But in the end it was the old issue of variance or the variability over time that brought the best-laid plans of borrowers to such an unhappy end. We noted earlier that the textbook equilibrating forces were largely absent - as foreign exchange became dearer, people wanted to buy more, not less. This was reinforced by lenders’ behaviour.
As the exchange rates fell, foreign lenders, although protected from exchange rate risk, began to realise that they were exposed to increasing credit risk, and became extremely reluctant to roll over their lending. The credit-rating agencies added their own special twist-of-the-knife, down-grading these countries six months after the problems began, so that portfolio managers were forced to sell into the collapsed markets.