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October 5, 2004 - Roughly once a year, the managing director of the International Monetary Fund (IMF), the U.S. treasury secretary, and in some cases, the finance ministers of other G-7 countries get a call from the finance minister of a large emerging market economy. The emerging-market finance minister indicates that the country is rapidly running out of foreign reserves, that it has lost access to international capital markets, and perhaps that it has lost the confidence of its own citizens. Without a rescue loan, it will be forced to devalue its currency and default either on its government debt or on loans to the country’s banks that the government has guaranteed.
How should IMF and G-7 policy-makers respond to financial crises? Unfortunately, there are no simple answers. Countries experience currency crises, banking crises, corporate crises, and sovereign debt crises in various combinations. They can run out of cash despite having modest debts, or can run out of cash in large measure because they already have too much debt.
In Bailouts or Bail-Ins?, New York University’s Nouriel Roubini and former Council International Affairs Fellow Brad Setser argue that the tools needed to respond to a wide range of crises already exist. The core challenge facing the G-7 and the IMF is to do a better job of matching existing tools to different types of crises. There is no need to dramatically expand the IMF right now, nor to create a sovereign bankruptcy regime. But there is a need to develop a rigorous, hard-headed approach to managing crises. Among the authors’ recommendations:
- The G-7 needs to stop pretending the IMF will be getting out of the business of providing rescue loans to crisis countries. The IMF’s lending norms need to be adjusted to reflect the actual amounts necessary to help emerging economies, not kept at the low levels the IMF routinely breaches.
- The IMF should be more willing to distinguish between countries and make hard judgments. Countries that get into trouble despite modest deficits and little accumulated debt are better financial bets than those that get into trouble with larger debts and little proven ability to reduce deficits.
- IMF lending and a coercive debt restructuring can be complements, not substitutes. In some instances, IMF financing can be most effectively deployed to support a debt restructuring, not to try to avoid one.
- Banks remain every bit as important as bonds. Cross-border bank credits have gotten off the hook too easily; coordinated rollovers are at times necessary. In some cases, the IMF should be willing to help to finance a domestic lender of last resort during an external restructuring.
- The G-7 should not rely on the IMF to save countries that are too strategically important to fail. If the G-7 wants to give a country like Turkey a special break, it should do so on its own dime.
“…by far the best book written in recent years on the vexing subject of how the international community should address international financial crises of emerging-market economies…. This book will be read with enormous benefit by students, scholars, policy-makers, and financial market participants.”
—Jeffrey D. Sachs, Director of the Earth Institute, Columbia University
"Roubini and Setser bring valuable experience from the policy-making process to their analysis of responding to 21st century financial crises in emerging economies. Bailouts or Bail-ins? will prove to be a useful tool for those confronting these crises, and a clear, accessible overview for those studying global markets."
—Lawrence Summers, President, Harvard University; former Secretary of the Treasury
“This is the most intelligent and comprehensive analysis yet of how the international community should respond to financial crises. Its analyses of the theoretical literature on the causes of crises, the evolution of official doctrine, and recent experience with crisis management are especially strong. It will be the definitive work on this subject for some time to come.”
—Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Political Science, University of California, Berkeley
Nouriel Roubini is an associate professor of economics and international business at the Stern School of Business, New York University. He was a faculty member of the economics department at Yale University (1988-95). He was senior economist for international affairs at the White House Council of Economic Advisers (1998-99), and senior adviser to the undersecretary for international affairs and the director of the Office of Policy Development and Review at the U.S. Treasury Department (1999-2000). He has been a long-time consultant to the IMF and a number of other public and private institutions. He is a fellow at the National Bureau of Economic Research and the Centre for Economic Policy Research. He is co-author of Political Cycles: Theory and Evidence (MIT Press, 1997).
Brad Setser is a research associate at the Global Economic Governance Programme at University College, Oxford. He was an international affairs fellow at the Council on Foreign Relations and a visiting scholar at the IMF. He served in the U.S. Treasury from 1997 to 2001, where he worked extensively on the reform of the international financial architecture, sovereign debt restructurings, and U.S. policy toward the IMF. He was the acting director of the U.S. Treasury’s Office of International Monetary and Financial Policy.
Bailouts or Bail-ins?
Nouriel Roubini and Brad Setser
A Council on Foreign Relations Book published by the Institute for International Economics
Phone: 800/522-9139 ; Fax: 703/661-1501
384pp. ISBN paper 0-88132-371-3. $28.95
Contact: Marie X. Strauss, Communications, 212-434-9536, [email protected]