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The effect of payments standstills on yields and the maturity structure of international debt

  • Benjamin Martin
  • Adrian Penalver
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    Payments standstills have been suggested as a tool for the resolution of financial crises in emerging markets economies. A simple model is developed here to examine the implications of standstills for yields and the maturity structure of debt. An emerging market country chooses to sell short and long-term debt to risk-neutral international investors. The key assumptions are that the level of short-term debt increases the probability of crisis, that crises have costs that spill over into the next period, and that the orderly resolution of financial crises will reduce the cost of crises. A standstill is depicted as an orderly rollover of short-term debt. Standstills have the benefit of reducing the proportion of short-term debt and so lower the probability of crisis. This comes at the cost of generally lower expected output.

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    Paper provided by Bank of England in its series Bank of England working papers with number 184.

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    Date of creation: Apr 2003
    Date of revision:
    Handle: RePEc:boe:boeewp:184
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    1. Jeffrey A. Frankel & Nouriel Roubini, 2001. "The Role of Industrial Country Policies in Emerging Market Crises," NBER Working Papers 8634, National Bureau of Economic Research, Inc.
    2. Gai,Prasanna & Simon Hayes & Hyun Song Shin, 2002. "Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises," Departmental Working Papers 2002-02, The Australian National University, Arndt-Corden Department of Economics.
    3. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
    4. 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.
    5. Willem H. Buiter & Anne Sibert, 1999. "UDROP: a small contribution to the international financial architecture," LSE Research Online Documents on Economics 20224, London School of Economics and Political Science, LSE Library.
    6. 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.
    7. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
    8. Buiter, Willem H. & Sibert, Anne, 1999. "UDROP: A Small Contribution to the New International Financial Architecture," CEPR Discussion Papers 2138, C.E.P.R. Discussion Papers.
    9. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
    10. Andy Haldane & Mark Kruger, 2001. "The Resolution of International Financial Crises: Private Finance and Public Funds," Working Papers 01-20, Bank of Canada.
    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.
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