 1996 presidency, Abdala Bucaram, who called himself "El Loco" (the madman), drove the economy into the ground before being impeached for corruption (although the rock video he made of himself ought to have been sufficient grounds for impeachment) and packed off into exile in Panama. Then El Nino's freak weather obliterated crops, property and infrastructure, costing one-fifth of the country's annual output. In 1998, its banking system collapsed, and the central bank had to back deposits; domestic debt grew 10-fold to $2.6 billion last year.

All this is why Ecuador's debt did not fall to 50% of gross domestic product as Brady negotiators had predicted; it rose to 115% of GDP in 1999 (from 100% at the time of the Brady deal). Debt servicing, which cost nearly two-thirds of export income in 1992, was supposed to fall by this year to 18%. Instead, it was 60% of GDP in late 1999 -- or at least would have been if Ecuador had paid. In retrospect, it is clear that it was fantastical to believe that Ecuador could keep up with its debt payments of close to $250 million a year.

How not to handle a meltdown

It is bad enough that Ecuador's government has been dithering about what to do. Commercial banks are bickering mightily with Paris Club government lenders, the U.S. Treasury and international institutions, known in trade jargon as IFIs. (Can it really be just coincidence that the acronym for the multilaterals is pronounced "iffy"?) The issues are who gets to bleed what is left of the country's assets, and who should help fix it.

Official creditors admonish the banks for making speculative investments, and argue that bailing out a broke country is tantamount to bailing out investment bankers. After all, investors know when they buy highly speculative emerging-market bonds that there is a high chance of default; the deeply discounted prices and high yields reflect this. Banks are still smarting over the Paris Club's insistence in April 1999 that Pakistan ask private creditors to reschedule their bonds before governments would fork over any money. Bankers accuse the International Monetary Fund of condoning Ecuador's default, as a way to use a country to test how to get private creditors to help bail out poor countries.

The fight has delayed help and deepened the crisis. It avoids the real issue: that Ecuador simply cannot afford to pay the money it owes, for some reasons of its own making and others far out of its control.

Prescriptions for change?

Over the 1990s, an average 22% of sovereign debt was defaulted, a percentage that is worse than any decade since the 1830s. As the year 2000 began, 28 foreign countries were in default on $102 billion of borrowing, or about 14% of the world's debt, according to Standard & Poor. The credit rating agency predicts that sovereign defaults will inch up over the next decade.

It is far better to anticipate those troubles now instead of letting them degenerate like Ecuador has. Under today's anarchy, nobody wins. Rogue bondholders can and do run roughshod over bankrupt countries and good-faith creditors.

Harvard's Jeffrey Sachs, a prominent advisor to nations on the brink (including Ecuador), has laid out a blueprint for working out cases of severe financial stress. Bankrupt countries need a legal framework that gives them a time out from payments; a deep and fundamental restructuring; and a mechanism to coordinate creditors and ensure that all are treated equally. This is an important starting point towards resolving other issues.

Bankers argue that rescheduling debts makes investors unwilling to lend in the future. That may be true, but if a country is never allowed to get back on its feet they certainly will not be providing money either. Banks may be more willing to put up new money to help debtors out of crisis, but they are only willing rescuers when they believe that official lenders are doing their share. In some cases, creditors must simply throw their hands up and let a country start fresh -- especially when loans carried political strings in the first place.

Countries, like individual debtors, do not default because they want to. They stop paying when they are bankrupt and have no choice. If a country does not get enough help in the first place, creditors are in for replays.