Throwing good money after bad: Make the bankers pay
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Throwing good money after bad: Make the bankers pay

How do you wean crisis countries away from official bail-outs onto private funding? There has to be a way to reward borrowers for improved behaviour yet punish lenders for piling in indiscriminately. New lending models include contingent repos, sovereign default options and credit spread bonds. But will they catch on? James Smalhout reports.

Global capital turns nasty

Too many risks, too few rewards

Capitalism and serfdom

The spectre of intervention

Can the IMF play supercop?

A breathing space for the IMF

Banks and bad policies must share more of the pain

The IMF treatment isn't working. As Ricardo Hausmann, chief economist at the Inter-American Development Bank, points out. "Tranched, conditioned IMF support simply doesn't do the trick of calming markets down." The IADB thinks that Argentina has something to offer. Argentina's instrument of better market discipline is a corset and safety-harness rolled into one. It consists of a contingent repo which allows the country to borrow up to $7.3 billion from 13 private lenders at Libor plus 205 basis points. The daily valuation of the collateral, mostly Argentina's own dollar bonds, is a way of telling the country's finance officials, and president Menem, how they are doing. Argentina posts collateral set at 125% of the loan. If the market value of the bonds falls by 5% or more, there's a call for more collateral. If the drop is more than 20% the new collateral must be in dollars. But so far Argentina hasn't drawn on the facility.

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