Managing ...nancial crises in emerging markets: new developments in review

We begins with a summary of the current debate on sovereign debt restructuring, including the idea of inserting collective action clauses (CACs) into sovereign bond contracts and the IMF’s proposal for a Sovereign Debt Restructuring Mechanism (SDRM). We compare these two proposals in a context where problems of creditor coordination interact with those of debtor incentives – “debtor moral hazard.” This is followed by a formal section, where the focus is on CACs and how they reduce the risk of crises. Finally, we turn to matters of political-economy and the recent con...dence crisis in Brazil. We discuss how and why orthodox IMF policies of partial bailout combined with policy support can restore con...dence and reduce sovereign spreads in circumstances when an untried Left-wing candidate spooks ...nancial markets. ¤Acknowledgements: Thanks are due to Matthew Fisher, Javier García Fronti, Morris Goldstein and Ted Truman for their comments in section 1; and to Aloiso Aruajo, Ricardo Cavaclanti, Renato Flores, Hugo Hopenhayn, Federico Sturzenegger for comments and discussions on the topics of sections 2 and 3. Thanks to Kannika Thampanishvong and Lei Zhang for their collaboration in section 4. Finally, we are grateful to Javier García Fronti and Elba Roo for technical assistance funded by ESRC project No. R000219236 “Moral Hazard and Financial Institutions”.