Restructuring, Default & Debt Reduction

[Brad DeLong]

>Brad DeLong wrote:
>
>>>Meltzler's idea is that at the announcement of the default, the 
>>>IMF announces
>>>that it will buy Argentinian bonds at 60 cents in the dollar. 
>>>This removes the
>>>incentive to panic, because you now know the maximum extent of your loss.
>>>Anyone who wants to sell, sells to the IMF at 60c.  That won't 
>>>attract genuine
>>>vultures, so there's more of a chance of an orderly market.  In 
>>>fact, given a
>>>guarantee that there will be liquidity and that they won't get 
>>>"stuck" with a
>>>position, it's likely that the everyday traders will continue to 
>>>make a market
>>>and the price will never even reach 60.
>>
>>
>>But if it does reach 60, don't we need a much bigger and 
>>well-funded IMF? How many bond are out there?
>
>I think the idea is that the IMF will never actually have to buy the 
>bonds - just the guarantee will keep their price comfortably above 
>60. And if it did buy them in a panic, it's highly likely it could 
>sell them at a profit - not unlike central banks buying their own 
>currency to defend its value. The Fed has consistently turned a 
>profit on its foreign exchange interventions.
>
>Doug

Meltzer seems to have forgotten that commitments are credible only if 
you actually have the resources to carry them out if you need to. If 
the IMF doesn't to have the resources--and I don't think it does--to 
carry out the Meltzer plan, then its guarantee will not be credible, 
and it has to buy them.

Meltzer has landed himself on the horns of a dilemma. He wants the 
private market to engage in stabilizing speculation, but knows very 
well that will not always happen in the absence of a lender of last 
resort. So he wants to create the illusion of a well-funded lender of 
last resort, but he fears the reality: an IMF with a lot of money is 
what Meltzer regards as a public social-democratic institution on the 
loose, and Meltzer loathes public institutions as inefficient and 
wasteful...

Brad DeLong