Search Results

Stochastic optimal control model of short-term debt 1

Jerome L. Stein

in Stochastic Optimal Control, International Finance, and Debt Crises

Data on the credit rating of bonds issued in the first half of the 1990s suggest that investors in emerging market securities paid little attention to credit risk, or that they were comfortable with ... More

Data on the credit rating of bonds issued in the first half of the 1990s suggest that investors in emerging market securities paid little attention to credit risk, or that they were comfortable with the high level of credit risk that they were incurring. This chapter develops a paradigm for intertemporal optimization under uncertainty in a finite horizon discrete time context, with the constraint that there be no default on short-term foreign currency denominated debt. The object is to select consumption, investment, and the resulting short-term debt in the first period to maximize the expected present value of the utility of consumption over both periods. The constraint is that regardless of the state of nature in the second period, there will be no default on the debt.Less

Sovereign Default

Julianne Ams, Reza Baqir, Anna Gelpern, and Christoph Trebesch

S. Ali Abbas, Alex Pienkowski, and Kenneth Rogoff (eds)

in Sovereign Debt: A Guide for Economists and Practitioners

This chapter begins by defining sovereign default. It proceeds to untangle several common forms of default, including unilateral and negotiated default, and default that results in principal haircuts ... More

This chapter begins by defining sovereign default. It proceeds to untangle several common forms of default, including unilateral and negotiated default, and default that results in principal haircuts and payment reprofiling, and offers a clear taxonomy of default, using real-world examples when needed. The chapter then explores the various costs of sovereign default, and the factors that influence them. It considers some of the weaknesses and distortions within the existing framework of crisis prevention and resolution, highlighting the role of official bailouts and moral hazard, and the causes of delayed and inadequate debt relief (“too little, too late”). The chapter concludes with recommendations for reducing the incidence and cost of default.Less

Living and Dying with Hard Pegs: The Rise and Fall of Argentina's Currency Board

Augusto de la Torre, Eduardo Levy Yeyati, and Sergio L. Schmukler

in Monetary Unions and Hard Pegs: Effects on Trade, Financial Development, and Stability

The rise and fall of Argentina’s currency board illustrates the extent to which the advantages of hard pegs have been overstated. The currency board did not promote fiscal or monetary discipline, and ... More

The rise and fall of Argentina’s currency board illustrates the extent to which the advantages of hard pegs have been overstated. The currency board did not promote fiscal or monetary discipline, and fostered nominal stability and financial intermediation only at the cost of endogenous financial dollarization. Ultimately the failure adequately toaddress the currency-growth-debt trap, into which Argentina had fallen at the end of the 1990s, precipitated a run on the currency and on the banks, triggering a currency collapse and a sovereign debt default. The crisis, rooted in the underlying weaknesses of Argentina’s monetary regime, can best be interpreted as a bad outcome of a high-stakes strategy to overcome a weak-currency problem. To increase the credibility of the hard peg, the government raised its exit costs, which deepened the crisis once exit could no longer be avoided.Less

Introduction

Hassan Malik

in Bankers and Bolsheviks

This introductory chapter argues that the story of the Russian investment boom and bust of the late nineteenth and early twentieth centuries is based on, among other things, financial and economic ... More

This introductory chapter argues that the story of the Russian investment boom and bust of the late nineteenth and early twentieth centuries is based on, among other things, financial and economic data, as well as the correspondence, reports, and other documents in government and private banking archives in Moscow, Saint Petersburg, Paris, London, and New York. The 1918 Bolshevik repudiation of debts contracted by the Tsarist and Provisional governments—the largest default in history—punctuated the end of an era during which Russia had become the leading net international debtor in the world. It is relevant to an extensive academic literature that stretches across the disciplines of history, economics, and political science. The secondary literature cited in these sources relates to the Russian Revolution, banking and business history, the historical sociology of revolutions, and international capital flows. Given the crucial importance of the last of these, the story is international, touching on aspects of the histories of nations such as Russia, France, Germany, Britain, the United States, China, and Japan.Less

Reparations, Deficits, and Debt Default: The Great Depression in Germany

Albrecht Ritschl

in The Great Depression of the 1930s: Lessons for Today

Germany’s Great Depression of the early 1930s started in 1929 with a sudden stop in the current account. It ended after a foreign debt default that unfolded in several stages from 1931 to 1933. This ... More

Germany’s Great Depression of the early 1930s started in 1929 with a sudden stop in the current account. It ended after a foreign debt default that unfolded in several stages from 1931 to 1933. This chapter reviews Germany’s macroeconomic history between the gold-based stabilization of 1924 and the transition to autarky and domestic credit expansion in 1933. During the Dawes Plan of 1924–29, Germany borrowed abroad massively to pay reparations out of credit, a phenomenon that gave rise to the debate about the transfer problem between Keynes and his critics. An incentive-based interpretation of the transfer problem is sketched out to explain the later current account reversal. Time-varying VARs are employed to trace the propagation of the resulting macroeconomic shock, and to obtain estimates of the fiscal multipliers.Less

The Restructuring Process

Lee Buchheit, Guillaume Chabert, Chanda DeLong, and Jeromin Zettelmeyer

in Sovereign Debt: A Guide for Economists and Practitioners

This chapter goes into depth on the debt restructuring process itself, a topic which has not been covered in the literature in detail before. It gives a step-by-step outline of how restructurings ... More

This chapter goes into depth on the debt restructuring process itself, a topic which has not been covered in the literature in detail before. It gives a step-by-step outline of how restructurings take place, from deciding on the appropriate strategy, to determining which debt should be covered and in what way; to engagement with creditors in the negotiating process. It also covers one of the main structural problems in reaching an agreement with creditors—the collective action problem—and explores ways by which such problems can be overcome with both private creditors (collective action clauses, exit consents) and the official sector (the role of the Paris Club).Less

Curbing ‘Vulture Fund’ Litigation

Cephas Lumina

in Sovereign Debt and Human Rights

The lack of an international legal framework for the restructuring of sovereign debt, and the voluntary nature of current international debt restructuring initiatives have created opportunities for ... More

The lack of an international legal framework for the restructuring of sovereign debt, and the voluntary nature of current international debt restructuring initiatives have created opportunities for predatory private commercial entities—called ‘vulture funds’—to acquire defaulted sovereign debts at substantial discounts, refuse to participate in debt restructurings and aggressively pursue repayment of the full face value of the debt through litigation, often in multiple jurisdictions. This chapter discusses current official initiatives designed to curb vulture fund litigation and proposes a rethink of the doctrine of sovereign immunity as a key measure to curb the predatory behaviour of ‘vulture funds’. It also discusses the impact of the activities of these 'vulture funds’ on the realisation of human rights, particularly in developing countries, as well other consequences for the countries targeted by ‘vulture funds’Less