Bail Out or Work Out? Theoretical Considerations

29 Pages Posted: 3 Jan 2005

Date Written: May 2004

Abstract

This paper assesses various crisis resolution proposals using a theoretical model of (liquidity and solvency) crisis. The model suggests that payments standstills and last-resort lending are equally efficient means of dealing with liquidity crises, while coordinated lending through creditor committees is second best. Debt write-downs are preferred to subsidised IMF financing when dealing with solvency crises, because of the negative moral hazard implications of the latter tool. Finally, the model suggests that international bankruptcy court proposals may be superior to existing contractual approaches in securing such write-downs.

Keywords: Crisis resolution, international lender of last resort, standstills, IMF

JEL Classification: F33, F34

Suggested Citation

Haldane, Andrew and Irwin, Gregor and Saporta, Victoria, Bail Out or Work Out? Theoretical Considerations (May 2004). Available at SSRN: https://ssrn.com/abstract=641162 or http://dx.doi.org/10.2139/ssrn.641162

Andrew Haldane

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Gregor Irwin

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Victoria Saporta (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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