Others have suggested that standstills create moral hazard and alter debtor incentives in the process by undermining the primacy of debt contracts. But, as I have noted before, a well-designed framework for sovereign debt workouts, involving a voluntary standstill where that is thought to be helpful, might be no more likely to provide perverse incentives for sovereign debtors to default than insolvency law does for corporate debtors. But it would have to be clear that the standstill option would be used sparingly and in tightly-defined circumstances; otherwise, it could be self-defeating. Having highlighted all these common themes, I could be accused of wearing rose-tinted spectacles if I did not also acknowledge that there are important distinguishing features between sovereign and corporate workouts. Unlike a company, a sovereign, of course, cannot be liquidated. Public policy approaches to crisis management recognise that there is an argument for sovereign debt restructuring in cases where the crisis arises from poor performance and policy. In such cases, as more generally, crisis management will involve a careful combination of official finance, policy adjustment by the debtor and PSI. This is rather different to the corporate case, where the creditors might well decide to liquidate, rather than restructure, a company whose problems arose solely from poor management. The lack of a corresponding insolvency law back-up in the sovereign case might mean that the incentives to repay are weaker, and that the moral hazard effect inducing a voluntary default is more common, than in the corporate case.

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.