Corporate bankruptcy law grew up as it became clear that market forces delivered losers as well as winners and that some orderly means was needed of dealing with the losers. In this way, bankruptcy law supports the market mechanism. The situation is no different in a sovereign context. A well-articulated framework for dealing with sovereign liquidity problems should reduce the inefficiencies and inequities of the current unstructured approach to standstills. It would support the international capital market mechanism. It would be no  7  BIS Review 70/2000  more likely to induce debtors to default than bankruptcy law is to induce corporate debtors to default. In neither case is default a soft option. We would of course hope and expect sovereign standstills to be the exception rather than the rule. But it is better to plan for all contingencies, and to articulate these plans, than have international public policy made on the hoof. In this respect, crisis-fighting shares many similarities with fire-fighting. Fire-prevention is ideal, but will never entirely prevent fires occurring. So it makes sense to have a fire-fighting plan, which everyone understands and abides by, to minimise the damage when fires do occur. Would standstills work? The issue of whether standstills should form a part of the official sector’s toolkit of responses remains under active debate. A number of arguments against the use of standstills have been made by policymakers, academics and the private sector. Let me try and articulate some of the concerns.
During rapid economic expansion, problems with bottlenecks may occur temporarily because new production facilities are not always available just when they are needed to cope with increased demand. Experience in the 1990s suggests, however, that firms have become more flexible, both in the utilisation of existing capital stocks and in the procurement of new technology, machinery and plant when demand rises. This suggests that, if anything, it is not the level of unutilised capital resources that is critical at present. Instead, an analysis of resource utilisation should probably focus on the labour market. Another reason for this is that in a price analysis at macro level, the weightiest item in costs is wages; total wage costs are equivalent to over two-thirds of GDP. The level of unemployment has been reduced but remains high, particularly compared with the post-war period up to the early 1990s. Seen from that angle, some might say that the Swedish economy has plenty of unutilised resources. Experience from other European countries has taught us, however, that after a severe shock, as happened in the early 1990s, unemployment tends to stick at a high level, at least for a while. Estimates of the equilibrium level of unemployment in Sweden suggest that it moved up in the early 1990s and in terms of registered unemployment is somewhere in the interval 4.5 to 7.5%. Considering that the rate of registered unemployment is currently inside this interval, the estimates would suggest that the Swedish economy is now close to full capacity utilisation.