Witness the problems of collective action that arose when banks were asked to roll over their credits to South Korea. Such disarray reminds us that asymmetric information and the incentive to free ride can be major obstacles to achieving an efficient market solution. The virulence of the contagion reminds us that no country can simply be left to sort out its problems as if it stood alone. It will not always be possible to prevent financial crises. Even the strongest warnings by the IMF have not proved sufficient to ensure that the markets draw back gradually and that governments smoothly implement the required policy corrections. And sometimes a crisis may take even the best-informed observers by surprise: few can confidently claim to have foreseen the Korean crisis. More information is a boon but in 1997 the snag was that unfolding crisis led markets to draw different inferences from the same information.

Following the Mexican crisis there was widespread recognition that it might not be feasible for the IMF to rescue all countries experiencing financial crises. Even financial packages of $50bn and more might not suffice for countries whose external liabilities are several times larger than that. Even where bailout was feasible, preventing all losses on international investment is not desirable, given the consequences in terms of moral hazard. At that time, two reports [1, 3] discussed the need to build new institutions to support a more efficient market-based resolution of debt crises and the need for new policy approaches. But when the Asian crisis struck, nothing had yet come of these 'orderly workout' initiatives [2].

The Mexican crisis involved a run on the government's bonded debt and prompted proposals for restructuring 'securitized' sovereign debt more efficiently. The Asian crisis involves bank loans as well as bonds, and private as well as public liabilities. But previous proposals are still relevant. While the problem in Asia initially involved the non-sovereign obligations of banks and corporations, it also gave rise to a series of sovereign liquidity crises. The reluctance of lenders to roll over loans to the private sector quickly developed into a parallel reluctance to roll over loans to the government. They held back on the grounds that the crisis in the private sector might weaken the government's revenue position and that the government might end up assuming responsibility for many of those same private sector obligations. There was a perception that the widespread inability of banks and corporate giants to service their external debts might force a generalised standstill and the imposition of exchange controls, interrupting debt-service payments on sovereign obligations.

Though bank loans were critical in Asia, bonds went on being important, too. Flows of international sovereign bond issues by developing countries (including transition economies) rose from some $2.5bn a year in the second half of the 1980s to nearly $40bn in 1996, a year when bank loans to sovereigns amounted to no more than $3bn. The stock of such bonds had reached some $250bn at the end of 1996.

There is, therefore, still a strong case for:

• new provisions in loan contracts (sharing clauses, majority voting clauses and the like) to deal with collective action problems on the part of creditors
• standing steering committees of creditors to clinch better representation and to smooth negotiations
• IMF lending into arrears in appropriate circumstances.