Bailing in the private sector

During the last decade, there has been a significant bias towards
bond financing on emerging markets, with private investors relying
on a bail-out of bonds by the international community. The bias has
been a main cause for recent excessive fragility of international
capital markets. The paper shows how collective action clauses in
bonds contracts help to involve the private sector in risk sharing.
It argues that such clauses, as a market based instrument, will
raise spreads for emerging market debt and so help to correct a
market failure towards excessive bond finance. Recent pressure by
the IMF to involve the private sector is facing a conflict between
the principle to honour existing contracts and the principle of
equal treatment of bondholders.