The Bail-In Problem: Systematic Goals, Ad Hoc Means

Barry Eichengreen and Christof Ruehl

No 7653, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we analyze the recent efforts of the international financial institutions to limit the moral hazard created by their assistance to crisis countries. We question the wisdom of the case-by-case approach taken in Pakistan, Ecuador, Romania and Ukraine. We show that because default and restructuring are so painful and costly, it is simply not time consistent for the IFIs to plan to stand aside if the markets refuse to roll over maturing claims, restructure problem debts, or provide new money. Because these realities create an incentive to disburse even if investors fail to comply, the IFIs are then placed in the position of having to back down on their previous conditionality, which undermines their credibility. And since investors are aware of these facts, their behavior is unlikely to be modified by the IFIs' less-than-credible statements of intent. Hence, this approach to bailing in the private sector' will not work. Fortunately, there is an alternative: introducing collective-action clauses into loan agreements. This, and not ad hoc efforts to bail in the private sector, is a forward-looking solution to the moral hazard problem.

JEL-codes: F0 F3 (search for similar items in EconPapers)
Date: 2000-04
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Published as Eichengreen, Barry & Ruhl, Christof, 2001. "The bail-in problem: systematic goals, ad hoc means," Economic Systems, Elsevier, vol. 25(1), pages 3-32, March.

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Journal Article: The bail-in problem: systematic goals, ad hoc means (2001)
Working Paper: The Bail-In Problem: Systematic Goals, Ad Hoc Means (2000)
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