Global Financial Crises: Institutions and Incentives

Author: Mr. Manmohan S. Kumar, Mr. Paul R Masson, and Mr. Marcus Miller

Increasing emphasis has been placed on the need for an effective lender of last resort for sovereign states and on procedures for sovereign debt restructuring to help cope with global financial crises. Where private creditors use short-term debt to check sovereign debtor's moral hazard, there is the risk of self-fulfilling crises. In this context, we conclude that the proposal of the Meltzer Commission-for unconditional financial support, but only to states that pre-qualify-could be the source of increased instability. After discussing analogies with private sector arrangements, we compare the operations of the existing Paris Club with proposed Chapter 11 style procedures.

Volume/Issue: Volume 2000 Issue 105

Publication date: June 2000

ISBN: 9781451852813

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Topics covered in this book

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Business and Economics , Finance , Taxation - General , WP , short term , private sector , long-term debt , debtor country , emerging market , International monetary reform , lender of last resort , financial crises , short term debt , one-off debt reduction , valuation model , debt maturity , values jump , debt rollover , Liquidity , Moral hazard , Sovereign debt restructuring , Global

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Summary

Increasing emphasis has been placed on the need for an effective lender of last resort for sovereign states and on procedures for sovereign debt restructuring to help cope with global financial crises. Where private creditors use short-term debt to check sovereign debtor’s moral hazard, there is the risk of self-fulfilling crises. In this context, we conclude that the proposal of the Meltzer Commission—for unconditional financial support, but only to states that pre-qualify—could be the source of increased instability. After discussing analogies with private sector arrangements, we compare the operations of the existing Paris Club with proposed Chapter 11 style procedures.