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Efforts at crisis resolution that succeed in reducing potential inefficiencies and instability in the international financial system are in the interest of both the private and the public sectors. This paper focuses on how the private sector is likely to adapt to the recent initiatives by the official sector to further involve the private sector in the resolution of crises. The key conclusion is that recent experiences with payment suspensions and bond restructurings are limited as guides to determining the future success or failures of these initiatives, because the private sector most likely has adapted in order to minimize any unwanted involvement.

International Monetary Fund. External Relations Dept.

Hong Kong has turned in a strong economic performance over the past decade and a half. Since the initiation of economic reforms in China in 1978, real GUP growth has averaged nearly 7 percent a year, while exports have increased more than sixfold. Hong Kong has evolved into a service-based economy and an important international financial center. Its per capita GDP—$22,770 in 1995, versus $5,500 as recently as 1980—is comparable to all but the wealthiest industrial countries. Hong Kong’s gains have been achieved in the context of a massive, market-driven economic restructuring that has also reflected an increasing degree of integration with China.

Camilla Andersen

Peter Kenen presented the SDRM in a more positive light than he had on previous occasions, saying he now favored the statutory approach over the contractual approach (see box on features of the SDRM, page 37).

Mr. Alberto M. Ramos
This paper constructs a theoretical framework that rationalizes banks’ short- and long-run adjustment dynamics—in portfolio composition and in the capital structure—following a period of financial distress. The model captures stylized facts about banks’ behavior following a shock to the capital base—namely, the rush to liquidity and credit crunch. Bank panel data show that Argentine domestic retail banks underwent a period of adjustment of six quarters following the Mexican devaluation crisis, reducing their risk-exposure since, owing to bank capital scarcity, depositors became less prone to tolerate bank default risk. Foreign-owned banks suffered a milder shock and adjusted immediately.
Mr. Jochen R. Andritzky and Julian Schumacher
Sovereign debt restructurings are perceived as inflicting large losses to bondholders. However, many bonds feature high coupons and often exhibit strong post-crisis recoveries. To account for these aspects, we analyze the long-term returns of sovereign bonds during 32 crises since 1998, taking into account losses from bond exchanges as well as profits before and after such events. We show that the average excess return over risk-free rates in crises with debt restructuring is not significantly lower than the return on bonds in crises without restructuring. Returns differ considerably depending on the investment strategy: Investors who sell during crises fare much worse than buy-and-hold investors or investors entering the market upon signs of distress
Mr. Anil Ari
I propose a dynamic general equilibrium model in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises. When banks' investment decisions are not contractible, depositors form expectations about bank risk-taking and demand a return on deposits according to their risk. This creates strategic complementarities and possibly multiple equilibria: in response to an increase in funding costs, banks may optimally choose to pursue risky portfolios that undermine their solvency prospects. In a bad equilibrium, high funding costs hinder the accumulation of bank net worth, leading to a persistent drop in investment and output. I bring the model to bear on the European sovereign debt crisis, in the course of which under-capitalized banks in defaultrisky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quantified using Portuguese data and accounts for macroeconomic dynamics in Portugal in 2010-2016. Policy interventions face a trade-off between alleviating banks' funding conditions and strengthening risk-taking incentives. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.
Mr. Daniel Garcia-Macia
High household wealth is often cited as a key strength of the Italian economy. Both in absolute terms and relative to income, the Italian household sector is wealthier than most euro area peers. A sizable fraction of this wealth is held by the rich and upper middle classes. This paper documents the changes in the Italian household sector’s financial wealth over the past two decades, by constructing the matrix of bilateral financial sectoral exposures. Households became increasingly exposed to the financial sector, which in turn was exposed to the highly indebted real and government sectors. The paper then simulates different financial shocks to gauge the ability of the household sector to absorb losses. Simple illustrative calculations are presented for a fall in the value of government bonds as well as for bank bail-ins versus bailouts.
International Monetary Fund. External Relations Dept.

Following are edited excerpts from the International Monetary and Financial Committee (IMFC) press conference that took place on April 12 in Washington, D.C. Participating in the press conference were Gordon Brown, Chair of the IMFC and U.K. Chancellor of the Exchequer, and Horst Köhler, IMF Managing Director.The full transcript is available on the IMF’s website (

Mr. Timothy Geithner

On November 17, Timothy Geithner took over as head of the Federal Reserve Bank of New York after serving for two years as Director of the IMF’s Policy Development and Review Department. Before that, he worked from 1988 to 2001 in the U.S. Treasury, including as Under Secretary for International Affairs. He spoke with Laura Wallace about the IMF’s strengths and weaknesses, and lessons on managing and resolving crises.