Orderly Sovereign Debt Restructuring: Missing in Action !

35 Pages Posted: 20 Apr 2016  

Otaviano Canuto

World Bank

Brian Pinto

World Bank - Moscow Office

Mona Prasad

affiliation not provided to SSRN

Date Written: May 1, 2012

Abstract

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.

Keywords: Debt Markets, Bankruptcy and Resolution of Financial Distress, External Debt, Emerging Markets, Access to Finance

Suggested Citation

Canuto, Otaviano and Pinto, Brian and Prasad, Mona, Orderly Sovereign Debt Restructuring: Missing in Action ! (May 1, 2012). World Bank Policy Research Working Paper No. 6054. Available at SSRN: https://ssrn.com/abstract=2050277

Otaviano Canuto (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Brian Pinto

World Bank - Moscow Office ( email )

Moscow
Russia
202-473-7340 (Phone)

Mona Prasad

affiliation not provided to SSRN ( email )

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