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Bail out or work out? theoretical considerations

Listed author(s):
  • 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: 130-148

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Handle: RePEc:ecj:econjl:v:114:y:2004:i:494:p:c130-c148
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  1. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
  2. Miller, Marcus & Zhang, Lei, 1998. "Sovereign Liquidity Crises: the Strategic Case for a Payments Standstill," CEPR Discussion Papers 1820, C.E.P.R. Discussion Papers.
  3. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers 98-21, C.V. Starr Center for Applied Economics, New York University.
  4. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
  5. Barry Eichengreen & Kenneth Kletzer & Ashoka Mody, 2003. "Crisis resolution: next steps," Pacific Basin Working Paper Series 03-05, Federal Reserve Bank of San Francisco.
  6. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-419, June.
  7. Michael Chui & Prasanna Gui & Andrew G Haldane, 2000. "Sovereign liquidity crises: analytics and implications for public policy," Bank of England working papers 121, Bank of England.
  8. Jean-Charles Rochet & Xavier Vives, 2002. "Coordination failures and the lender of last resort: was Bagehot right after all?," LSE Research Online Documents on Economics 24928, London School of Economics and Political Science, LSE Library.
  9. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 21-42, Fall.
  10. Kenneth M. Kletzer and Brian D. Wright., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research (CIDER) Working Papers C98-100, University of California at Berkeley.
  11. 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.
  12. Andy Haldane & Mark Kruger, 2001. "The Resolution of International Financial Crises: Private Finance and Public Funds," Staff Working Papers 01-20, Bank of Canada.
  13. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring; Collective Action Clauses and official Crisis Intervention," IMF Working Papers 03/134, .
  14. 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.
  15. Giovanni Dell'Ariccia & Jeronimo Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending; A Test," IMF Working Papers 02/181, .
  16. 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.
  17. 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.
  18. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(4), pages 459-472, November.
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