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Sovereign Bankruptcy in the European Union in the Comparative Perspective

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  • Leszek Balcerowicz
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    Abstract

    This paper distinguishes four alternative sovereign debt resolution mechanisms: pure market solutions, modified market solutions, crisis lending by the IMF and other institutions, and the proposed Sovereign Debt Restructuring Mechanism (SDRM). It is hard to find--at the general level of analysis--the unique advantages of SDRM. The assessment of the European Stabilization Mechanism will ultimately depend on its operation, especially whether it will be a tool of subsidizing countries in debt distress or an instrument of fiscal crisis lending. The present fiscal problems in the eurozone are due to the erosion of fiscal discipline and not to the lack of strong compensatory transfers within the eurozone. The right model to look at the conditions for the stability of the eurozone is not a single state but the gold standard-type system, a system of sovereign states with a (de facto) single currency. Based on this analogy and considering modern developments, three types of measures are needed to safeguard the stability of the eurozone: (1) measures that would reduce the procyclicality of the macroeconomic policies and of the economy; (2) reforms that would help the eurozone economies grow out of increased public debt; and (3) steps to increase the flexibility of the economy so that it can deal with the future shocks in a better way.

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    Bibliographic Info

    Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP10-18.

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    Date of creation: Dec 2010
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    Handle: RePEc:iie:wpaper:wp10-18

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    Keywords: Debt Resolution; European Union; Eurozone; Financial Crisis; SDRM;

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    References

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    1. Patrick Bolton, 2003. "Toward a Statutory Approach to Sovereign Debt Restructuring," IMF Working Papers 03/13, International Monetary Fund.
    2. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
    3. Jeromin Zettelmeyer & Federico Sturzenegger, 2005. "Haircuts," IMF Working Papers 05/137, International Monetary Fund.
    4. Vito Tanzi, 2004. "The Stability and Growth Pact: Its Role and Future," Cato Journal, Cato Journal, Cato Institute, vol. 24(1-2), pages 57-69, Spring/Su.
    5. Jeffrey D. Sachs, 2003. "The Roadblock to a Sovereign Bankruptcy Law," Cato Journal, Cato Journal, Cato Institute, vol. 23(1), pages 73-77, Spring/Su.
    6. Mati, Amine & Thornton, John, 2008. "The exchange rate and fiscal consolidation episodes in emerging market economies," Economics Letters, Elsevier, vol. 100(1), pages 115-118, July.
    7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
    8. Raghuram G. Rajan, 2005. "Institutional Reform and Sovereign Debt Crises," Cato Journal, Cato Journal, Cato Institute, vol. 25(1), pages 17-24, Winter.
    9. Nouriel Roubini & Paolo Manasse, 2005. "Rules of Thumb for Sovereign Debt Crises," IMF Working Papers 05/42, International Monetary Fund.
    10. Ian Vasquez, 1996. "The Brady Plan and Market-Based Solutions to Debt Crises," Cato Journal, Cato Journal, Cato Institute, vol. 16(2), pages 233-243, Fall.
    11. repec:cto:journl:v:24:y:2004:i:1-2:p:57-69 is not listed on IDEAS
    12. Olivier Jeanne & Jeromin Zettelmeyer, 2004. "The Mussa Theorem," IMF Working Papers 04/192, International Monetary Fund.
    13. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
    14. Anna J. Schwartz, 2003. "Do Sovereign Debtors Need a Bankruptcy Law?," Cato Journal, Cato Journal, Cato Institute, vol. 23(1), pages 87-100, Spring/Su.
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    Cited by:
    1. Marco Committeri & Francesco Spadafora, 2013. "You never give me your money? Sovereign debt crises, collective action problems, and IMF lending," Questioni di Economia e Finanza (Occasional Papers) 143, Bank of Italy, Economic Research and International Relations Area.
    2. SchilirĂ², Daniele, 2011. "A new governance for the EMU and the economic policy framework," MPRA Paper 30237, University Library of Munich, Germany.

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