Those writedowns were the price the banks paid for poor lending judgment. But private investors who pour money into countries the IMF might rescue will not have to make similar sacrifices for their mistakes. In effect, the IMF will assume the risk of default by supplying money to pay off these private creditors. There's certainly a recognition it is a problem,'' in the G-7, a Canadian official said. The question of how to force private creditors to share in the pain occupied a lot of discussion among G-7 leaders.
Nobody knows how to deal with it because debt crises have changed so much.
In the 1980s, the creditors were several dozen large banks whose officers could be collected in a single room to negotiate with their debtors. Now, the creditors are thousands of individual mutual funds, pension funds, investment banks and individuals who simply cannot be gathered together for a coordinated rescheduling operation. Mexico's problems last year were rooted in the huge amounts of money foreign investors poured into the country to grab high rates of interest with little currency risk. But investors' appetite diminished as Mexico's current account deficit grew and monetary policy remained too loose. It managed to avoid defaulting, and investors did not write down loans.