How Would a New Bankruptcy Regime Help?

macroeconomics, sovereign debt, new bankruptcy arrangements, New Bankruptcy Regime

Interconnectedness and Contagion

Prepared by Hal S. Scott with assistance from the staff of the Committee on Capital Markets Regulatio

Facing the Debt Challenge of Countries That Are Too Big to Fail

The recent financial woes of Greece and other nations are reinvigorating the debate over whether to bail out defaulting countries or, instead, restructure their debt. Bailouts are expensive, in the case of Greece costing potentially hundreds of billions of euros. But a bailout was virtually inevitable because a default on Greek debt was believed to have the potential to bring down the world financial system. This is a growing problem: as finance becomes more intertwined, the potential for a countrys debt default to trigger a larger systemic collapse becomes even more tightly linked. This reveals a phenomenon viewed until recently as limited to banks and other large financial institutionsthe problem of too big to fail. Bailouts are not, however, the only way to prevent defaults. Just as policymakers have been proposing orderly resolution procedures for troubled financial institutions, an orderly resolution procedure for troubled countries can bypass the need for a bailout. This short and accessible paper, written as a chapter for the forthcoming book Sovereign Debt: From Safety to Default (Robert W. Kolb ed., 2010-11), explains how simple such a resolution procedure would be and why, without it, we will all end up subsidizing nations that lack the political will or ability to be fiscally responsible

Overview and Operation of U.S. Financial Sanctions, Including the Example of Iran

Financial sanctions are increasingly being used in the mix of international economic sanctions being employed by the United Nations, regional entities, and individual countries, including the United States. These financial sanctions have become more focused and effective as the tools and techniques have improved significantly for tracing and identifying the financial transactions of terrorists, weapons proliferators, human rights violators, drug cartels, and others. These sanctions can not only freeze financial assets and prohibit or limit financial transactions, but they also impede trade by making it difficult to pay for the export or import of goods and services. In spite of this growing impact of financial sanctions, these sanctions are not well understood outside of a small group of experts. This article provides an introduction to the mechanics and operation of U.S. financial sanctions, and it illustrates their use against Iran

Looking Forward: 2005-2010 - a Sovereign Debt Restructuring Reverie

In a prior article, the author asked why, if a sovereign debt restructuring treat would be effective and easy to implement, one does not yet exist. There appeared to be at least three reasons: the very novelty of the approach; the opposition of interest groups who believe that a treaty approach would make it too easy for sovereign debtors to default; and the failure of parties to appreciate the importance of a treaty approach, coupled with concern over ceding sovereignty. In this short reverie, the author hopes to show that these reasons are flawed and that, even where bond issues already include collective action clauses, a treaty approach would benefit both debtor-nations and their creditors

Looking Forward: 2005-2010 - a Sovereign Debt Restructuring Reverie

In a prior article, the author asked why, if a sovereign debt restructuring treat would be effective and easy to implement, one does not yet exist. There appeared to be at least three reasons: the very novelty of the approach; the opposition of interest groups who believe that a treaty approach would make it too easy for sovereign debtors to default; and the failure of parties to appreciate the importance of a treaty approach, coupled with concern over ceding sovereignty. In this short reverie, the author hopes to show that these reasons are flawed and that, even where bond issues already include collective action clauses, a treaty approach would benefit both debtor-nations and their creditors