Fixing Financial Crises in the 21st Century

By Andrew G. Haldane | Go to book overview

9

Binding-in the private sector
Andrew G. Haldane, Simon Hayes, Adrian Penalver, Victoria Saporta and Hyun Song Shin1
9.1

Introduction
Over recent years, there has been an intense debate on the reform of the international financial architecture. Several competing reform plans have been tabled. Some of these are "big ideas" requiring new, supranational institutions - or at least an adaptation of existing institutions. For example, in 1999 Stanley Fischer, then first Deputy Managing Director of the IMF, set out a blueprint for an International Lender of Last Resort, with the IMF at its centrepiece (Fischer 1999). In 2001, Anne Krueger (2001), newly-appointed first Deputy Managing Director of the IMF, set out an alternative plan for a sovereign debt restructuring mechanism (SDRM), or surrogate international bankruptcy court. These big ideas would require far-reaching institutional and statutory change.Alongside these "big ideas" are several smaller ones. For example, some have argued for the greater use of collective action clauses (CACs) in bond - and possibly other loan - contracts to facilitate debt restructuring (Eichengreen and Portes 1995; Rey 1996; Taylor 2002). Others have proposed presumptive limits on official finance in combination with periodic suspensions of payments (Council on Foreign Relations 1999; Miller and Zhang 1999; Haldane and Kruger 2001). These smaller ideas would typically require less far-reaching reform.Many of these competing plans do, however, have at least one common feature - they envision a temporary standstill on debt repayments by the country and an accompanying binding-in of private sector creditors. To clarify terms up front, we define a "standstill regime" as comprising two generic features:
• a breach of the financial contractual terms of a debt contract between a debtor(s) and its creditors, typically the temporary suspension of payments;
• the binding-in of creditors during the period of that breach of contractual terms, to prevent individual creditors imposing externalities on other creditors and on the debtor.

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