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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. Ghosal, Sayantan & Thampanishvong, Kannika, 2009. "Does strengthening Collective Action Clauses (CACs) help?," The Warwick Economics Research Paper Series (TWERPS) 895, University of Warwick, Department of Economics.
  2. Corsetti, Giancarlo & Guimaraes, Bernardo & Roubini, Nouriel, 2006. "International lending of last resort and moral hazard: A model of IMF's catalytic finance," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 441-471, April.
  3. Stephen Morris & Hyun Song Shin, 2004. "Catalytic Finance: When Does It Work?," Yale School of Management Working Papers ysm339, Yale School of Management.
  4. 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.
  5. 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," Occasional Papers 0805, Banco de España;Occasional Papers Homepage.
  6. 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.
  7. 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.
  8. 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.
  9. Andy Haldane & Mark Kruger, 2001. "The Resolution of International Financial Crises: Private Finance and Public Funds," Staff Working Papers 01-20, Bank of Canada.
  10. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
  11. 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.
  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. 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.
  14. 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.
  15. Prasanna Gai & Hyun Song Shin, 2003. "Debt maturity structure with pre-emptive creditors," Bank of England working papers 201, Bank of England.
  16. Patrick Bolton & Olivier D Jeanne, 2007. "Structuring and Restructuring Sovereign Debt; The Role of a Bankruptcy Regime," IMF Working Papers 07/192, International Monetary Fund.
  17. 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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