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Sovereign Liquidity Crisis: The Strategic Case for a Payments Standstill

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  • Marcus Miller
  • Lei Zhang

Abstract

Is sovereign borrowing so different from corporate debt that there is no need for bankruptcy- style procedures to protect debtors? With the waiver of immunity, sovereign debtors who already face severe disruption from short-term creditors grabbing their currency reserves are also exposed to litigious creditors trying to seize what assets they can in a 'race of the vultures'. Shielding sovereign debtors from inter-creditor conflict by authorised standstills on payments doubt-less runs some risk of debtor's moral hazard. But the lack of an orderly procedure for resolving sovereign liquidity crises means that the IMF is de facto forced to bail out countries in trouble. This leads to both debtor and creditor moral hazard, as investors lend without monitoring, knowing that their investments are essentially guaranteed. The strategic case for legalising standstills is to rescue the international financial system from this 'time consistent' trap.

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Bibliographic Info

Paper provided by Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick in its series CSGR Working papers series with number 35/99.

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Date of creation: Jun 1999
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Handle: RePEc:wck:wckewp:35/99

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Postal: Centre for the Study of Globalisation and Regionalisation (CSGR) University of Warwick Coventry CV4 7AL, U.K.
Phone: +44 (0) 1203 572 533
Fax: +44 (0) 1203 572 548
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Web page: http://www.warwick.ac.uk/fac/soc/CSGR/
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Keywords: Sovereign borrowing; liquidity crises; moral hazard; time consistency; international institutions.;

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