Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-Ins, or Bail-Outs?. Issue Volume 66:Issues 4(2018) (December 2018)

• Record Type: Journal Article
• Authors: Sandri, Damiano
• Is Part Of: IMF economic review. Volume 66:Issues 4(2018)
• Page Start: 665
• Page End: 693
• Publication Date: 2018-12
• Subjects: F33 -- F34 -- F4; Foreign exchange -- Periodicals; Commerce -- Periodicals; Currency question -- Periodicals; International finance -- Periodicals; International economic relations -- Periodicals; 332.152
• DOI: 10.1057/s41308-018-0067-3
• Languages: English
• ISSNs: 2041-4161

Abstract

Abstract The paper presents a tractable model to understand how international financial institutions (IFIs) should deal with the sovereign debt crisis of a systemic country, in which case private creditors' bail-ins entail international spillovers. We use the model to solve for the optimal combination between fiscal consolidation, bail-ins, and bail-outs to restore debt sustainability. For non-systemic countries, only fiscal consolidation and bail-ins should be used, based on an ex-post assessment of their relative costs. Systemic crises raise significant new challenges. First, to reduce the spillovers associated with bail-ins, IFIs should be able to provide bail-outs. Second, to contain the moral hazard effects of bail-outs, IFIs should operate under a binding crisis-resolution framework that limits the provision of bail-outs to highly systemic countries, coupled with more stringent fiscal consolidation requirements.