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The Future of the International Monetary System

Edited by Marc Uzan

Is the international financial architecture debate over? Not according to leading experts gathered together in this impressive volume who try to identify the key trends that will fashion the international financial system in the years ahead. As history has shown, the evolution of the international monetary system is a slow process. However, the authors argue that we may be entering a new era in which a combination of factors will have lasting consequences on the functioning of the international monetary system and the future role of the IMF.
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Chapter 13: How can the cost of debt crises be reduced?

Jeromin Zettelmeyer


Jeromin Zettelmeyer1 INTRODUCTION There is a consensus that sovereign debt restructuring is difficult and costly for both creditors and debtors, and that the international financial architecture should be reformed in ways that reduce these costs. There is less consensus on what such reforms consist of. Reform initiatives since the early 1980s have included: creating a statutory regime for resolving sovereign debt crises, promoting the use of collective action clauses and other bond clauses that stipulate what to do in the event of a crisis, improving collective creditor representation, temporary standstills in connection with official lending into arrears, creating a code of conduct, and directly stabilizing debt prices through official lending or some kind of centralized fund (see Rogoff and Zettelmeyer 2002, for references and a survey). Not all of these initiatives are mutually exclusive. But they differ greatly, and reflect different understandings of the nature of the problem. This chapter makes the point that how one thinks about reducing the costs of debt crises should depend on why one thinks they are so costly in the first place. It briefly sketches two schools of thought, and interprets some recent reform proposals in that context. It then turns to a particular way of thinking about the costs of debt restructuring that has received less attention so far, but has some interesting implications for the reform program. This focuses on the idea that high restructuring costs are a substitute for explicit legal seniority, and that...

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