Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises

Abstract

Recent debate on the reform of the international financial architecture has highlighted the potentially important role of the official sector in crisis management. We examine how such public intervention in sovereign debt crises affects efficiency, ex ante and ex post. Our results shed light on the scale of capital inflows in such a regime, and we establish conditions under which this leads to an improvement in debtor country welfare. The efficacy of measures such as officially sanctioned stays on creditor litigation depend critically on the quality of public sector surveillance and the size of the costs of sovereign debt crises. * Andrew Haldane, Adrian Penalver, Paul Tucker and an anonymous referee for helpful comments and encouragement. We thank seminar participants at the International Finance Summer Camp in Santiago, the London School of Economics, the University of Newcastle upon Tyne, the Bank of England and the Bank of Japan for comments on an earlier version of the paper. The usual caveat applies. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of England. †

Credit Derivatives and Sovereign Debt Crises

“…In a world of multiple creditors, this presumes that there is some form of creditor coordination such as through collection action clauses (CAC), creditor committees, or restructuring via the London or the Paris Club (recent restructuring experiences also suggest that the holdout problem is perhaps overstated; see for example De Brun and Della Mea (2003) who show that in the Uruguay case restructuring was implemented within a short time on debt which did not include CACs). 14 The assumption that the bondholder obtains the liquidation value in full may seem extreme; however, our main results hold also when the bondholder can only secure a fraction of the country's funds. Furthermore, it should be noted that the possibilities for creditors to enforce their claims against sovereigns have improved substantially recently as bondholders can now threaten to disrupt future …nancing: in 2000 Elliott Associates succeeded in stopping the distribution of Peru's payments to new bondholders, forcing causes additional private default costs c > 0 to the country, such as from lower domestic consumption.…”

“…The bondholder then obtains the liquidation value of the project k, with k < 1 (in Section 5.1 we consider that the bondholder has to litigate in order to obtain k). 14 The disruption of the project 11 Such pre-default restructuring has become common since the mid 1990s. 12 We focus here on the extreme case where the sovereign has all the bargaining power.…”

Bank Loans Versus Bond Finance: Implications for Sovereign Debtors

“…In addition, bondholders choosing not to participate became subordinated to the new issues. 12 Gai et al (2004) also show that IMF intervention can improve welfare if it can distinguish between a strategic and an unavoidable liquidity default and reduce output loss in the case of liquidity defaults. In a different set-up, Spiegel (2005) shows that the IMF can prevent liquidity crises by offering a lending package that induces a separating equilibrium in creditorsÕ behaviour, even if it cannot distinguish between liquidity and solvency crises.…”

Sovereign debt disputes: A database on government coerciveness during debt crises

“…Eaton (2004), Gai et al (2004) and Ghosal and Miller (2003) underline the crucial role of information asymmetries in debt crisis resolution. Private creditors need accurate macroeconomic and financial data to evaluate restructuring offers and a government's capacity to pay.…”