Use capital control, like Malaysia did in 1998

How it works: stop the explosion of the debt ratio with some combination of temporary capital controls, to place a curfew on panicked capital flight, and possibly the repudiation of some foreigncurrency debt. Meanwhile, get things in place for a fiscally sustainable regime once the crisis is over. If all goes well, confidence will gradually return, and you’ll eventually be able to remove the capital controls.

Malaysia did this in 1998; South Korea, with US aid, effectively did something like it at the same time, by pressuring banks into maintaining their short-term credit lines.

A decade later, Iceland did very well with a combination of capital controls and debt repudiation (strictly speaking, refusing to take public responsibility for the debts run up by private bankers).

Argentina also did quite well with heterodox policies in 2002 and for a few years after, effectively repudiating two thirds of its debt. But the Kirchner regime didn’t know when to stop and turn orthodox again, setting the stage for the country’s return to crisis.

And maybe that example shows how hard dealing with this kind of crisis is.

You need a government that is both flexible and responsible, not to mention technically competent enough to implement special measures and honest enough to carry out that implementation without massive corruption. The writer is a Nobel Prize winner and op-ed columnist for ‘The New York Times’. He is also distinguished professor of Economics at the Graduate Centre of the City University of New York