For example, should a country facing severe liquidity pressures decide to suspend payments temporarily, then the IMF should be willing to support that decision while remedial policy measures are put in place. This support could take the form of bridging finance – so-called IMF lending-into-arrears. The pre-conditions of lending-into-arrears could be designed to ensure that payments suspensions are handled in an orderly fashion – for example, that they are time-limited and equitable, and the debtor is negotiating in good faith. This would reduce uncertainty on the part of both debtors and creditors as to how the end game would be played out, thereby reducing borrowing costs. These sets of procedures represent evolution in, rather than revolution of, the international financial architecture. They are about ensuring the official sector's own actions are clear, consistent and accountable, so that they contribute effectively to the resolution of financial crises. These procedures are fully consistent with the principles of private sector involvement outlined in the IMFC communiqué last September and more recently by the G7 Finance Ministers last month. The framework set out here is an attempt to begin to add some operational colour to those overarching principles. To sum up, both borrowing countries and private sector creditors must expect that, except in exceptional cases of systemic concern, the limits on official finance means that they and they alone will be responsible for dealing with a resolution of problems concerning debt repayment. Standstills and debt restructuring will be only one of many options open to negotiation between debtors and creditors.
But even on foreign currency borrowing, a country may find that the spread of the interest rate at which it can borrow over the interest rate charged to "safe" countries, such as the United States, can reach extremely high levels. And where that interest rate is markedly higher than the growth rate of the economy, the debt burden rapidly becomes unsustainable unless the interest rate can be brought down quickly. Before the Russian default and devaluation of 1998, the average spread on emerging market sovereign debt was around 500 basis points, in itself a sizeable addition to the burden of borrowing in international capital markets. That spread then rose sharply to levels of between 1000 and 1500 basis points. At these levels debt burdens were clearly unsustainable. Since then, macroeconomic reform in many of the affected countries, with the help and support of the IMF, has reduced average spreads to a range of between 600 and 800 basis points, although there has been a further rise recently following the difficulties in Turkey and Argentina. Emerging market spreads are currently around 900 basis points over interest rates on US Treasury bonds. It is not easy to reconcile spreads at this level with the fact that sovereign debt defaults on bonds are running at historically low levels. In part, the low level of defaults may reflect the increase in the number of exceptionally large loans made by the IMF in recent years. So what does account for the high level of emerging market spreads?