Sovereign debt crisis: A review of reasons, consequences and solutions

Substantial consequences are things that are often reminded for every country when they fall into a debt crisis and face the risk of default. However, the impact of the sovereign debt crisis on the economy is still controversial when previous studies have produced mixed results. Some studies suggest that insolvent countries need to face serious penalties, while others mention forgiveness, or even an opportunity to boom after insolvency. This article reviews the impact of the sovereign debt crisis in both theoretical considerations and empirical evidence, while depicting the causes and consequences, as well as solutions to solving the debt crisis. Several important solutions have been drawn, including promoting economic growth; developing programs and mechanisms to control lending; debt restructuring; using macroeconomic instruments and tightening policies; interventions of IMF and other financial institutions. In particular, the impact of domestic debt is also thoroughly analyzed in this study.