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Resolving sovereign debt crises : the market-based approach and the role of the IMF
| Content Provider | Semantic Scholar |
|---|---|
| Author | Bedford, Adrian Penalver Paul Salmon, Chris |
| Abstract | 99 SOVEREIGN DEBT CRISES in emerging market economies are not unusual and often impose significant costs on the parties directly involved. Moreover, historical episodes such as the Barings crisis in the 1890s, the Latin American debt crises of the 1980s, and the collapse of LTCM in 1998 show that sovereign debt crises also have the potential to catalyse instability in the global financial system. The challenge in restructuring sovereign debts Restructuring sovereign debts to private creditors has always been a difficult and time-consuming process. In the absence of a formal restructuring mechanism, the process has evolved as the nature of the sovereign debt market has changed. Private markets and the official sector have had to respond 'on the run' to specific problems thrown up by each new case. Any mechanism for restructuring sovereign debt has to deal with several inherent features of the market including: limited ability to enforce debt contracts; weak inter-creditor coordination ; and information asymmetries. Each of these features is a matter of degree and is present to some extent in other debt markets as well. Box 1 explains the particular effects they have on the resolution of sovereign debt crises. In 2002, the IMF proposed the creation of a Sovereign Debt Restructuring Mechanism (SDRM) to act as a formal resolution framework. Several forms of the SDRM were developed, all based around the use of statutory powers to implement a debt restructuring embedded within an IMF programme. (1) When the SDRM failed to attract sufficient support, attention turned instead to enhancing market mechanisms in order to improve specific aspects of the crisis resolution process — the so-called 'market-based approach'. Pursuit of the market-based approach, though, does not imply that the IMF has no role to play in resolving sovereign debt crises. Indeed, since the onset of the 1980s Latin American debt crises, official sector policies and actions have exerted significant influence over the incentives of sovereign debtors and private creditors, both before and during a debt restructuring. One objective of IMF programme support for member countries experiencing debt servicing problems is to overcome the inefficiencies created by the lack of an effective framework for dealing with sovereign debt crises. In negotiations with a member over the conditionality associated with a programme, the Fund typically sets out the financial parameters for Resolving sovereign debt crises occasionally requires renegotiation of debts to private creditors, typically in conjunction with an … |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://www.bankofengland.co.uk/publications/fsr/2005/sovdebt.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
