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Bail-outs that are truly involuntary

Author: Cadot, Olivier INSEAD Area: Economics and Political Science Series: Working Paper ; 93/13/EPS Publisher: Fontainebleau : INSEAD, 1993.Language: EnglishDescription: 28 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: The paper considers the issue of bail-out lending to sovereign debtors when some lenders have more information than others. It is shown that in a pooling equilibrium, uniformed but strategically-thinking lenders with no prior exposure can be induced to take participations in syndicates whose role will be to refinance troubled debtors. This will be possible when the uniformed lenders are optimistic enough about the overall state of the market. When their priors on the market deteriorate, a sudden shift can be triggered to a separating equuilibrium ; such a shift is called a "debt crisis". The new equilibrium is characterized by a higher concentration of lending among large banks, at a lower overall level
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The paper considers the issue of bail-out lending to sovereign debtors when some lenders have more information than others. It is shown that in a pooling equilibrium, uniformed but strategically-thinking lenders with no prior exposure can be induced to take participations in syndicates whose role will be to refinance troubled debtors. This will be possible when the uniformed lenders are optimistic enough about the overall state of the market. When their priors on the market deteriorate, a sudden shift can be triggered to a separating equuilibrium ; such a shift is called a "debt crisis". The new equilibrium is characterized by a higher concentration of lending among large banks, at a lower overall level

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