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The bail-in problem: systematic goals, ad hoc means

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  • Eichengreen, Barry
  • Ruhl, Christof

Abstract

In this paper we analyze the recent efforts of the international financial institutions to limit the moral hazard created by their assistance to crisis countries. We question the wisdom of the case-by-case approach taken in Pakistan, Ecuador, Romania and Ukraine. We show that because default and restructuring are so painful and costly, it is simply not time consistent for the IFIs to plan to stand aside if the markets refuse to roll over maturing claims, restructure problem debts, or provide new money. Because these realities create an incentive to disburse even if investors fail to comply, the IFIs are then placed in the position of having to back down on their previous conditionality, which undermines their credibility. And since investors are aware of these facts, their behavior is unlikely to be modified by the IFIs' less-than-credible statements of intent. Hence, this approach to bailing in the private sector' will not work. Fortunately, there is an alternative: introducing collective-action clauses into loan agreements. This, and not ad hoc efforts to bail in the private sector, is a forward-looking solution to the moral hazard problem.
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  • Eichengreen, Barry & Ruhl, Christof, 2001. "The bail-in problem: systematic goals, ad hoc means," Economic Systems, Elsevier, vol. 25(1), pages 3-32, March.
  • Handle: RePEc:eee:ecosys:v:25:y:2001:i:1:p:3-32
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    1. William R. Cline, 1995. "International Debt Reexamined," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 46.
    2. W.H. Buiter & A Sibert, 1999. "UDROP: A Small Contribution to the International Financial Architecture," CEP Discussion Papers dp0425, Centre for Economic Performance, LSE.
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    Cited by:

    1. Weinschelbaum, Federico & Wynne, Jose, 2005. "Renegotiation, collective action clauses and sovereign debt markets," Journal of International Economics, Elsevier, vol. 67(1), pages 47-72, September.
    2. Sturzenegger, Federico & Zettelmeyer, Jeromin, 2008. "Haircuts: Estimating investor losses in sovereign debt restructurings, 1998-2005," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 780-805, September.
    3. 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.
    4. Rockerbie, Duane W. & Easton, Stephen T., 2009. "Commercial banks, default insurance and IMF reforms," Economics Discussion Papers 2009-39, Kiel Institute for the World Economy (IfW).
    5. Powell, Andrew & Arozamena, Leandro, 2003. "Liquidity protection versus moral hazard: the role of the IMF," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1041-1063, December.
    6. Tillmann, Peter, 2005. "Private sector involvement in the resolution of financial crises: How do markets react?," Journal of Development Economics, Elsevier, vol. 78(1), pages 114-132, October.
    7. Jeffrey A. Frankel & Nouriel Roubini & Mervyn King & Robert Rubin & George Soros, 2003. "Industrial Country Policies," NBER Chapters,in: Economic and Financial Crises in Emerging Market Economies, pages 155-296 National Bureau of Economic Research, Inc.
    8. Andrew Powell, 2002. "The Argentina Crisis: Bad Luck, Bad Management, Bad Politics, Bad Advice," Business School Working Papers veinticuatro, Universidad Torcuato Di Tella.
    9. Federico Sturzenegger, 2002. "Defaults in the 90´s: Factbook and Preliminary Lessons," Business School Working Papers veintidos, Universidad Torcuato Di Tella.
    10. Cecile Bastidon & Philippe Gilles & Nicolas Huchet, 2008. "A Selective Bail-Out International Lending of Last Resort Model," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 103-114, May.
    11. Simona MUTU, 2014. "Contribution To Systemic Risk Of The European Banking Groups With Subsidiaries In Central And Eastern Europe," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 14, pages 129-150, December.
    12. Bastidon, Cécile & Gilles, Philippe & Huchet, Nicolas, 2008. "The international lender of last resort and selective bail-out," Emerging Markets Review, Elsevier, vol. 9(2), pages 144-152, June.
    13. Jérôme Sgard, 2000. "La gestion des crises de liquidité internationale : logique de faillite, prêteur en dernier ressort et conditionnalité," Working Papers 2000-16, CEPII research center.
    14. Taesoo Kang & Guonan Ma, 2009. "Credit card lending distress in Korea in 2003," BIS Papers chapters,in: Bank for International Settlements (ed.), Household debt: implications for monetary policy and financial stability, volume 46, pages 95-106 Bank for International Settlements.
    15. Andrew Powell, 2002. "Countries with international payments´ difficulties: what can the IMF do?," Business School Working Papers veintitres, Universidad Torcuato Di Tella.
    16. Hattori, Masazumi, 2004. "A theory of sovereign debt roll-over crisis," LSE Research Online Documents on Economics 24700, London School of Economics and Political Science, LSE Library.
    17. Cécile Bastidon, 2003. "Un modèle de conditionnalité ex ante de l'intervention multilaterale," Post-Print hal-00731610, HAL.
    18. Michelle White, 2002. "Sovereigns in Distress: Do They Need Bankruptcy?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 287-320.
    19. Canuto, Otaviano & Pinto, Brian & Prasad, Mona, 2012. "Orderly sovereign debt restructuring : missing in action !," Policy Research Working Paper Series 6054, The World Bank.

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    JEL classification:

    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance

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