It was not irrational to expect exchange rates to remain reasonably stable, not only because policy in these countries had succeeded in keeping a high degree of stability over a reasonably long period of time, but also because (based on our earlier argument) they might have expected, if anything, the exchange rate to appreciate over time, which would have reduced the cost of their overseas 9 borrowing.
This in turn put pressure on the liquidity position of the sponsoring institution which was invariably a bank with access to a central bank liquidity window. Future reform of the MMF industry should ensure that any insurance that this “recourse to sponsor” provides is properly charged to MMF investors.