Bailing in the private sector - On the adequate design of international bond contracts

Gerhard Illing

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: During the last decade, there has been a significant bias towards bond financing on emerging markets, with private investors relying on a bail-out of bonds by the international community. This bias has been a main cause of the recent excessive fragility of international capital markets. The following paper shows how collective action clauses in bonds contracts help to involve the private sector in risk-sharing. It argues that such clauses, as a market-based instrument, will raise the spreads for emerging market debt and so help to correct a market failure towards excessive bond finance. Recent pressure by the IMF to involve the private sector faces a conflict between the principle of honouring existing contracts and that of equal treatment of bondholders.

Date: 2000
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Published in Intereconomics 2 35(2000): pp. 64-71

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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenar:19517

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