Financial crises in emerging market economies are often accompanied by difficulties of the sovereign concerned to honour its contractual obligations to foreign creditors. The expectation of such payment difficulties can trigger disorderly actions if creditors rush to withdraw their investment from the crisis
country of if the debtor is tempted to resort to unorthodox measures to prevent capital outflows. This can magnify the costs of the crisis and delay a timely restoration of normal market functioning. The official sector (mostly the IMF) may reduce the likelihood of such a
disorderly outcome by extending financial assistance. But there are limits to its involvement, not least because the potential volume of IMF lending is small compared to the size of private capital flows to emerging
market economies and because a large “bail out” by the official sector would lead to moral hazard. Countries would possibly not take necessary preventive action to avoid financial crises in the first place.For both these reasons – limited official funds and moral hazard – private sector creditors to a crisis country need to share some of the financial burden and thereby actively get involved in the management of financial crises in emerging market economies