The Economist argues in favor of the US rule of Chapter 11 bankruptcy under which firms in financial difficulties are encouraged to trade out of them. The argument seems plausible, but it doesn’t address the question of moral hazard. Firms will be more willing to take on excessive debt if there’s a possibility of repudiating it and surviving.

Another point of interest is that survival rates for Chapter 11 seem to vary widely. Airlines seem to do OK, but very few of the tech and telecom companies that have entered Chapter 11 have ever emerged. With dotcoms, the problem was often one of finding enough assets to pay a liquidator. I have the impression that, overall, the survival rate of firms going into Chapter 11 is falling, but that’s only an impression.