Orderly Sovereign Debt Restructuring : Missing in Action!

This paper takes a hard look at the experience with official intervention in sovereign debt crises, focusing on debt crises of the 1980s, Russia in 1998, Argentina in 2001, and Greece in 2010. Based on the track record, the authors argue that in situations where countries face a solvency problem, official intervention is more likely to succeed if official money is lent at the risk-free rate reflecting its seniority and private creditors receive an upfront haircut. Such an approach would limit the costs associated with procrastination and increase the chances of success by enabling a more realistic fiscal program to restore solvency. They examine the moral hazard implications for debtor countries of this proposal and find that these are unlikely to be severe. In fact, after their crises of 1997-2001, emerging market countries embarked on an aggressive and comprehensive program of self-insurance, indicating that they are weary of debt crises and their costs. However, the prospect of an upfront haircut for private creditors in the event of insolvency is likely to make them more diligent in their sovereign lending decisions.

Bibliographic Details

Main Authors:	Pinto, Brian, Canuto, Otaviano, Prasad, Mona
Language:	English
Published:	World Bank, Washington, DC 2012-05
Subjects:	ACCOUNTING, ADJUSTMENT LOANS, ARBITRAGE, ASSET CLASS, ASSET PRICES, BAILOUT, BAILOUTS, BALANCE SHEETS, BANK LOANS, BANK POLICY, BANKING SECTOR, BANKING SYSTEM, BANKRUPTCIES, BANKRUPTCY, BANKRUPTCY MECHANISM, BANKRUPTCY PROCEDURE, BANKRUPTCY PROCESS, BASIS POINTS, BLACK MARKET, BLACK MARKETS, BOND, BOND HOLDERS, BOND ISSUE, BOND ISSUES, BOND SPREADS, BONDHOLDERS, BONDS, BORROWING COST, BORROWING COSTS, BUDGET CONSTRAINT, BUDGET CONSTRAINTS, BUDGET SURPLUSES, CAPITAL ACCOUNTS, CAPITAL ADEQUACY, CAPITAL MOBILITY, CATALYTIC FINANCE, CENTRAL BANK, CENTRAL BANKS, CODE OF CONDUCT, COLLECTIVE ACTION, COLLECTIVE ACTION CLAUSES, COLLECTIVE ACTION PROBLEM, COMMERCIAL BANK, COMMERCIAL BANK LOANS, COMMERCIAL BANKS, CONTINGENT LIABILITIES, CORPORATE TAX RATE, COUNTRY DEBT, CREDIBILITY, CREDIT STANDING, CREDITOR, CREDITOR COORDINATION, CREDITWORTHINESS, CURRENCY, CURRENCY BOARD, CURRENCY CRISES, CURRENCY CRISIS, CURRENCY MISMATCHES, CURRENT ACCOUNT SURPLUSES, DEBT BURDEN, DEBT CRISES, DEBT CRISIS, DEBT DEFAULT, DEBT DEFAULTS, DEBT EXCHANGE, DEBT INSTRUMENTS, DEBT OBLIGATIONS, DEBT OUTSTANDING, DEBT OVERHANG, DEBT POLICY, DEBT PROBLEM, DEBT PROBLEMS, DEBT REDUCTION, DEBT RELIEF, DEBT SERVICE, DEBT SERVICE PAYMENTS, DEBT SWAP, DEBT SWAPS, DEBTOR, DEBTOR COUNTRIES, DEBTOR COUNTRY, DEBTORS, DEFAULT RISK, DEPOSIT, DEVALUATION, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DOLLAR DEBT, DOMESTIC BANKS, ECONOMIC POLICIES, EMERGING MARKET, EMERGING MARKET COUNTRIES, EMERGING MARKETS, EUROBOND, EVENT OF INSOLVENCY, EXCHANGE RATE, EXTERNAL BORROWING, EXTERNAL DEBT, EXTERNAL DEBTS, FACE VALUE, FEDERAL DEPOSIT INSURANCE, FINANCIAL INSTITUTIONS, FINANCIAL MARKETS, FINANCIAL STABILITY, FINANCIAL SUPPORT, FINANCIAL SYSTEM, FISCAL DEFICIT, FISCAL DEFICITS, FIXED EXCHANGE RATE, FIXED EXCHANGE RATES, FIXED INCOME, FLEXIBLE EXCHANGE RATES, FLOATING RATE, FLOATING RATE DEBTS, FOREIGN BANKS, FOREIGN EXCHANGE, FOREIGN EXCHANGE RESERVE, FOREIGN EXCHANGE RESERVES, FREE RIDER PROBLEMS, GLOBAL DEVELOPMENT FINANCE, GLOBAL FINANCIAL STABILITY, GLOBALIZATION, GOVERNMENT BONDS, GOVERNMENT DEBT, HEDGE FUND, HOLDING, HOLDINGS, HOME CURRENCIES, INDEBTED, INDEBTED POOR COUNTRIES, INDIVIDUAL CREDITORS, INFLATION, INSOLVENCY SITUATION, INSTITUTIONAL ARRANGEMENT, INSURANCE, INSURANCE CORPORATION, INTEREST BURDEN, INTEREST DIFFERENTIAL, INTEREST PAYMENTS, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL BANKRUPTCY, INTERNATIONAL BOND, INTERNATIONAL BOND MARKETS, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL MARKETS, INTERNATIONAL ECONOMICS, INTERNATIONAL LAW, INVESTMENT BANKS, LEGAL IMPEDIMENTS, LENDER, LENDER OF LAST RESORT, LENDING DECISIONS, LEVY, LIQUIDITY, LIQUIDITY PROBLEM, LOAN, LOCAL CURRENCY, LONG BOND, LONG TERM CAPITAL, MACROECONOMIC CRISES, MACROECONOMIC INSTABILITY, MACROECONOMIC UNCERTAINTY, MACROECONOMIC VOLATILITY, MARKET ACCESS, MARKET INDEX, MARKET VALUE, MATURITY, MONETARY FINANCING, MONETARY FUND, MORAL HAZARD, PAYMENT TERMS, POLITICAL ECONOMY, POLITICAL RISK, PORTFOLIOS, PRIVATE CAPITAL, PRIVATE CREDITORS, PRIVATE DEBT, PRIVATE DEBTS, PRIVATE INVESTMENT, PRIVATE INVESTORS, PRIVATE LENDERS, PRIVATE LOANS, PRIVATE] INVESTORS, PRIVATIZATION, PROBABILITY OF DEFAULT, PUBLIC DEBT, PUBLIC FINANCES, PUBLIC INVESTMENTS, PUBLIC SECTOR DEBT, REAL EXCHANGE RATES, REMAINING DEBT, RENEGOTIATION, RENEGOTIATIONS, RESERVES, RETURN, RISK-FREE RATE, RISKY ASSET, SECONDARY MARKET, SECONDARY MARKET PRICES, SOLVENCY, SOLVENCY PROBLEM, SOVEREIGN BONDS, SOVEREIGN DEBT, SOVEREIGN DEBT MARKETS, SOVEREIGN DEBT RESTRUCTURING, SOVEREIGN DEBT RESTRUCTURING MECHANISM, SOVEREIGN DEFAULTS, SOVEREIGN LENDING, SOVEREIGN RISK, SOVEREIGN YIELD, SWAP, SWAPS, T-BILL, T-BILLS, TAX, TAX COLLECTIONS, TOTAL DEBT, TRADING, TRANCHES, TRANSACTIONS COSTS, TREASURY, TREASURY BILLS, WAGES,
Online Access:	http://documents.worldbank.org/curated/en/2012/05/16251472/orderly-sovereign-debt-restructuring-missing-action https://hdl.handle.net/10986/9363
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