recognition that the restructuring will not restore sustainability with a“sufficiently high” probability, which should in turn suggest the need for more relief, which would in turn generate lower discount factors. Markets, however, are often irrationally pessimistic(on average, as we noted above, there have been excess risk-adjusted returns on sovereign bonds), and so they may demand an interest rate that is significantly higher than the safe interest rate, even when debt would be sustainable if the bonds carried an interest rate appropriate for the risk. 11 The higher interest rate, however, affects the debt sustainability: there are multiple equilibria in the assessment of debt sustainability, such that it is even possible that larger write-downs are associated with higher prices for the new bonds. 12 8.5 Addressing overoptimism and its deeper causes Finally, an old concern – but worth revisiting as it is still relevant today – refers to the overoptimism in the IMF baseline growth scenarios in DSAs. Overoptimistic forecasts in IMF DSA, often the consequence of underestimating the contractionary policies of the standard conditionalities in IMF programs, not only contribute to the“too little too late” syndrome in sovereign debt restructuring but also allow for IMF lending in situations in which, under more reasonable and unbiased forecasts, debts would be deemed unsustainable. On the other hand, creditors, and even financial advisors hired by governments in restructuring processes, focus their complaints on the other side of the problem: if the IMF is not optimistic enough in its baseline assumptions, it may be difficult to strike a deal aligned with the IMF DSA, given creditors’ incentives and their demands that there be little write-down of the principal and limited reductions in interest rates. In those situations, the IMF staff finds itself again caught between a rock and a hard place: if they are sound in their analyses and realistic in the assumptions used in the DSA, they will be blamed for the failure to reach a deal(albeit an unsustainable one). They can, of course, be unrealistic and thereby contribute to, or at least facilitate, an unsustainable debt deal – but then they will be blamed when, a few years down the road, another restructuring is required. The problems we have discussed briefly in this note illustrate the deficiencies of the existing system for sovereign debt restructuring, pointed out in the Stiglitz Report on“Reforming the International Monetary and Financial Systems in the Wake of the 2008 Global Crisis”(Stiglitz et al., 2010). 9. Conclusion Timely and effective debt crises resolutions are important for economic efficiency and equity, and for this, better debt crises resolution frameworks are needed(Guzman and Stiglitz, 2016a). An important element in any good debt crisis resolution process is a good DSA. This paper has provided insights into how DSAs can be improved, with a focus on the most critical elements in current practice that need more scrutiny. 11 Sometimes creditors seem to expect the new bonds to have the same high interest rates as the old risky bond. Any reduction in interest rates is viewed as a write-down. This makes no sense: the high premium reflected the risk of default; with sustainable debt restructuring, there is no justification for that premium. And if that premium had not existed in the first place, the probability of a necessary restructuring would have been lower. This is a classic problem of multiple equilibria in the servicing of public debt(Calvo, 1988). 12 There is some controversy about how appropriate to measure(or even think about) a write-down. In a crisis, a country’s debt usually has a low value – a$100 bond might sell for$25. If the exchange bond sells at$25, one could view it as a 75 per cent write down on the face value, but a 0 percent write down on current market value. However, the current market value depends critically on expectations of the terms of the exchange bond. If the exchange bond has a lower value that the current market price, it simply means that the market was overly optimistic about the terms of the exchange bond Series: Debt Sustainability Assessments& Their Role in the International Financial Architecture 13