From fire fighting towards sharing the responsibilities; Thoughts on financial crisis management

This paper analyses the involvement of the private sector in the orderly resolution of financial crises in emerging markets. Private sector involvement is an instrument to create the right incentives for participants in the international capital markets to prevent future crises. Since the 1980s, the financial markets have become more complex, creating new challenges for sound crisis management. This paper describes these challenges and formulates principles in this respect. Crisis resolution should to the extent possible proceed in a co-operative and market-friendly manner, parties in equal cases should be treated equally and participants should make the process transparent. Subsequently, from the cases of Korea, Indonesia, Russia, Brazil, Pakistan, Romania and Ukraine, lessons are drawn regarding the implementation of those principles in practice. These point, amongst other things, to the limits of a voluntary approach and the importance of timing for equal treatment of creditors. Finally, the paper examines tools that should be implemented ex ante that can assist in the management of crises, such as private contingent credit lines, collective action clauses, debtor-creditor relations and sanctioning standstills. The paper concludes with questions for further research on practical issues.