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You Never Give Me Your Money?

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You Never Give Me Your Money?

Sovereign Debt Crises, Collective Action Problems, and IMF Lending

IMF,

15 min read
10 take-aways
Audio & text

What's inside?

The protocol for dealing with sovereign debt crises has had to evolve dramatically in recent times.

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Editorial Rating

6

Qualities

  • Innovative

Recommendation

Economists Marco Committeri and Francesco Spadafora present a timely analysis of the European sovereign debt crisis from the little-known perspective of the lending framework of the International Monetary Fund (IMF). They examine the crisis’s impact on the framework, which the IMF established in the 1990s, and they focus on fundamental but unresolved issues surrounding the systemic nature of sovereign debt crises. Their working paper provides a useful historical context and important insights into crucial areas such as collective action issues and spillover impacts. Structure is not this paper’s strong point, so readers may have to persevere to follow the chronology. However, the authors do make it very clear that preventing the next sovereign debt crisis will require further reforms. Interestingly, their title echoes lyrics from the Beatles’ Abbey Road album that sum up today’s international sovereign debt scene pretty well: “You never give me your money / You only give me your funny paper / And in the middle of negotiations / You break down.” While this paper doesn’t offer any definitive solutions to the problems it depicts, getAbstract believes it is essential reading for anyone who wants to understand how the global financial establishment deals with the challenges of a sovereign debt crisis. If the analogy to the song holds, all will turn out fine, because, in the end, “All good children go to heaven.”

Summary

All Together Now

Over the past three decades, international authorities have altered how they deal with sovereign debt crises to keep pace with changing global conditions and the increasing sophistication of financial markets. From the 1980s emerging-markets debt crisis to the 2010 Greece bailout and restructuring, bankers, lawyers, regulators and supranational agencies such as the International Monetary Fund (IMF) have developed a “framework of rules and tools” to manage these crises. The IMF bases its framework on two pillars: its ability to lend to distressed countries and the use of “Collective Action Clauses” (CACs) in sovereign debt agreements. CACs “facilitate a voluntary, timely and orderly debt restructuring” by ensuring that bondholders adhere to majority decisions, thereby defusing any “holdouts” who could block attempts at settlement in favor of their own interests.

Yet these adaptations are insufficient in light of more recent incidents during the European Union’s sovereign debt crisis, a chain of events that points to the need, first, for preventing such a crisis in the future, and second, for better methods of handling a debt crisis and containing its...

About the Authors

Marco Committeri and Francesco Spadafora are economists at the Banca d’Italia, Italy’s central bank.

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