Bail-Out or Work-Out? Theoretical Considerations

Victoria Saporta, Andrew G Haldane and Gregor Irwin
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Victoria Saporta: Bank of England

No 181, Royal Economic Society Annual Conference 2003 from Royal Economic Society

Abstract: In recent years, we appear to have entered an era of capital account crises. In response, a number of new crisis resolution ideas have been put forward, including the establishment of supranational institutions such as an international lender of last resort or an international bankruptcy court, temporary payments standstills and the inclusion of collective action clauses in debt contracts. This paper assesses these proposals using a theoretical model of crisis. The model underscores the importance of adapting policy interventions to the nature of the crisis at hand. For example, it finds that payments standstills and last-resort lending are an equally efficient means of dealing with liquidity crises, both ex-ante and ex-post, while creditor committees are second-best. It finds that debt-write-downs are a preferred means of dealing with solvency crises than subsidized IMF financing because of the negative moral hazard implications of the latter tool. And it finds that international bankruptcy court proposals may be superior to contractual approaches in securing such write-downs

Keywords: crisis resolution; international lender of last resort; standstills; IMF (search for similar items in EconPapers)
JEL-codes: F33 F34 (search for similar items in EconPapers)
Date: 2003-06-04
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Persistent link: http://EconPapers.repec.org/RePEc:ecj:ac2003:181

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