Financial institutions are very important for not only helping to develop economic conditions but also securing bailouts from the economic crisis in different countries and organizations. But some regional and global financial institutions including the World Bank, the International Monetary Fund, the Islamic Bank and the Asian Development Bank play very significant roles in the economic development and rescue from economic crisis in different countries. But countries in economic crisis do not always get financial support or do not get financial support timely from such institutions because of many reasons, some of which are associated with the receiving countries and some others are associated with the financial institutions.
Notably, a bailout, which can help the entity being rescued to survive from difficult economic conditions, indicates financial support to a country or an organization facing a potential bankruptcy or operating on the verge of bankruptcy (because of a prolonged financial crisis) given through a variety of forms including loans, cash, bonds and stock purchases. A government, an organization or an individual provides money and/or resources to a failing entity in the bailout process. But the most common forms are direct loans or loans through a third party guarantees to the rescued entity, be it a country or an organization. But the terms of bailout loans, which aim to help to avoid a potentially complete collapse of an organization or the financial crisis of a country, remain favorable to the entity being rescued.
Notably, bailout efforts were made earlier too. Indeed, many governments and organizations received bailout support from governments and financial institutions. The United States has a long history of bailouts dating back to 1792. Recently, according to available sources, South Korea received bailouts in 1997, Indonesia in 1999, Brazil in 1998, 2001 and 2002 and Argentina in 2001 and 2002. Also, the United States government offered one of the largest bailouts at the time of the global financial crisis in 2008. Its bailout targeted some largest financial institutions that experienced huge losses from the collapse of the subprime mortgage market and the resulting credit crisis. Very recently, Greece received bailout supports to manage debts from the European Union in several phases starting in 2010.
Of course, there are different challenges to bailout support from financial institutions and governments. The capacity of financial institutions and governments, the possibility of return and some other factors are considered by financial institutions to provide bailout support. Consequently, many financial institutions may not be able to provide bailout support especially when the bailout needs a higher amount. This is the case when a country requires bailout support. For example, Greece required more than 300 billion US dollars for the bailout. The amount is, of course, not possible for many organizations to support. Consequently, bailout loans or other forms of bail-out support that require a higher amount need the roles of major financial institutions, including regional and global financial institutions.
No doubt, many financial, political and other factors/causes can drive the decision of bailouts. Some factors including the challenge to recovery of the entity being rescued especially when the bailout is given in the form of loans, challenge to getting back loans and the chance of failure to boost the lending activities. Also, political factors are often an important driving force behind the decision of providing a bailout. It is claimed that bailout decisions are sometimes made by government institutions based on political considerations rather than actual risks assessment of organizations that are about to be bankrupt. Moreover, there are some concerns with bailouts. One of the main concerns is that the bailout may not work always (as desired). Moreover, bailouts can be prolonged sometimes. Bailout support for Greece, where it took around 10 years, is an example here.
But a bailout is more difficult when a country is in crisis compared to an organization. For the bailout of organizations, respective governments and financial organizations within the given country play as main actors. Indeed, the USA undertook massive bailout efforts for financial support to giant corporations. For example, the US Troubled Asset Relief Program authorized 700 billion USD as government bailout support during the 2007-08 financial crisis. In the United Kingdom, the rescue package was 500 billion Pound in the same period. But for the bailout of any country, mostly global and regional financial institutes play significant roles. This is the case in countries including less resourceful countries where there are limited large-scale financial institutions to rescue.
Of course, there are some negative aspects of bailouts especially for emergency type bailout support. The bailout may lower the business standards for giant companies because of the incentivization of risks and the creation of moral hazards (especially through the assistance of safety nets that is rendered by some as something ought-not). Also, a bailout promotes centralized bureaucracy because it allows governments to interfere in the free market economy. No less important is that a bailout leads to corporate welfare that can encourage corporate irresponsibility. Yet, a bailout is needed when a country or an organization is about to be bankrupt. In terms of a country, bailout support is needed to avert the disastrous effects of bankruptcy and help its economy remain functional. It is needed for organizations because of the potential effects of bankruptcy on the national economy and employees and other reasons.
Thus, some measures are important to make sure that countries and organizations, which have the potential or are about to be bankrupt, get bailout support from a variety of sources including regional and global financial institutions. Thus, organizational, political and other barriers need to be well-addressed so that financial institutions can provide bailout support. Moreover, a bailout needs to be given timely and the terms of the bailout need to be made favorable to the organizations or countries being rescued since it is given to help to revive from crisis. But countries and organizations also need to utilize bailout support in a better way and improve their capacity to avoid the need for further bailout support. Of course, some other measures including improved financial management are also very important.
But in serious problems of insolvency or massive potential negative effects of possible bankruptcy, another approach such as bail-in can also be used. Notably, bail-in is the opposite of a bailout and indicates saving an institution from possible collapse by writing off debts by creditors. An example can be the rescue deal for the biggest banks in Cyprus in 2013. In the rescue effort, shareholders and creditors bore the responsibility for some of the costs. In terms of a country, creditors including the concerned foreign creditors may write off debts that can reduce the burden of debt or the chance of insolvency. Also, the time of debt payment can be extended with or without any interests, depending on the situation of the country in consideration and financial creditors.
DISCLAIMER: The views expressed are those of the authors and do not necessarily reflect the official policy or position of the Magazine, its employees or any other authors. Views published are the sole responsibility of the author(s).
