Bail Out or Work Out? Theoretical Considerations
29 Pages Posted: 3 Jan 2005
Date Written: May 2004
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: Suggested Citation