Bail out or work out? theoretical considerations

Andrew Haldane, Gregor Irwin and Victoria Saporta

Economic Journal, 2004, vol. 114, issue 494, C130-C148

Abstract: This paper assesses various crisis resolution proposals using a theoretical model of liquidity and solvency crisis. The model suggests that payments standstills and last-resort lending are an equally efficient means of dealing with liquidity crises, while coordinated lending through creditor committees is second-best. Debt write-downs are preferred to subsidised IMF financing when dealing with solvency crises, because of the negative moral hazard implications of the latter tool. Finally, the model suggests that international bankruptcy court proposals may be superior to existing contractual approaches in securing such write-downs. Copyright 2004 Royal Economic Society.

Date: 2004
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