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IMF Economic Review

, Volume 66, Issue 4, pp 665–693 | Cite as

Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-Ins, or Bail-Outs?

  • Damiano Sandri
Research Article
  • 44 Downloads

Abstract

The paper presents a tractable model to understand how international financial institutions (IFIs) should deal with the sovereign debt crisis of a systemic country, in which case private creditors’ bail-ins entail international spillovers. We use the model to solve for the optimal combination between fiscal consolidation, bail-ins, and bail-outs to restore debt sustainability. For non-systemic countries, only fiscal consolidation and bail-ins should be used, based on an ex-post assessment of their relative costs. Systemic crises raise significant new challenges. First, to reduce the spillovers associated with bail-ins, IFIs should be able to provide bail-outs. Second, to contain the moral hazard effects of bail-outs, IFIs should operate under a binding crisis-resolution framework that limits the provision of bail-outs to highly systemic countries, coupled with more stringent fiscal consolidation requirements.

JEL Classification

F33 F34 F4 

Supplementary material

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Copyright information

© International Monetary Fund 2018

Authors and Affiliations

  1. 1.International Monetary FundWashingtonUSA

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