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Sovereign Liquidity Crises: the Strategic Case for a Payments Standstill

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Author Info
Miller, Marcus
Zhang, Lei

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Abstract

Is sovereign debt so different from corporate debt that there is no need for bankruptcy procedures to handle potential defaults? The basic tools of finance seem to confirm that, without water-tight sovereign immunity, creditors face a Prisoner’s Dilemma: litiginous creditors may be tempted to grab what sovereign assets they can in a ‘race of the vultures’. Recent case history also suggests that there may be gains to ‘learning by suing’. To check this by a standstill on payments would doubtless run some risk of debtor’s moral hazard, as the Institute for International Finance have warned in their report on crisis resolution. But not to have an orderly procedure may mean that the IMF is de facto forced to bail out distressed members, leading to the risk of investors’ moral hazard, where investors lend without monitoring (secure in the belief that the international agencies will have to intervene). The strategic case for making legal a standstill on payments is to rescue the authorities from this ‘time consistent’ trap.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1820.

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Date of creation: Mar 1998
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Handle: RePEc:cpr:ceprdp:1820

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Related research
Keywords: international institutions; liquidity crises; Moral Hazard; Sovereign Borrowing; Time Consistency;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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    Other versions:
  2. Joshua Aizenman, 2003. "Reforming the global financial system," Center for Global, International and Regional Studies, Working Paper Series 1019, Center for Global, International and Regional Studies, UC Santa Cruz. [Downloadable!]
  3. Joshua Aizenman, 2002. "Financial Opening: Evidence and Policy Options," NBER Working Papers 8900, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Andrew G Haldane & Gregor Irwin & Victoria Saporta, . "Bail out or work out? Theoretical considerations," Bank of England working papers 219, Bank of England. [Downloadable!]
  5. Jonathan Thomas, 2004. "Bankruptcy Proceedings for Sovereign State Insolvency and their Effect on Capital Flows," ESE Discussion Papers 93, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
    Other versions:
  6. Yung Chul PARK & Yunjong WANG, 2001. "Reform Of The International Financial System And Institutions In Light Of The Asian Financial Crisis," G-24 Discussion Papers 12, United Nations Conference on Trade and Development. [Downloadable!]
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    Other versions:
  9. Peter B. Clark & Haizhou Huang, 2001. "International Financial Contagion and the Fund: A Theoretical Framework," IMF Working Papers 01/137, International Monetary Fund. [Downloadable!]
  10. Olivier Jeanne, 2004. "Debt Maturity and the International Financial Architecture," IMF Working Papers 04/137, International Monetary Fund. [Downloadable!]
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    Other versions:
  12. Joshua Aizenman & Stephen J. Turnovsky, 2002. "Reserve Requirements on Sovereign Debt in the Presence of Moral Hazard -- on Debtors or Creditors?," Economic Journal, Royal Economic Society, vol. 112(476), pages 107-132, January. [Downloadable!] (restricted)
    Other versions:
  13. Alba, Pedro & Bhattacharya, Amar & Claessens, Stijn & Ghosh, Swati & Hernandez, Leonardo, 1998. "Volatility and contagion in a financially integrated world : lessons from East Asia's recent experience," Policy Research Working Paper Series 2008, The World Bank. [Downloadable!]
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    Other versions:
  15. Olivier Jeanne & Jonathan David Ostry & Jeromin Zettelmeyer, 2008. "A Theory of International Crisis Lending and IMF Conditionality," IMF Working Papers 08/236, International Monetary Fund. [Downloadable!]
    Other versions:
  16. Luisa Lambertini, 2001. "Volatility and Sovereign Default," Boston College Working Papers in Economics 577, Boston College Department of Economics. [Downloadable!]
  17. Aitor Erce-Domínguez, 2006. "Using standstills to manage sovereign debt crises," Banco de España Working Papers 0636, Banco de España. [Downloadable!]
  18. Adrian Penalver, . "How can the IMF catalyse private capital flows? A model," Bank of England working papers 215, Bank of England. [Downloadable!]
  19. 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!]
  20. Arminio Fraga & Daniel L. Gleizer, 2001. "Constrained Discretion and Collective Action Problems: Reflections on the Resolution of International Financial Crises," Working Papers Series 34, Central Bank of Brazil, Research Department. [Downloadable!]
  21. Galati, Davide & Sitzia, Bruno, 2000. "Sovereign bond ratings and market spreads. a dynamic panel analysis," MPRA Paper 8984, University Library of Munich, Germany. [Downloadable!]
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