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Sovereign debt crises: could an international court minimize them?

  • Aitor Erce

This paper discusses the merits of the statutory approach to sovereign debt crises. It presents a model of sovereign debt roll-overs where, in the event of a liquidity crisis, a Sovereign Bankruptcy Court has powers to declare a standstill on debt payments. The model shows the ability of the Court to mitigate the coordination problem inherent to roll-overs in sovereign debt markets. Moreover, the scale of the coordination problem is reduced regardless of the quality of the information handled by the Court. The mere existence of the Court forces investors to focus on its course of action rather than on other investors beliefs. Nonetheless, such an entity might affect negatively countries’ incentives to apply costly policies.

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File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2013/0142.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 142.

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Date of creation: 2013
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Handle: RePEc:fip:feddgw:142
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  1. Marcus Miller & Lei Zhang, 1999. "Sovereign Liquidity Crisis: The Strategic Case for a Payments Standstill," CSGR Working papers series 35/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  2. Morris, Stephen & Shin, Hyun Song, 2006. "Catalytic finance: When does it work?," Journal of International Economics, Elsevier, vol. 70(1), pages 161-177, September.
  3. Sayantan Ghosal & Kannika Thampanishvong, 2007. "Does Strengthening Collective Action Clauses (CACs) Help?," CDMA Working Paper Series 200711, Centre for Dynamic Macroeconomic Analysis, revised 15 Oct 2007.
  4. Gai, Prasanna & Hayes, Simon & Shin, Hyun Song, 2004. "Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises," Journal of International Economics, Elsevier, vol. 62(2), pages 245-262, March.
  5. Patrick Bolton & Olivier Jeanne, 2007. "Structuring and Restructuring Sovereign Debt: The Role of a Bankruptcy Regime," Journal of Political Economy, University of Chicago Press, vol. 115(6), pages 901-924, December.
  6. Prasanna Gai & Hyun Song Shin, 2003. "Debt maturity structure with pre-emptive creditors," Bank of England working papers 201, Bank of England.
  7. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
  8. Aitor Erce, 2013. "Sovereign debt restructurings and the IMF: implications for future official interventions," Globalization and Monetary Policy Institute Working Paper 143, Federal Reserve Bank of Dallas.
  9. Eichengreen, Barry & Kletzer, Kenneth & Mody, Ashoka, 2003. "Crisis Resolution: Next Steps," Santa Cruz Department of Economics, Working Paper Series qt4cj974r4, Department of Economics, UC Santa Cruz.
  10. 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.
  11. 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.
  12. Andrew G Haldane & Gregor Irwin & Victoria Saporta, 2004. "Bail out or work out? Theoretical considerations," Bank of England working papers 219, Bank of England.
  13. 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.
  14. Javier Díaz-Cassou & Aitor Erce-Domínguez & Juan J. Vázquez-Zamora, 2008. "The role of the IMF in recent sovereign debt restructurings: Implications for the policy of lending into arrears," Banco de Espa�a Occasional Papers 0805, Banco de Espa�a.
  15. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
  16. Jochen R. Andritzky, 2012. "Government Bonds and their Investors; What Are the Facts and Do they Matter?," IMF Working Papers 12/158, International Monetary Fund.
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