ABSTRACT
If such moral hazard is a substantial problem, then the solution presumably involves making sure that borrowers and their creditors do more, and expect to do more, to contain and correct the damage when adversity strikes. Because emerging market borrowers generally suffer substantial economic damage in a financial crisis, while at least some private creditors (particularly short-term creditors of banks and of the sovereign) are often seen to escape with limited losses, much of the emphasis in recent discussions of this issue has focused on more efficient and effective mechanisms for involving private creditors in avoidance and resolution of emerging market financial crises. This is reflected in extensive discussions during the past few years, in many official fora, of better mechanisms of “private sector involvement” (PSI).
