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Asset Purchase Bailouts and Implicit Guarantees

Author

Listed:
  • Mengus, Eric
Abstract
This paper shows that bailouts of private agents can optimally take the form of asset purchases, even if this also means paying off external asset holders, in the presence of borrowing constraints and asymmetric information on liquidity needs. The combination of these two ingredients make direct compensation through loans and/or net transfers imperfect. Thus, when more constrained agents are also more exposed to the asset, the compensation through asset purchases becomes desirable. Anticipating these purchases, private agents engage in a collective bet on the defaulting asset, leading to an equilibrium implicit guarantee, where even an intrinsically worthless asset can be traded at a positive price.

Suggested Citation

  • Mengus, Eric, 2017. "Asset Purchase Bailouts and Implicit Guarantees," HEC Research Papers Series 1209, HEC Paris, revised 02 Jul 2017.
    • Handle: RePEc:ebg:heccah:1209
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    Cited by:

    1. Mengus, Eric, 2018. "Honoring sovereign debt or bailing out domestic residents? The limits to bailouts," Journal of International Economics, Elsevier, vol. 114(C), pages 14-24.

    More about this item

    Keywords

    Implicit guarantees; bailouts; capital ows; capital controls;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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