past couple of years Private creditors ought to be willing to take large write-downs of their debts in some instances, particularly when a country is so deeply in hock that it is effectively insolvent. In such circumstances, trying to force the debtor to repay in full can often be counterproductive. Not only do citizens of the debtor country suffer, but creditors often receive less than they might have if they had lessened the countrys debt burden and thus given the nation the will and means to increase investment and growth. Sometimes debt restructuring does happen, as in Ecuador(1999), Pakistan(1999), and Ukraine(2000). However such cases are the exception rather than the rule, as current international law makes bankruptcies by sovereign states extraordinarily messy and chaotic. As a result, the official lending community, typically led by the IMF, is often unwilling to force the issue and sometimes finds itself trying to keep a country afloat far beyond the point of no return. In Russia in 1998, for example, the fficial community threw money behind a fixed exchange-rate regime that was patently doomed. Eventually, the fund cut the cord and allowed a default, proving wrong those many private investors who thought russia was"too nuclear to fail. But if the fund had allowed the default to take place at an earlier stage, Russia might well have come out of its subsequent downturn at least as quickly and with less official debt Since restructuring of debt to private creditors is relatively rare, many critics reasonably worry that IMF financing often serves as a blanket believe they will be bailed out by the IMF, they have reason to len o insurance policy for private lenders. Moreover, when private creditors more-and at lower interest rates-than is appropriate. The debtor country, in turn, is seduced into borrowing too much, resulting in more frequent and severe crises, of exactly the sort the IMF was designed to alleviate. i will be the first to admit the "moral hazard theory of IMF lending is clever(having introduced the theory in the 1980s), and I think it is surely important in some instances. But the empirical evidence is mixed. One strike against the moral hazard argument is that most countries generally do repay the IMf, if not ol time, then late but with full interest. If the IMF is consistently paid then private lenders receive no subsidy, so there is no bailout in any simplistic sense. Of course, despite the IMF's strong repayment record in major emerging-market loan packages, there is no guarantee about the future, and it would certainly be wrong to dismiss moral hazard as unimportant Fiscal follies Even if IMf policies are not to blame for budget cutbacks in poor economies, might the funds programs still be so poorly designed thatpast couple of years. Private creditors ought to be willing to take large write-downs of their debts in some instances, particularly when a country is so deeply in hock that it is effectively insolvent. In such circumstances, trying to force the debtor to repay in full can often be counterproductive. Not only do citizens of the debtor country suffer, but creditors often receive less than they might have if they had lessened the country's debt burden and thus given the nation the will and means to increase investment and growth. Sometimes debt restructuring does happen, as in Ecuador (1999), Pakistan (1999), and Ukraine (2000). However, such cases are the exception rather than the rule, as current international law makes bankruptcies by sovereign states extraordinarily messy and chaotic. As a result, the official lending community, typically led by the IMF, is often unwilling to force the issue and sometimes finds itself trying to keep a country afloat far beyond the point of no return. In Russia in 1998, for example, the official community threw money behind a fixed exchange-rate regime that was patently doomed. Eventually, the fund cut the cord and allowed a default, proving wrong those many private investors who thought Russia was "too nuclear to fail." But if the fund had allowed the default to take place at an earlier stage, Russia might well have come out of its subsequent downturn at least as quickly and with less official debt. Since restructuring of debt to private creditors is relatively rare, many critics reasonably worry that IMF financing often serves as a blanket insurance policy for private lenders. Moreover, when private creditors believe they will be bailed out by the IMF, they have reason to lend more—and at lower interest rates—than is appropriate. The debtor country, in turn, is seduced into borrowing too much, resulting in more frequent and severe crises, of exactly the sort the IMF was designed to alleviate. I will be the first to admit the "moral hazard" theory of IMF lending is clever (having introduced the theory in the 1980s), and I think it is surely important in some instances. But the empirical evidence is mixed. One strike against the moral hazard argument is that most countries generally do repay the IMF, if not on time, then late but with full interest. If the IMF is consistently paid, then private lenders receive no subsidy, so there is no bailout in any simplistic sense. Of course, despite the IMF's strong repayment record in major emerging-market loan packages, there is no guarantee about the future, and it would certainly be wrong to dismiss moral hazard as unimportant. Fiscal Follies Even if IMF policies are not to blame for budget cutbacks in poor economies, might the fund's programs still be so poorly designed that