Insulating private creditors from loss, by bailing out sovereign or private borrowers, clearly weakens market discipline – both on the borrowers and the lenders. I have little doubt that this is one of the reasons why international lenders have, in some cases, under-estimated the risks associated with their lending, resulting in an inappropriate pricing of debt.
As a result, borrowers have, in some cases, enjoyed access to an excessive level of credit and have not been as discerning as they might otherwise have been in determining how these funds will be applied.