Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-ins or Official Transfers?

October 16, 2015

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Format: Chicago

Damiano Sandri. Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-ins or Official Transfers?, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper presents a tractable model to understand how international financial institutions (IFIs) should deal with the sovereign debt crisis of a systemic country, in which case private creditors' bail-ins entail international spillovers. Besides lending to the country up to its borrowing capacity, IFIs face the difficult issue of how to address the remaining financing needs with a combination of fiscal consolidation, bail-ins and possibly official transfers. To maximize social welfare, IFIs should differentiate the policy mix depending on the strength of spillovers. In particular, stronger spillovers call for smaller bail-ins and greater fiscal consolidation. Furthermore, to avoid requiring excessive fiscal consolidation, IFIs should provide highly systemic countries with official transfers. To limit the moral hazard consequences of transfers, it is important that IFIs operate under a predetermined crisis-resolution framework that ensures commitment.

Subject: Asset and liability management, Debt restructuring, Financial crises, Financial sector policy and analysis, Fiscal consolidation, Fiscal policy, Moral hazard, Spillovers

Keywords: Bail-in operation, Bail-ins, Break-even condition, Credit rationing, Crisis state, Crisis-prevention effort, Debt restructuring, Financing needs, Fiscal consolidation, International community, Marginal social cost, Moral hazard, Policy mix, Sovereign default, Spillovers, Transfers, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/223
Stock No:

WPIEA2015223
ISBN:

9781513569246
ISSN:

1018-5941

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