Sovereign Liquidity Crisis: the Strategic Case for a Payments Standstill.” Centre for the Study of Globalization and Regionalization Working Paper no

Is sovereign borrowing so dierent from corporate debt that there is no need for bankruptcy-style procedures to protect debtors? With the waiver of immunity, sovereign debtors who already face severe disruption from short-term creditors grabbing their currency reserves are also exposed to litigious creditors trying to seize what assets they can in a `race of the vultures'. Shielding sovereign debtors from inter-creditor con ict by authorised standstills on payments doubtless runs some risk of debtor's moral hazard. But the lack of an orderly procedure for resolving sovereign liquidity crises means that the IMF is de facto forced to bail out countries in trouble. This leads to both debtor and creditor moral hazard, as investors lend without monitoring, knowing that their investments are essentially guaranteed. The strategic case for legalising standstills is to rescue the international nancial system from this `time consistent ' trap. JEL Classication: F34, D82, G1