Substantial amounts of private capital have flowed into emerging markets in the last 15 years. In addition to lending provided by commercial banks and direct investment from multinational corporations, an increasingly diverse range of investors—including pension funds, mutual funds, insurance companies, and hedge funds—have built portfolios of emerging market debt and equity securities. However, these private flows frequently have been interrupted, with periods of retrenchment by international investors and creditors that have generally reflected inconsistent economic performance by emerging market economies and shifts in the global environment. The financial crises that have occurred over the past decade have galvanized actions by the international financial community to limit their severity and frequency of such crises and to bolster the financial system more broadly.
Over the course of the past two-three years in particular, there has been strong cooperation between the public and the private sectors to secure systemic improvements in the architecture of emerging markets finance. One important innovation has been the development of Collective Action Clauses (CACs) for sovereign bond contracts and their growing use since the trail-blazing bond issue by Mexico in early 2003. In addition, a new approach, which complements CACs, has been developed to strengthen the capacity of the system to avoid crises and cope more effectively with those that do arise, including in cases where debt restructuring becomes unavoidable. The Institute of International Finance (IIF), the International Primary Market Association (IPMA),1 and major sovereign issuers of international bonds—in particular, Brazil, Korea, Mexico, and Turkey—released the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets in late 2004. These Principles are a set of market-based, voluntary guidelines for cooperative action between borrowers and creditors. They command the broad support of the G20 and an increasing number of issuers, as well as many in the investor community.