The new buzz word in the global architecture debate is PSI – Private Sector Involvement. IMF staff are working to flesh out the framework for private sector involvement in financial crisis resolution outlined in the 1999 G7 Summit statement. In particular, work has focussed on the benefits of a formal debt standstill mechanism. However, the publication of IMF studies supporting such a mechanism has been blocked by the board because not all members, including the US and UK, agree with the idea.
Whilst progress has been made on resolving financial crises in specific country cases such as Pakistan and Ukraine, the IMF admits that little progress has been made on how to resolve crises caused by a sudden reversal in investors’ confidence. Bailout programmes do not work in all cases, and are costly.
The IMF has had some positive experience with using “moral suasion”, ie in Korea, and a debt monitoring system in Brazil encouraged creditors to stay in the country.
European governments, concerned about the cost of financial packages, favour a system which would force private creditors to roll over their loans if the need for financial support is above a certain threshold. The IMF has concluded that the most effective solutions are either to default, which could have implications for future borrowing costs, or to impose exchange controls.