Such loans would normally be short-lived, and should be made available at an above-market interest rate such that this sort of finance is seen as last not first  BIS Review 71/2001  5  resort. The second solution to the co-ordination problem is for the borrower to impose a temporary suspension of payments to create a "time out" during which the borrower can negotiate directly with the creditors, and so arrange a new profile of repayments of debt. Both approaches, if understood and implemented consistently over time, can provide an efficient solution to the co-ordination problem and eliminate the incentives for a liquidity run. But, as Ken Rogoff pointed out in 1999, the lender of last resort approach carries with it the risk of introducing significant moral hazard into the loan market. If lenders believe that sovereign borrowers are likely to be bailed out, then their incentive to assess the riskiness of their loans will diminish. Equally, borrowing countries will find it more attractive to claim that the measures necessary to continue servicing their debt are "politically impossible" if they believe that there is an international deep pocket willing to extend loans and defer the moment when the national balance constraint is binding. There are two good reasons for the IMF not being able to play the role of an international lender of last resort, at least for the foreseeable future. First, the moral hazard created by both lenders and borrowers cannot simply be assumed away.
There appears to be a good deal of uncertainty concerning the conditions surrounding the availability of official finance. It could be that investors are demanding higher interest rates to compensate for that uncertainty. There is also uncertainty among market participants about what would happen in the event of a debt restructuring and the expected repayments that would ensue. One role for the official community is to try and mitigate these uncertainties through greater clarity about the criteria for official lending and its crisis resolution policies – a theme I return to below. If successful, one outcome of these reforms would be lower borrowing costs for emerging markets. Investors are also starting to differentiate among borrowing countries more clearly than before. This has led to a greater dispersion of spreads on emerging market debt. Before the Russian crisis these spreads were tightly compressed with the central 50% of the distribution of emerging market spreads covered by a range of only around 100 basis points. At present, the range covered by the central 50% of the distribution is over 500 basis points. Correspondingly, there has been a sharp fall in the correlation between changes in emerging market spreads. The rolling 26 week correlation between changes in emerging market spreads reached a peak of around 0.8 at the time of the Russian crisis. Since then it has steadily declined, reaching a level of only 0.2 before the recent rise to around 0.35 following adverse developments in Turkey and Argentina. This differentiation in spreads is a welcome development.