## Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-ins or Official Transfers?

_IMF Working Papers, October 16, 2015_

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## Bibliographic details
- Authors: Damiano Sandri
- Published: October 16, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513569246.001

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### Summary
- 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.
- Besides lending to the country up to its borrowing capacity, IFIs face the difficult issue of how to address the remaining financing needs with a combination of fiscal consolidation, bail-ins and possibly official transfers.
- To maximize social welfare, IFIs should differentiate the policy mix depending on the strength of spillovers.
- Stronger spillovers call for smaller bail-ins and greater fiscal consolidation.
- To avoid requiring excessive fiscal consolidation, IFIs should provide highly systemic countries with official transfers.
- To limit the moral hazard consequences of transfers, it is important that IFIs operate under a predetermined crisis-resolution framework that ensures commitment.

### Key Findings and Analytical Points
- The model highlights international spillovers from private creditors' bail-ins when the sovereign in crisis is systemic.
- IFIs can lend up to the borrowing capacity of the country; remaining financing needs must be met through a mix of:
  - fiscal consolidation,
  - bail-ins,
  - official transfers.
- Optimal policy mixes vary with the strength of spillovers:
  - Stronger spillovers → smaller bail-ins and greater fiscal consolidation.
- Official transfers can reduce the required degree of fiscal consolidation for highly systemic countries.
- Commitment via a predetermined crisis-resolution framework is crucial to limit moral hazard from transfers.

### Policy Recommendations
- Differentiate the IFI policy mix according to the strength of international spillovers associated with a systemic sovereign crisis.
- Use smaller bail-ins and larger fiscal consolidation when spillovers are stronger.
- Provide official transfers to highly systemic countries to avoid excessive fiscal consolidation.
- Ensure transfers are provided within a predetermined crisis-resolution framework to ensure commitment and limit moral hazard.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/dealing-with-systemic-sovereign-debt-crises-fiscal-consolidation-bail-ins-or-official-43347_