Private Sector Involvement in Crisis Resolution

In G-7 meetings, since the Mexican crisis that resulted in the Rey Report1 to the meeting in Halifax in 2002,2 there has been emphasis on the recovery of private foreign credit for a country to receive official financing. Otherwise, official resources, of the IMF, World Bank, etc., would simply fall into a barrel without a bottom, providing only liquidity for capital flight of local and international investors trying to avoid exchange and local financial crises. Whatever the final verdict of academic and technical debate, the international financial community believes strongly in the possibility of moral hazard. This hazard consists of the breakdown of discipline in the calculation of risk by countries and companies in expectation that IFIs will rescue countries and their governments will prevent failure of certain entities. Moral hazard, whatever its merit or dimension, is a necessary assumption because it is part of the official doctrine. However, the G-7 may contribute to moral hazard by influencing the rescue of countries because of geopolitical interest.