Posted by: Nicholas Davis | March 12, 2009

The need for speedy recapitalization and debt restructuring: Roubini in 1998

Here’s the conclusion from a 1998 paper by Nouriel Roubini (NYU), Giancarlo Corsetti (Yale) and Paulo Pesenti (the Federal Reserve of New York) entitled “What Caused the Asian Financial and Currency Crisis?” Part II: The Policy Debate”, which I stumbled across on the World Bank website in the ‘contagion of financial crises‘ section. By the way, those pages haven’t been updated since 2000. Who wants to bet they’ll be updated pretty soon? Never mind the fact that they missed it coming, this crisis is a gold mine for economists!

Nouriel and his mates write:

… several observes have emphasized that an effective way to help the Asian countries to start producing and exporting again may consist of an accelerated debt restructuring process that will recapitalize banks, reduce corporate debt overhang, and provide firms with debt moratoria and new priority financing of working capital and trade. In this regard, it can be argued that a gradual, voluntary and market-based work/out of foreign and domestic debts is not the most effective strategy to address this issue, since a market based process of debt restructuring may be too slow. The longer the process takes, the larger the number of otherwise solvent firms that become insolvent, and the worse the collapse of economic activity. Suggestions for a comprehensive approach to bank and corporate restructuring with a more active role of governments may have to be considered.

This is exactly the position the US is in, with banks being recapitalized and the auto sector asking for money to tide them over. Even Nouriel back then probably didn’t dream of the US needing this kind of policy advice one day, but clearly it would have been valuable for the Federal Reserve (where Pesenti was at the time of writing) and others to consider exactly how a speedy government restructuring in these circumstances could be affected. Because, despite the article’s claim that market-based processes might be “too slow”, it could be argued that the US government’s actions haven’t been as fast or decisive as the situation requires. Ah, the joys of democracy!

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