Saturday, October 26, 2013

Avinash Persaud on the risks of bail-ins

A bail-out is when an outside entity, like external investors, a central bank or an international organization like the IMF, rescues an indebted bank or firm or even a country by injecting money. A bail-in, in contrast is when the creditors are also forced to bear some of the burden of the adjustment. Persaud, a well known financial economist, has recently argued (subscription required) that contingent convertible notes, known as CoCos, convertible notes that can be converted into equity according to specified events, and that "automatically bail-in creditors when banks run into trouble" are no better then fool's gold.

Why should we care? Here is an insider of financial markets, that worked at JP-Morgan in the 1990s, and was a member of the UN Commission of Experts on Reforms of the International Monetary and Financial System (the so-called Stiglitz Commission; Report here), suggesting that these instruments "are a throwback to the failed philosophy at the heart of the 2004 Basel II global banking rules, which made the market pricing of risk the frontline of defense against financial crises." And we know how well that worked.

Not only the recovery in developed countries is anemic, as a result of widespread austerity, but also lax regulation, and excessive risk taking are still the norm.

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IMF Programs: Past and Present

A roundtable with Daniela Gabor, Roberto Lampa and Pablo Bortz, on the IMF and its Programs this Thursday in Buenos Aires, organized by ...