Abstract

Increasing emphasis has been placed on the need for an effective lender of last resort for sovereign states to help cope with global financial crises. Where private creditors use short-term debt to check sovereign debtor’s moral hazard, for example, there is clearly a role for an international lender of last resort to prevent self-fulfilling crises. This framework is used to assess the proposal of the Meltzer Commission -- for unconditional financial support, but only to states that pre-qualify. We find that, in the absence of conditional lending for those that do not qualify, there could be increased instability.

The recent Korean bail-in and the Brady Plan both show that procedures for sovereign debt restructuring -- including roll overs and write downs -- are essential complements to an international lender of last resort. After discussing analogies with private sector arrangements, the paper briefly compares the operations of the existing Paris Club with proposed Chapter 11 style procedures.