Between 1990 and 1996, capital inflows to emerging market countries rose from $60 billion to $194 billion. Mexico’s problems in 1995 changed the form of these capital transfers. Equity owners learned from their losses. After 1995, portfolio investment declined, but direct investment increased....

This paper proposes a low cost alternative to the large bailout packages that the International Monetary Fund (IMF) has organized to address financial crises. The IMF would act as a lender of last resort. Faced with an unsustainable debt burden, a government would declare default. It would...