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Bail out or work out? theoretical considerations

  • Andrew G Haldane
  • Gregor Irwin
  • Victoria Saporta

This paper assesses various crisis resolution proposals using a theoretical model of liquidity and solvency crisis. The model suggests that payments standstills and last-resort lending are an equally efficient means of dealing with liquidity crises, while coordinated lending through creditor committees is second-best. Debt write-downs are preferred to subsidised IMF financing when dealing with solvency crises, because of the negative moral hazard implications of the latter tool. Finally, the model suggests that international bankruptcy court proposals may be superior to existing contractual approaches in securing such write-downs. Copyright 2004 Royal Economic Society.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 114 (2004)
Issue (Month): 494 (03)
Pages: C130-C148

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Handle: RePEc:ecj:econjl:v:114:y:2004:i:494:p:c130-c148
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  1. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  2. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
  3. Sayantan Ghosal & Marcus Miller, 2003. "Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," Economic Journal, Royal Economic Society, vol. 113(487), pages 276-304, 04.
  4. Chui, Michael & Gai, Prasanna & Haldane, Andrew G., 2002. "Sovereign liquidity crises: Analytics and implications for public policy," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 519-546, March.
  5. Jean-Charles Rochet & Xavier Vives, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," FMG Discussion Papers dp408, Financial Markets Group.
  6. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring; Collective Action Clauses and official Crisis Intervention," IMF Working Papers 03/134, International Monetary Fund.
  7. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
  8. Kenneth Kletzer & Barry J. Eichengreen & Ashoka Mody, 2003. "Crisis Resolution; Next Steps," IMF Working Papers 03/196, International Monetary Fund.
  9. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," NBER Working Papers 7265, National Bureau of Economic Research, Inc.
  10. Haldane, Andrew G. & Penalver, Adrian & Saporta, Victoria & Shin, Hyun Song, 2005. "Analytics of sovereign debt restructuring," Journal of International Economics, Elsevier, vol. 65(2), pages 315-333, March.
  11. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  12. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 51-82, 04.
  13. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
  14. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
  15. Andy Haldane & Mark Kruger, 2001. "The Resolution of International Financial Crises: Private Finance and Public Funds," Working Papers 01-20, Bank of Canada.
  16. Marcus H. Miller & Lei Zhang, 1999. "Sovereign Liquidity Crisis: The Strategic Case for A Payments Standstill," Working Paper Series WP99-8, Peterson Institute for International Economics.
  17. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper 98-10, Federal Reserve Bank of Atlanta.
  18. 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.
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