Asset Purchase Bailouts and Implicit Guarantees

32 Pages Posted: 27 Jun 2017 Last revised: 2 Jul 2017

See all articles by Eric Mengus

Eric Mengus

HEC Paris - Economics & Decision Sciences

Date Written: June 26, 2017

Abstract

This paper shows that bailouts of private agents can optimally take the form of asset purchases, even if this also means paying off external asset holders, in the presence of borrowing constraints and asymmetric information on liquidity needs. The combination of these two ingredients make direct compensation through loans and/or net transfers imperfect. Thus, when more constrained agents are also more exposed to the asset, the compensation through asset purchases becomes desirable. Anticipating these purchases, private agents engage in a collective bet on the defaulting asset, leading to an equilibrium implicit guarantee, where even an intrinsically worthless asset can be traded at a positive price.

Keywords: Implicit guarantees, bailouts, capital ows, capital controls

JEL Classification: F34, F36, F65

Suggested Citation

Mengus, Eric, Asset Purchase Bailouts and Implicit Guarantees (June 26, 2017). HEC Paris Research Paper No. ECO/SCD-2017-1209. Available at SSRN: https://ssrn.com/abstract=2992625 or http://dx.doi.org/10.2139/ssrn.2992625

Eric Mengus (Contact Author)

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

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