An International Federal Deposit Insurance Corporation George Soros (1998) has proposed the creation of a new international author-

ity to insure international investors against debt defaults. It would be a sort of Federal Deposit Insurance Corporation for country debt. Borrowing countries would pay for the insurance in advance when floating loans. The IMF would set limits on how much each country could be borrow, and the G-7 would vigorously deny bailouts to uninsured loans.

This idea is dubious on several counts. First, the G-7’s promise not to bail out

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uninsured loans would hardly be credible, since the proposal does nothing to change the fundamental incentives that draw them into crises now.6 After all, in most countries the government’s promise to guarantee the safety of bank deposits is implicit, not explicit. Secondly, it is not obvious how the IMF would determine limits on how much could be loaned, or what the appropriate insurance fee would be. Finally, it would be difficult to invest the insurer with any meaningful regulatory power, for much the same reasons as it is hard to create a powerful international bankruptcy court or global financial regulator.

The Soros proposal does, however, highlight an important issue. If private agents are engaged in risky activities that generate negative externalities—which include not only the costs of bailouts but the costs of greater vulnerability to financial crises—then, in an ideal theoretical world, the activities of such agents should be taxed. Modern approaches to domestic deposit insurance attempt to achieve this with variable capital requirements on different types of loans, and variable insurance charges. In practice, high levels of uncertainty, together with political pressure, make it very difficult to establish appropriate insurance charges, but the principle still holds. Again, the recent Basel II accord is an attempt to move in this direction.