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According to authors Terrence Checki and Ernest Stern, past strategies for resolving the sovereign debt crises in emerging markets no longer offer "a viable tactical blueprint for dealing with current or future crises. The central role now played by the markets in debt financing has made past solutions outdated and requires a fundamental shift in the way the international public sector thinks about and deals with unfolding crises.
With little consensus in policy circles about the best way to handle financial crises in emerging markets, Messrs. Checki and Stern outline a flexible, market-oriented approach to crisis resolution that allows for different forms of participation by the public and private sectors.
Paying careful attention to the realities of the current environment, the authors offer a strategy for crisis resolution that incorporates a number of elements:
a flexible, case-by-case approach that recognizes options between the polar extremes of full-fledged bailouts or comprehensive defaults;
clearer articulation of the public sectors objectives;
an emphasis on working with the grain of the situation—that is, identifying interests common to all players and fashioning strategies that are consistent with normal market functioning;
the pursuit of creative ways to stretch public sector support that is, to encourage private capital flows in circumstances where such funds might not otherwise be available;
a recognition that the interest in and ability of private and public creditors to be part of the resolution of a financial crisis will differ and that those differences will be critical in determining the degree or form of participation; and
the restoration of the IMFs role as a mitigator, rather than a manager, of crises.
Mr. Checki is an executive vice president of the Federal Reserve Bank of New York and head of the Banks Emerging Markets and International Affairs Group; Mr. Stern is a managing director of J.P. Morgan & Co.