1.
The Bailout/Bail-in Conundrum
in Sovereign Debt Crises
Alessandro Leipold
Chief Economist, The Lisbon Council
Twitter: @ALeipold
Sovereign Debt Crises: Prevention and Management
IAI-Istituto Affari Internazionali, Roma
10 December 2018
DRAFT

2.
Source: Huertas, Thomas F., The Case for Bail-ins, Institute for Law and Finance, Frankfurt 2012.
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3.
“The choice between a bailout and a bail-in… has rightly ben called the most
difficult issue in the entire debate on international financial architecture
reform. Policymakers, academics, and private-sector participants all
continue to debate how to respond most effectively to crises… Despite recent
efforts to clarify the IMF’s access policy, its major shareholders… simply don’t
agree on the right approach to resolving financial crises in emerging
economies… The debate is far from settled, either in theory or in practice.”
Roubini, Nouriel, “Bailouts or Bail-Ins?,” Institute for International Economics, Washington DC, 2004.
Bailout vs Bail-in: A “far from settled” debate
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4.
Source: Boughton, James M., Silent Revolution:
The International Monetary Fund 1979–1989,
Washington DC, 2001
Full-fledged bailouts
First steps to PSI
Rescheduling as integral
part of response
Extended menu of PSI
(swaps, buybacks, et al)
Full-fledged bail-ins
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5.
Years 1 2 3 4 5
1981 "Plain vanilla" bailouts
(Poland, CR, Hungary)
1982→ Concerted Lending
(Mex, Arg, Bra, et al)
1984→
1985→
1989→ Brady Plan; IMF LIA
policy (Mex, Ven, Arg)
1994-95 Mexico "tequila" crisis
(full tesobono bailout)
1998 Brazil (IMF
insistence on PSI)
1999-2001 Ecuador, Russia, Arg
(large PS losses)
2010-11 Greece, Ireland, Portugal
2012
2013 Cyprus (bail-in of senior
debt, large deposits)
2018 Argentina
QUO VADIS?
LULL
Greece PSI + public debt reprofiling, interest
rate reductions
LULL
BAILOUT ↔ BAIL-IN SCALE
MYRAs (Mex, Jam, Ven et al)
Debt-equity swaps, buybacks, toleration of
arrears (Chile, Bolivia, CR)
Korea crisis (interbank rollover + large
public funds)
LULL
The Bailout-Bail-in Shuffle:
An Encore at Each Crisis
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6.
As in other crises, the first responses during the Great Recession from 2008 onward were pure bailouts. “Bail-ins” appear
only later in the crisis (notably after 2010), typically featuring an extension of maturities (reprofiling) rather than a
reduction in face value (restructuring). Compared to earlier crises, there was also a relatively low proportion of bail-ins (7
out of 32 IMF program cases examined). Source: IMF, Crisis Program Review, November 2015.
Restructuring and Non-Restructuring, IMF Program Cases, 2008-13
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7.
Euro Crisis: Lurching Between Bailout and Bail-in
March 2010: «This mechanism… has to be considered ultima ratio.” – Statement by the Heads of State and Government
of the Euro Area.
April 2010: Bail-out of Greece.
October 2010: Deauville «walk» favoring haircuts whenever a rescue is mounted – but only after mid-2013.
November 2010: Bail-out of Ireland.
March 2011: «The beneficiary Member State will be required to put in place an appropriate form of private-sector
involvement.» – ESM Term Sheet.
May 2011: Bail-out of Portugal.
June 2011: «We strongly advise against all concepts that are not purely voluntary or that have elements of compulsion.»
- Jean-Claude Trichet, ECB President, at European Parliament hearing.
February 2012: PSI (private sector haircut) in Greece.
March 2013: Upfront PSI (bank deposit bail-in) in Cyprus. Hailed by Eurogroup President Dijsselbloem as a “template.”
October 2017: ESM «should include a predictable debt restructuring mechanism,» including «the automatic extension of
the maturities of sovereign bonds in the event that an ESM program is granted.» – German Finance Ministry ‘non-paper’
on Eurozone reforms.
November 2018: «Let me say upfront that there is no support in the room for introducing any automaticity or mechanic
approaches in the context of debt restructurings.» – Mario Centeno, Remarks following Eurogroup meeting.
December 2018: “When appropriate, and if requested by the Member State, the ESM may facilitate the dialogue
between its Members and private investors. This involvement would take place on a voluntary, informal, non-binding,
temporary, and confidential basis.” – Eurogroup Report to Leaders on EMU Deepening.
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8.
Bail-in generally expected to prevail
throughout period.
Until 2010: Bail-in expected to prevail.
From 2010: Bailout allowed via
«systemic exception» clause.
From 2016: Intermediate solution via
reprofiling (bail-in «lite»).
The IMF’s (Elusive?) Search for the Right Bailout↔Bail-in Balance 2002-2016
Bailout generally expected to prevail
throughout period.
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9.
Access Under IMF Arrangements, 1980-2015
Annual Access Limits
(in % of quota)
1981-83: 150
1984: 125
1985: 115
1986-91: 110
1992-93: 68
1994-2008: 100
2009-2016: 200
April 2016→: 145
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10.
1. Official bailouts tend to be first line of response. Whatever declared beforehand, bailouts
are the default option. “Bail-ins have been the tools of later resort, if not of last resort.”
2. “Corner” solutions are rare. In practice, middle solutions have worked best.
3. Approach is case contingent. “Case-by-case” and “menu” approaches. Right answer
depends not only on given conditions, but also changes over time, hence…
4. Policy is evolutionary. Frequent review and reformulation of policies in light of
experience. ESM does too little of this.
5. Although limits to the use of public funds tend to be exceeded, a policy of access limits
sets useful guidelines for public and private sector involvement. ESM should adopt.
6. Statutory approaches (SDRM) have not garnered consensus, while contractual solutions
(CACs) have shown their limits. “Single-limb” CACs are being oversold.
7. Credibility is elusive, with a large gap between tough rhetoric and actual decisions. “Never
Again” is a hollow mantra. Hard rules don’t survive hard cases.
BailoutBail-in – Lessons from Sovereign Debt Crises
«Hard Rules Don’t Survive Hard Cases»
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