Exceptional lending above this presumptive limit would be possible in order, to provide operational flexibility in extreme cases – for example, those threatening systemic stability. That is why the framework is one of presumptive limits rather than strict rules. But granting exceptional access should require much greater ex ante justification and ex post accountability. For example, exceptional access programmes should be automatically referred to the new Independent Evaluation Office of the IMF. This would raise the hurdle for granting exceptional access and provide greater clarity to debtors and creditors about the support countries could expect from the official community. The logical consequence of limited official finance is that inevitably there will be times when a reprofiling of sovereign debt may be necessary for some countries. Some have argued that sovereign debt restructuring or default is potentially too disastrous to contemplate, for the country or indeed for the world economy. The Russian default in 1998, and the disruption to world markets that followed from it, is often cited as evidence for the prosecution. More careful analysis suggests two rather different conclusions from the Russian experience. First, the Russian default was disruptive in part because it came as a surprise to market participants. Private creditors had planned on one assumption – exceptional IMF financing, or the "moral hazard" play as it was labelled by the market – and were surprised when their comfort blanket was removed. Greater clarity and stronger presumptions about the size and form of Fund financing would have reduced the surprise and the accompanying contagion.
The expansion of private capital flows was gradual, and, until about ten years ago, was primarily concentrated on flows among the developed economies. It is only in the past ten years that the explosion of private capital flows to emerging market economies has taken place. Data from the World Bank suggest that annual capital flows to emerging markets were less than $ bn in the early 1970s, rising to around $ bn in the late 1990s. At their peak, capital flows to emerging markets were around 5% of those countries' GDP. Unfortunately, capital flows on this scale can reverse themselves as suddenly as they appear. The result of such sudden and large reversals of short-term capital flows has been a series of international financial crises, in Mexico in 1994-95, Asia in 1997-98, Brazil in 1998-99, and, more recently in Turkey and Argentina. The frequency and scale of these crises, if they were to continue, would be a serious impediment to the evolution of the international capital market. Unless we can both reduce the frequency and severity of such crises, and improve our techniques of crisis resolution, then the demonstrators against globalisation will be provided with unnecessary ammunition. The costs of recent crises have been large. Between 1996 and 1998, the reversal of private capital flows to the five Asian countries primarily affected (Indonesia, Korea, Malaysia, the Philippines and Thailand) was almost $ bn, equivalent to about 15% of the pre-crisis level of GDP.