Udrop: A Small Contribution to the New International Financial Architecture

CEPR Working Paper No. 2138

Posted: 6 Sep 1999

See all articles by Willem H. Buiter

Willem H. Buiter

Citigroup New York; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University

Anne Sibert

Birkbeck, University of London; Centre for Economic Policy Research (CEPR)

Date Written: May 1999

Abstract

The purpose of the UDROP proposal is to prevent debt rollover crises for foreign-currency-denominated debt instruments. For such liabilities, there is no international analogue to the domestic lender of last resort or to domestic deposit insurance. UDROP stands for Universal Debt Rollover Option with a Penalty. Our proposal is that all foreign currency loans should have a rollover option attached to them. The 'pure' version of the option would entitle the borrower to extend or roll-over, at the discretion of the borrower, his performing debt at maturity for a specified period. The pricing of the option would be left to the contracting parties. A number of variants on the basic version are also considered. These make the individual borrower's ability to exercise his option contingent on the prior declaration of a state of 'disorderly markets', by the national central bank, the International Monetary Fund or an indicator of 'disorderly markets'. All versions of the scheme have the property that no commitment of public money is required, either by national governments or by international agencies such as the IMF or the World Bank. The UDROP proposal is rule based and general: it is mandatory for all foreign-currency debt and automatic. This stands in sharp contrast to the current practice of discretionary and politicised refinancing arrangements cobbled together in an ad-hoc manner on a case-by case basis by the IMF. UDROP is market-oriented: the terms and conditions on any foreign-currency loan and associated roll-over option would be negotiated by the lenders and borrowers.

JEL Classification: F31, F32, F33, F34, G13

Suggested Citation

Buiter, Willem H. and Sibert, Anne, Udrop: A Small Contribution to the New International Financial Architecture (May 1999). CEPR Working Paper No. 2138. Available at SSRN: https://ssrn.com/abstract=175453

Willem H. Buiter (Contact Author)

Citigroup New York

Citigroup Global Markets Inc
388 Greenwich Street
New York, NY 10013
United States
+12128162363 (Phone)
+12128168970 (Fax)

HOME PAGE: http://willembuiter.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Columbia University ( email )

420 West 118th Street
New York, NY
United States

Anne Sibert

Birkbeck, University of London ( email )

Malet Street
London, WC1E 7HX
United Kingdom
+44 20 7631 6420 (Phone)
+44 20 7631 6416 (Fax)

HOME PAGE: http://www.ems.bbk.ac.uk/faculty/sibert/index_html

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
536
PlumX Metrics