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Sovereign Default and State-Contingent Debt

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  • Martin Brooke
  • Rhys R. Mendes
  • Alex Pienkowski
  • Eric Santor

Abstract

The Latin American debt crises in the 1980s and the Asian crisis in the late 1990s both provided impetus for reforming the framework for restructuring sovereign debt. In the late 1980s, the Brady plan established the importance of substantive debt relief in addressing some crises. A decade later, as the Asian crisis faded, the G10 and major emerging market economies worked together to increase the flexibility of IMF lending and promoted the wider use of collective action clauses in foreign law bonds. More recently, the banking crisis of 2008-09 has led to the implementation of an ambitious financial sector reform agenda to reduce the risk of such a crisis occurring again. But reforms to reduce the incidence and cost of sovereign debt crises, such as those experienced in the euro area, have proceeded more slowly. The international community has a role to play in addressing this gap. In that regard, this paper is intended to stimulate debate on the problems in the current practices for sovereign debt restructuring and puts forward some proposals to improve the functioning of sovereign debt markets. The Bank of Canada and the Bank of England have collaborated on these issues in the past. For example, in 2001, Andy Haldane and Mark Kruger authored a joint paper on how to resolve sovereign debt crises in a more orderly and transparent manner. This current work builds on those ideas by exploring how state-contingent debt could further improve the system. Charlie Bean/John Murray London/Ottawa November 2013

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Bibliographic Info

Paper provided by Bank of Canada in its series Discussion Papers with number 13-3.

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Length: 23 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bca:bocadp:13-3

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Keywords: International financial markets; International topics;

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References

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 595, China Economics and Management Academy, Central University of Finance and Economics.
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  7. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
  8. Prasanna Gai & Ashley Taylor, 2004. "International financial rescues and debtor country moral hazard," Money Macro and Finance (MMF) Research Group Conference 2003 34, Money Macro and Finance Research Group.
  9. Paolo Mauro & Marcos Chamon, 2005. "Pricing Growth-Indexed Bonds," IMF Working Papers 05/216, International Monetary Fund.
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  11. Becker, Torbjorn & Richards, Anthony & Thaicharoen, Yunyong, 2003. "Bond restructuring and moral hazard: are collective action clauses costly?," Journal of International Economics, Elsevier, Elsevier, vol. 61(1), pages 127-161, October.
  12. Andrew G Haldane & Jorg Scheibe, 2004. "IMF lending and creditor moral hazard," Bank of England working papers 216, Bank of England.
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Cited by:
  1. Barr, David & Bush, Oliver & Pienkowski, Alex, 2014. "GDP-linked bonds and sovereign default," Bank of England working papers 484, Bank of England.

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