IMF initiatives to provide preventive bailouts to countries before difficulties arise and to “bail in” the private sector are fraught with problems. Preventive lines of credit are likely to be misused and to increase moral hazard, while efforts to force losses on the private sector may precipitate the very crises they are intended to prevent. The historical experience suggests that direct two‐party bargaining between creditors and debtors is a better way of handling financial crises than is reliance on official third‐party interventions. Private investors in the 19th and 20th centuries regularly solved collective action problems and supplied so‐called public goods that official agencies intend to provide. Default, or the real possibility of default, led to renegotiations of debt conditioned on reforms in the debtor country.
Official intervention, on the other hand, has not been characterized by fundamental reforms based on credible conditionality, as evidenced by the recent experiences of Russia, Brazil, and East Asia. During the Third World debt crisis of the 1980s, moreover, IMF lending created among all parties a sort of stalemate that postponed recovery for years. In a world characterized by direct two‐party negotiations, market institutions in insurance, credit, and surveillance would do much more to stabilize the international financial system than can be hoped for from continued interventions.
