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UDROP: A Contribution to the New International Financial Architecture

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  • Buiter, Willem H
  • Sibert, Anne C

Abstract

We propose a Universal Debt Rollover Option with a Penalty (UDROP) to prevent liquidity crises for foreign-currency debt. All foreign-currency liabilities should have an attached option entitling the borrower to extend performing debt for a specified period at a penalty rate. UDROP is market-oriented; contracting parties determine the option's price. Subsequent derivatives trading cannot undo it because contingent liabilities must also carry the option. No public money is required and all creditors are automatically "bailed in". The proposal is rule based and general. This contrasts with the current practice of discretionary and politicized refinancing arrangements cobbled together by the IMF. Copyright 1999 by Blackwell Publishers Ltd.

Suggested Citation

  • Buiter, Willem H & Sibert, Anne C, 1999. "UDROP: A Contribution to the New International Financial Architecture," International Finance, Wiley Blackwell, vol. 2(2), pages 227-247, July.
  • Handle: RePEc:bla:intfin:v:2:y:1999:i:2:p:227-47
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Joshua Aizenman, 2004. "Financial Opening: Evidence and Policy Options," NBER Chapters,in: Challenges to Globalization: Analyzing the Economics, pages 473-498 National Bureau of Economic Research, Inc.
    2. Aizenman, Joshua, 2003. "Reforming the global financial system," Center for Global, International and Regional Studies, Working Paper Series qt0cg1r6q8, Center for Global, International and Regional Studies, UC Santa Cruz.
    3. Eduardo Fernández-Arias & Ricardo Hausmann, 2000. "Getting it Right: What to Reform in International Financial Markets," IDB Publications (Working Papers) 3952, Inter-American Development Bank.
    4. 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.
    5. Luisa Lambertini, 2001. "Volatility and Sovereign Default," Boston College Working Papers in Economics 577, Boston College Department of Economics.
    6. Eduardo Fernández-Arias & Ricardo Hausmann, 2000. "The Redesign of the International Financial Architecture from a Latin American Perspective: Who Pays the Bill?," Research Department Publications 4245, Inter-American Development Bank, Research Department.
    7. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
    8. Olivier Jeanne, 2009. "Debt Maturity and the International Financial Architecture," American Economic Review, American Economic Association, vol. 99(5), pages 2135-2148, December.
    9. Bordo, Michael D. & Schwartz, Anna J., 2000. "Measuring real economic effects of bailouts: historical perspectives on how countries in financial distress have fared with and without bailouts," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 81-167, December.
    10. 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.
    11. Patrick Bolton, 2003. "Toward a Statutory Approach to Sovereign Debt Restructuring; Lessons From Corporate Bankruptcy Practice Around the World," IMF Working Papers 03/13, International Monetary Fund.
    12. Miller, Marcus & Zhang, Lei, 2000. "Sovereign Liquidity Crises: The Strategic Case for a Payments Standstill," Economic Journal, Royal Economic Society, vol. 110(460), pages 335-362, January.
    13. Gai, Prasanna & Shin, Hyun Song, 2004. "Debt maturity structure with pre-emptive creditors," Economics Letters, Elsevier, pages 195-200.
    14. Perkins, J.O.N., 2000. "Some Current Issues of Interational Monetary Policy," Department of Economics - Working Papers Series 758, The University of Melbourne.
    15. repec:idb:brikps:78869 is not listed on IDEAS
    16. Eichengreen, Barry & Ruhl, Christof, 2001. "The bail-in problem: systematic goals, ad hoc means," Economic Systems, Elsevier, vol. 25(1), pages 3-32, March.
    17. Takuji Kinkyo, 2004. "The case for regional exchange rate arrangement in East Asia," Working Papers 141, Department of Economics, SOAS, University of London, UK.
    18. Williamson, John, 2003. "Proposals for curbing the boom-bust cycle in the supply of capital to emerging markets," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1791, February.
    19. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Cómo hacerlo bien: qué reformar en los mercados financieros internacionales," Research Department Publications 4224, Inter-American Development Bank, Research Department.
    20. Charles Goodhart, 1999. "Myths About the Lender of Last Resort," FMG Special Papers sp120, Financial Markets Group.
    21. Eduardo Fernández-Arias & Ricardo Hausmann, 2000. "El rediseño de la arquitectura financiera internacional desde la perspectiva latinoamericana: ¿quién paga la cuenta?," Research Department Publications 4246, Inter-American Development Bank, Research Department.

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