Introduction

This chapter examines the effectiveness of the ‘catalytic approach’ to crisis and debt-workout lending in the international financial ­architecture – the belief that IMF intervention triggers renewed private capital inflows which complement adjustment programmes – in achieving private sector involvement in crisis resolution. A country with external debt problems must find a balance between financing its external deficit and economic adjustment. Financing part of the deficit reduces the burden of adjustment and provides the government with time to implement new policy measures. A gradual adjustment is assumed to lessen the burden on the domestic population. Hence measures that increase private financing in the face of external debt problems should also increase countries' policy space.

Involving private creditors in crisis resolution is crucial for a number of reasons. First, burden-sharing by private creditors is necessary to obtain balance between the pain of adjustment borne by the domestic population and private creditors (see this volume's introduction). Second, private sector involvement is needed to prevent moral hazard and thus reduce the probability of future crises. Third, participation and fresh private capital is necessary since official creditors – the International Monetary Fund (IMF) in particular – generally lack the resources to fully meet the financing needs of the crisis-hit country. Last but not least, the extent to which the IMF succeeds in creating a sense of equal burden-sharing between public and private agents is crucial for the implementation of IMF programmes by the authorities of the debtor country, and for the adjustment measures to be accepted by the public.