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The bail-in problem: systematic goals, ad hoc means

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  • Eichengreen, Barry
  • Ruhl, Christof

Abstract

In this paper we analyse the recent efforts of the international financial institutions to limit the moral hazard created by their assistance to crisis countries. We question the wisdom of the case-by-case approach taken in Pakistan, Ecuador, Romania and Ukraine. We show that because default and restructuring are so painful and costly, it is simply not time consistent for the IFIs to plan to stand aside if the markets refuse to roll over maturing claims, restructure problem debts, or provide new money. Because these realities create an incentive to disburse even if investors fail to comply, the IFIs are then placed in the position of having to back down on their previous conditionality, which undermines their credibility. And since investors are aware of these facts, their behaviour is unlikely to be modified by the IFIs' less-than-credible statements of intent. Hence, this approach to 'bailing in the private sector' will not work. Fortunately, there is an alternative: introducing collective-action clauses into loan agreements. This, and not ad hoc efforts to bail in the private sector, is the forward-looking solution to the moral hazard problem.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 25 (2001)
Issue (Month): 1 (March)
Pages: 3-32

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Handle: RePEc:eee:ecosys:v:25:y:2001:i:1:p:3-32

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References

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  1. Buiter, Willem H & Sibert, Anne, 1999. "UDROP: A Small Contribution to the New International Financial Architecture," CEPR Discussion Papers 2138, C.E.P.R. Discussion Papers.
  2. Willem H. Buiter & Anne Sibert, 1999. "UDROP: a small contribution to the international financial architecture," LSE Research Online Documents on Economics 20224, London School of Economics and Political Science, LSE Library.
  3. Marcus Miller & Lei Zhang, 1999. "Sovereign Liquidity Crisis: The Strategic Case for a Payments Standstill," CSGR Working papers series 35/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  4. Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
  5. Benjamin M. Friedman, 2000. "Debt Restructuring," NBER Working Papers 7722, National Bureau of Economic Research, Inc.
  6. William R. Cline, 1995. "International Debt Reexamined," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 46.
  7. Buiter, Willem H & Sibert, Anne C, 1999. "UDROP: A Contribution to the New International Financial Architecture," International Finance, Wiley Blackwell, vol. 2(2), pages 227-47, July.
  8. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
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Cited by:
  1. Sturzenegger, Federico & Zettelmeyer, Jeromin, 2008. "Haircuts: Estimating investor losses in sovereign debt restructurings, 1998-2005," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 780-805, September.
  2. Taesoo Kang & Guonan Ma, 2009. "Credit card lending distress in Korea in 2003," BIS Papers chapters, in: Bank for International Settlements (ed.), Household debt: implications for monetary policy and financial stability, volume 46, pages 95-106 Bank for International Settlements.
  3. Jose Wynne & Federico Weinschelbaum, 2004. "Renegotiation, Collective Action Clauses and Sovereign Debt Markets," 2004 Meeting Papers 7, Society for Economic Dynamics.
  4. Powell, Andrew & Arozamena, Leandro, 2003. "Liquidity protection versus moral hazard: the role of the IMF," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1041-1063, December.
  5. Canuto, Otaviano & Pinto, Brian & Prasad, Mona, 2012. "Orderly sovereign debt restructuring : missing in action !," Policy Research Working Paper Series 6054, The World Bank.
  6. Andrew Powell, 2002. "The Argentina Crisis: Bad Luck, Bad Management, Bad Politics, Bad Advice," Business School Working Papers veinticuatro, Universidad Torcuato Di Tella.
  7. Federico Sturzenegger, 2002. "Defaults in the 90´s: Factbook and Preliminary Lessons," Business School Working Papers veintidos, Universidad Torcuato Di Tella.
  8. Rockerbie, Duane W. & Easton, Stephen T., 2009. "Commercial banks, default insurance and IMF reforms," Economics Discussion Papers 2009-39, Kiel Institute for the World Economy.
  9. Jeffrey A. Frankel & Nouriel Roubini & Mervyn King & Robert Rubin & George Soros, 2003. "Industrial Country Policies," NBER Chapters, in: Economic and Financial Crises in Emerging Market Economies, pages 155-296 National Bureau of Economic Research, Inc.
  10. Tillmann, Peter, 2005. "Private sector involvement in the resolution of financial crises: How do markets react?," Journal of Development Economics, Elsevier, vol. 78(1), pages 114-132, October.
  11. Masazumi Hattori, 2004. "A theory of sovereign debt roll-over crisis," LSE Research Online Documents on Economics 24700, London School of Economics and Political Science, LSE Library.
  12. Cécile Bastidon, 2003. "Un modèle de conditionnalité ex ante de l'intervention multilaterale," Post-Print hal-00731610, HAL.
  13. Patrick Bolton, 2003. "Toward a Statutory Approach to Sovereign Debt Restructuring: Lessons from Corporate Bankruptcy Practice around the World," IMF Working Papers 03/13, International Monetary Fund.
  14. Bastidon, Cécile & Gilles, Philippe & Huchet, Nicolas, 2008. "The international lender of last resort and selective bail-out," Emerging Markets Review, Elsevier, vol. 9(2), pages 144-152, June.
  15. Cecile Bastidon & Philippe Gilles & Nicolas Huchet, 2008. "A Selective Bail-Out International Lending of Last Resort Model," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 103-114, May.
  16. Andrew Powell, 2002. "Countries with international payments´ difficulties: what can the IMF do?," Business School Working Papers veintitres, Universidad Torcuato Di Tella.

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