The smooth flow of funds around the globe is necessary for the machine we call the world economy to function. When an emerging economy fails, something has to be done. But what's the right approach? If aid is too easily forthcoming, a country in trouble might not be motivated to reform. On the other hand, are the established norms really the most effective way to handle these crisis situations?
Bailouts or Bail-ins is an informative survey of current practices in financial crisis resolution in emerging markets. The book provides detailed cases of how various crises over the past decade have been handled and also compares crises against one another. Coauthor Nouriel Roubini is an associate professor of economics and international business at the Stern School of Business, New York University, while Brad Setser is a research associate at the Global Economic Governance Program at University College, Oxford.
Together they examine the process of what typically happens when organizations such as the International Monetary Fund (IMF) respond to financial crises. (Roubini is a longtime consultant to the IMF, and Setser was a visiting scholar there.) The first part of Bailouts or Bail-ins surveys the current state of events, while the second half reviews the various considerations that are put forth in the debate on how to handle financial crises in the future.
Certainly all crises are not the same, but there are commonalities, according to the authors. Most prominent among them is that rescues typically take two forms: a bailout or a bail-in. Emergency financing or bailouts occur when the IMF provides loans for the country to "honor its contractual commitment to pay its debts." Bail-ins are defined as "an agreement by creditors to roll over their short-term claims or a formal debt restructuring," allowing the country enough time to right itself. Both responses have their benefits and drawbacks, and the authors attempt to illustrate the complexities and make recommendations on how such actions can accomplish the most effective ends.
In the end, they contend that a level of predictability is necessary for dealing with various types of crises. And although some suggested alternatives exist, the authors feel that institutions such as the IMF that are charged with handling financial crisis resolution "are in better shape than the current policy framework in place to deal with financial calamities."
A thorough rethinking of this "current policy framework" is in order. Roubini and Setser's examination of what is presently being done offers a useful means for analyzing the issue and the options available.—Ann Cullen