UDROP: a contribution to the new international financial architecture

Abstract

We propose a Universal Debt Rollover Option with a Penalty (UDROP) to prevent liquidity crises for foreign-currency debt. All foreign-currency liabilities should have an attached option entitling the borrower to extend performing debt for a specified period at a penalty rate. UDROP is market-oriented; contracting parties determine the option's price. Subsequent derivatives trading cannot undo it because contingent liabilities must also carry the option. No public money is required and all creditors are automatically 'bailed in'. The proposal is rule based and general. This contrasts with the current practice of discretionary and politicized refinancing arrangements cobbled together by the IMF