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Bail out or work out? Theoretical considerations

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  • Andrew G Haldane
  • Gregor Irwin
  • Victoria Saporta

Abstract

This paper assesses various crisis resolution proposals using a theoretical model of (liquidity and solvency) crisis. The model suggests that payments standstills and last-resort lending are equally efficient means of dealing with liquidity crises, while coordinated lending through creditor committees is second best. Debt write-downs are preferred to subsidised IMF financing when dealing with solvency crises, because of the negative moral hazard implications of the latter tool. Finally, the model suggests that international bankruptcy court proposals may be superior to existing contractual approaches in securing such write-downs.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 219.

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Date of creation: May 2004
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Handle: RePEc:boe:boeewp:219

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References

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  1. Rochet, Jean-Charles & Vives, Xavier, 2002. "Coordination failures and the lender of last resort : was Bagehot right after all?," HWWA Discussion Papers 184, Hamburg Institute of International Economics (HWWA).
  2. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, Springer, vol. 6(4), pages 459-472, November.
  3. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
  4. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-21, C.V. Starr Center for Applied Economics, New York University.
  5. Kenneth Kletzer & Barry J. Eichengreen & Ashoka Mody, 2003. "Crisis Resolution," IMF Working Papers 03/196, International Monetary Fund.
  6. Andrew G Haldane & Adrian Penalver & Victoria Saporta & Hyun Song Shin, 2003. "Analytics of sovereign debt restructuring," Bank of England working papers, Bank of England 203, Bank of England.
  7. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, Econometric Society, vol. 59(4), pages 1069-89, July.
  8. Marcus H. Miller & Lei Zhang, 1999. "Sovereign Liquidity Crisis: The Strategic Case for A Payments Standstill," Working Paper Series, Peterson Institute for International Economics WP99-8, Peterson Institute for International Economics.
  9. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(1), pages 155-78, February.
  10. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 21-42, Fall.
  11. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  12. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 621-639, June.
  13. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 85-104, Fall.
  14. Barry Eichengreen & Kenneth Kletzer, 2003. "Crisis Resolution: Next Steps," NBER Working Papers 10095, National Bureau of Economic Research, Inc.
  15. Sayantan Ghosal & Marcus Miller, 2003. "Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(487), pages 276-304, 04.
  16. Michael Chui & Prasanna Gui & Andrew G Haldane, 2000. "Sovereign liquidity crises: analytics and implications for public policy," Bank of England working papers, Bank of England 121, Bank of England.
  17. Andy Haldane & Mark Kruger, 2001. "The Resolution of International Financial Crises: Private Finance and Public Funds," Working Papers, Bank of Canada 01-20, Bank of Canada.
  18. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring," IMF Working Papers 03/134, International Monetary Fund.
  19. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 16(32), pages 51-82, 04.
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Citations

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Cited by:
  1. Jarita Duasa & Paul Mosley, 2006. "Capital Controls Re-examined: The Case for 'Smart' Controls," The World Economy, Wiley Blackwell, vol. 29(9), pages 1203-1226, 09.
  2. Aitor Erce, 2013. "Sovereign debt crises: could an international court minimize them?," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 142, Federal Reserve Bank of Dallas.
  3. Adrian Penalver, 2004. "How can the IMF catalyse private capital flows? A model," Bank of England working papers, Bank of England 215, Bank of England.
  4. Andrew G Haldane & Jorg Scheibe, 2004. "IMF lending and creditor moral hazard," Bank of England working papers, Bank of England 216, Bank of England.
  5. Aitor Erce-Domínguez, 2006. "Using standstills to manage sovereign debt crises," Banco de Espa�a Working Papers 0636, Banco de Espa�a.
  6. Gregor Irwin & David Vines, 2005. "The efficient resolution of capital account crises: how to avoid moral hazard," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 10(3), pages 233-250.

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