That should involve co-operation to facilitate a full exchange of information and analysis relating to the current financial situation and prospects of the sovereign. This will be easier if the country has already taken the necessary action to improve data availability and transparency and to meet relevant IMF data standards and codes. There is a close parallel with the way in which corporate and financial sector restructurings are governed by independent reviews based on full exchanges of information on the corporate’s or bank’s financial position. In both cases, it is essential that those analysing the debtor’s financial position (the IMF in the sovereign context and the independent accountants in a corporate case) are able to distinguish between different types of default. More effective monitoring should improve the discipline on the debtor and facilitate the extension of more lending by the private creditors in both cases. Another area where sovereign debt workouts could borrow from corporate and financial restructurings is in possible recourse to a neutral mediator, charged with facilitating a co-operative creditor solution. In the sovereign context, one possible facilitator might be the IMF. It would certainly have the resources and expertise to do the job, although one possible drawback is that the IMF, unlike an arbiter in a corporate workout, will sometimes itself have claims on the debtor, in this case the sovereign. And this raises a separate issue of whether, or in what circumstances, the IMF might provide financial support during a sovereign debt workout – so-called lending into arrears.

On top of that, there were contagion effects on public and private sector holdings of sovereign debt at a time when public finances in many countries were themselves deteriorating independently. I think it is important to appreciate that the existing framework governing sovereign debt workouts in emerging market economies (EMEs) evolved in a world where official financing dominated and private financing was provided by a relatively small number of developed country banks. But private claims now outweigh official claims on the major EMEs – by a ratio of 70:30 in recent years. And these private claims are increasingly to bond investors rather than banks – direct and portfolio investment flows now dwarf bank lending as a source of finance for EMEs. Bondholders are dispersed and often anonymous, so there are potentially greater creditor co-ordination problems. To contain the potential systemic consequences of future crises, both the public and private sectors have an incentive to devise a new framework that can deal more effectively with sovereign debt workouts, and most especially with the role of PSI, when private claims, particularly bondholdings, are substantial. This is very similar in kind to the challenge of adapting the London Approach, whose original principles were most relevant where the creditor group largely consisted of a fairly small group of relatively  BIS Review 67/2001  5  homogeneous banks, to a world where creditor groups had become much more disparate and international, involving large numbers of bondholders and other financial creditors.