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Sovereign Liquidity Crises: the Strategic Case for a Payments Standstill

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  • Miller, Marcus
  • Zhang, Lei

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

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  1. Leonardo Bartolini & Avinash Dixit, 1991. "Market Valuation of Illiquid Debt and Implications for Conflicts among Creditors," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 828-849, December.
  2. Cohen, Daniel, 1993. "A valuation formula for LDC debt," Journal of International Economics, Elsevier, vol. 34(1-2), pages 167-180, February.
  3. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
  4. Jeremy Bulow & Kenneth Rogoff, 1989. "Sovereign Debt Repurchases: No Cure for Overhang," NBER Working Papers 2850, National Bureau of Economic Research, Inc.
  5. Marcus Miller & Lei Zhang, 1998. "Macroeconomic Policy Options for Managing Capital Flows," CSGR Hot Topics: Research on Current Issues 01, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  6. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  7. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
  8. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
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