Greenspan."
Moral hazard infringes upon both transparency and accountability. It is
never explicit or known in advance. It is always arbitrary, or subject
to political and geopolitical considerations. Thus, it serves to
increase uncertainty rather than decrease it. And by protecting private
investors and creditors from the outcomes of their errors and
misjudgments - it undermines the concept of liability.
The recurrent rescues of Mexico - following its systemic crises in
1976, 1982, 1988, and 1994 - are textbook examples of moral hazard. The
Cato Institute called them, in a 1995 Policy Analysis paper,
"palliatives" which create "perverse incentives" with regards to what
it considers to be misguided Mexican public policies - such as refusing
to float the peso.
Still, it can be convincingly argued that the problem of moral hazard
is most acute in the private sector. Sovereigns can always inflate
their way out of domestic debt. Private foreign creditors implicitly
assume multilateral bailouts and endless rescheduling when lending to
TBTF or TITF ("too big or too important to fail") countries. The debt
of many sovereign borrowers, therefore, is immune to terminal default.
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