Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies

It has become routine to describe International Monetary Fund aid to a country in financial distress as a "bailout," particularly of foreign creditors. This characterization was deeply misleading in most cases. But "bailing in" foreign creditors in times of crisis--having creditors contribute to financial relief rather than add to the financial problem--became one of the top agenda items in reforming the international financial architecture. It was acknowledged that any such mechanism(s) would likely reduce the flow of private capital to developing countries, but that was viewed by some as an advantage and by others as a necessary price for mitigating the economic damage and distress associated with financial crises. This thorough book reviews critically and common-sensically the extensive if somewhat specialized discussion of the issue, as well as proposals to restore financial stability after financial crises by involving private capital directly in prospective workouts--by (very) loose analogy, to create an effective Chapter 11 of the U.S. bankruptcy code for sovereign debtors.