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UDROP: A Small Contribution to the International Financial Architecture

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Author Info
W Buiter
A Sibert

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Abstract

The purpose of the UDROP proposal is to prevent debt rollover crises for foreign-currency-enominated debt instruments. For such liabilities, there is no international analogue to the domestic lender of last resort or to domestic deposit insurance. UDROP stands for Universal Debt Rollover Option with a Penalty. Our proposal is that all foreign currency liabilities should have a rollover option attached to them. The ‘pure’ version of the option would entitle the borrower to extend or roll over his performing debt at maturity for a specified period. The pricing of the option would be left to the contracting parties. A number of variants on the basic version are also considered. These make the individual borrower’s ability to exercise his option contingent on the prior declaration of a state of ‘disorderly markets’, by the national central bank, the International Monetary Fund or an indicator of ‘disorderly markets’. All versions of the scheme have the property that no commitment of public money is required, either by national governments or by international agencies such as the International Monetary Fund or the World Bank. The UDROP proposal is rule based and general: it is mandatory for all foreign-currency debt and automatic. That is, it is exercised at the discretion of the borrower. This stands in sharp contrast to the current practice of discretionary and politicised refinancing arrangements cobbled together in an ad-hoc manner on a case-by-case basis by the International Monetary Fund. UDROP is market-oriented: the terms and conditions on any foreign-currency loan and associated rollover option would be negotiated by the lenders and borrowers.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number 0425.

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Date of creation: May 1999
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Handle: RePEc:cep:cepdps:0425

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  5. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Summers, L-H & Cline, W-R & Eichengreen, B & Portes, R & Fraga, A & Goldstein, M, 1996. "From Halifax to Lyons : What Has Been Done About Crisis Management?," Princeton Studies in International Economics 200, International Economics Section, Departement of Economics Princeton University,.
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  7. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers 98-21, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  8. Enrica Detragiache & Asli Demirgüç-Kunt, 1997. "The Determinants of Banking Crises - Evidence from Developing and Developed Countries," IMF Working Papers 97/106, International Monetary Fund.
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  11. Barry Eichengreen & Andrew K. Rose, 1998. "Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises," NBER Working Papers 6370, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Haizhou Huang & Chenggang Xu, 2001. "Financial Institutions, Contagious Risks, and Financial Crises," William Davidson Institute Working Papers Series 444, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  15. Chang, R. & Velasco, A., 1998. "Financial Fragility and the Exchange Rate Regime," Working Papers 98-05, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  16. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
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  18. Besley, Timothy, 1994. "How Do Market Failures Justify Interventions in Rural Credit Markets?," World Bank Research Observer, Oxford University Press, vol. 9(1), pages 27-47, January.
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  19. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eichengreen, Barry & Ruehl, Christoph, 2000. "The Bail-In Problem: Systematic Goals, Ad Hoc Means," CEPR Discussion Papers 2427, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Prasanna Gai & Hyun Song Shin, . "Debt maturity structure with pre-emptive creditors," Bank of England working papers 201, Bank of England. [Downloadable!]
  3. Luisa Lambertini, 2001. "Volatility and Sovereign Default," Boston College Working Papers in Economics 577, Boston College Department of Economics. [Downloadable!]
  4. Benjamin Martin & Adrian Penalver, . "The effect of payments standstills on yields and the maturity structure of international debt," Bank of England working papers 184, Bank of England. [Downloadable!]
  5. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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