Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-Ins, or Bail-Outs?

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. We use the model to solve for the optimal combination between...

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Bibliographic Details
Published in:IMF economic review 2018-12, Vol.66 (4), p.665-693
Main Author: Sandri, Damiano
Format: Article
Language:English
Subjects:
Analysis
Bail
Bank bailouts
Capital Markets
Crises
Economic models
Economic Policy
Economics
Economics and Finance
External debt
Financial institutions
Fiscal policy
International Economics
International finance
International financial institutions
Macroeconomics/Monetary Economics//Financial Economics
Management
Moral hazard
National debt
Planning
Public debt
RESEARCH ARTICLE
Sovereign debt
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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. We use the model to solve for the optimal combination between fiscal consolidation, bail-ins, and bail-outs to restore debt sustainability. For non-systemic countries, only fiscal consolidation and bail-ins should be used, based on an ex-post assessment of their relative costs. Systemic crises raise significant new challenges. First, to reduce the spillovers associated with bail-ins, IFIs should be able to provide bail-outs. Second, to contain the moral hazard effects of bail-outs, IFIs should operate under a binding crisis-resolution framework that limits the provision of bail-outs to highly systemic countries, coupled with more stringent fiscal consolidation requirements.
ISSN:2041-4161
2041-417X
DOI:10.1057/s41308-018-0067-3