Indonesia had accumulated unsustainable amounts of debt that had strained the national budget and the economy as a result of the Asian Financial Crisis in 1997-1998. Under these conditions of stress, the economic diplomacy taking place with the IMF and the Paris Club had become paramount because it was through these institutions that the government would negotiate for better terms of its debt obligation and commitments. The overall theme of this paper is to explore and question: how far can diplomacy be used in order to reach a viable solution for both debtors and creditors? The situation of an imminent debt default means that the problem has escalated to an unmanageable state where the gains of previous efforts have yet to bear fruit to address the debt problem. Diplomacy becomes the only available tool to provide relatively immediate and direct result to deal with the situation as countries are forced to negotiate for a viable solution. This research has made several conclusions. Several factors are seen to constrain the debtor’s ability in realizing its interests such as the debtor’s position of weakness, its dependency on the creditors’ loans and the concentration of power within the IMF as the linchpin of the international monetary order. Despite these limitations, key success factors in the economic diplomacy of relatively successful sovereign debt negotiations include the essence of time, continuity, and a comprehensive approach that involves the well-connected stakeholders, such as inter-governmental institutions (IMF, World Bank, ADB, etc.), domestic constituencies of creditor governments (Finance Minister and other cabinet members, Central Bank Governors, Senators) and also the private sector (credit rating agencies). Several possible strategies and considerations for future sovereign debt negotiations are discussed, which include the use of issue linkages, incorporating the political aspect of debt renegotiations, the creation of a ‘Debtors’ Club’, and a more active role of the Ministry of Foreign Affairs in economic diplomacy.

Keywords: Economic Diplomacy, Sovereign Debt Rescheduling, Negotiation Strategy, IMF, Paris Club, Indonesia.