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Sovereign Liquidity Crisis: The Strategic Case for a Payments Standstill

Author

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  • Marcus Miller
  • Lei Zhang

Abstract

Is sovereign borrowing so different from corporate debt that there is no need for bankruptcy- style procedures to protect debtors? With the waiver of immunity, sovereign debtors who already face severe disruption from short-term creditors grabbing their currency reserves are also exposed to litigious creditors trying to seize what assets they can in a 'race of the vultures'. Shielding sovereign debtors from inter-creditor conflict by authorised standstills on payments doubt-less runs some risk of debtor's moral hazard. But the lack of an orderly procedure for resolving sovereign liquidity crises means that the IMF is de facto forced to bail out countries in trouble. This leads to both debtor and creditor moral hazard, as investors lend without monitoring, knowing that their investments are essentially guaranteed. The strategic case for legalising standstills is to rescue the international financial system from this 'time consistent' trap.

Suggested Citation

  • 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.
    • Handle: RePEc:wck:wckewp:35/99
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    References listed on IDEAS

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    1. Leonardo Bartolini & Avinash Dixit, 1991. "Market Valuation of Illiquid Debt and Implications for Conflicts among Creditors," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 828-849, December.
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    More about this item

    Keywords

    Sovereign borrowing; liquidity crises; moral hazard; time consistency; international institutions.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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