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Manmohan S. Kumar, Mr. Paul R Masson, and Mr. Marcus Miller

Increasing emphasis has been placed on the need for an effective lender of last resort for sovereign states and on procedures for sovereign debt restructuring to help cope with global financial crises. Where private creditors use short-term debt to check sovereign debtor’s moral hazard, there is the risk of self-fulfilling crises. In this context, we conclude that the proposal of the Meltzer Commission—for unconditional financial support, but only to states that pre-qualify—could be the source of increased instability. After discussing analogies with private sector arrangements, we compare the operations of the existing Paris Club with proposed Chapter 11 style procedures.

Mr. Abdul d Abiad and Jonathan D. Ostry

This paper aims to put some constraints on the way primary surpluses are projected when making assessments of public debt sustainability. Projections should be tied either to the country's historical track record in generating surpluses-if the institutional and other factors accounting for this track record are expected to persist-or to some model that links primary surpluses to their fundamental determinants, either on the basis of constant institutions and policies or a credible reform program. History-based or model-based primary surplus projections provide a useful benchmark for judging the realism of fiscal forecasts underlying debt sustainability calculations. Together with information on future growth and interest rates, the primary surplus projections can be used to generate measures of overborrowing, and the magnitude of adjustment needed to return debt to a sustainable level.

Ms. Nancy P. Marion and Mr. Robert P Flood

credit dries up completely. 3 In April, 2001, Calomiris (2001) wrote in the Wall Street Journal that the fallout from an immediate write-down on Argentina’s debt would be small if coupled with a credible reform package that reduced fiscal expenditures and labor costs. With Argentine bond prices already depressed, he suggested a 25 to 30 percent write-down of the face value on Argentine obligations, which would translate into a market-value decline of roughly 10 to 15 percent. He noted that such a debt write-down, even with reform, could have a worrisome

Dale F. Gray and Mark R. Stone

application of this EVE framework, based on data for Indonesia and Korea, is shown in Table 2 . The impact of an exchange rate depreciation is greater for Indonesia than for Korea, because the former has a larger external debt. The increase in the country risk premium for one year raises the weighted average cost of capital and lowers the estimated present value of equity. The estimated decline in equity value is slightly greater for Korea than Indonesia, because equity is higher in the Korean corporate sector. The impact of a debt write-down on estimated equity value is

Mrs. Vanessa Le Lesle

. European Commission (EC) , 2011 , “ Technical Details of a Possible EU Resolution Framework for Bank Recovery and Resolution, ” January . European Commission (EC) , 2012 a , “ Discussion Paper on the Debt Write-down Tool—Bail-in, ” March 3 . European Commission (EC) , 2012 b , “ Opening Remarks by President Barroso on the Next Steps for Stability, Growth and Jobs, ” Speech/12/402, May 30 . European Commission (EC) , 2012 c , “ Directive of the European Parliament establishing a Framework for the Recovery and Resolution of Credit Institutions

Mr. Eduardo Borensztein

pose no major problem; the advantage of reducing debts, in a non-Modigliani-Miller context, should come from preventing unnecessary and socially costly bankruptcies and strengthening the financial markets. In the case of nonstandard or “voucher” privatizations, a one-time-only debt write-down could be effected at the time of privatization; since privatization will not be repeated, this should not affect the credibility of the monetary authorities for the future. 1/ It would also be possible to use debt write-down as an inducement for enterprises where management

Ms. Nancy P. Marion and Mr. Robert P Flood
We use a simple model of international lending to show that an emerging market borrower who might default can be shut out of international capital markets without warning. A modest haircut on obligations, for example, can shut down lending.
Mr. Eduardo Borensztein
This paper analyzes some of the lessons that can be drawn from the experience of Eastern Europe in the process of transition to a market economy that is under way, and examines some key challenges currently facing policymakers in these economies. The paper studies the constraints affecting the general strategy of reform--rapid versus gradual--that was adopted, and the output decline initially experienced and its effect on medium-term growth perspectives. The paper also discusses the implementation of mass privatization schemes, and the type and extent of government intervention in the restructuring process. This is a Paper on Policy Analysis and Assessment and the author(s) would welcome any comments on the present text. Citations should refer to a Paper on Policy Analysis and Assessment of the International Monetary Fund, mentioning the authors) and the date of issuance. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.