Alan Greenspan has suggested that consideration be given to simple rules of thumb such as that countries without a track record of international borrowing should maintain unencumbered foreign exchange reserves sufficient to meet all foreign currency liabilities over the following year, and that the average maturity of external liabilities should exceed three years. Rudiger Dornbusch has proposed the use of value at risk assessments of country balance sheets. Ideas such as these, precisely because they focus on the national balance sheet, are sure to be centre stage. (3)  Encourage inflows of equity rather than debt finance. This is an extension of the need to manage the national balance sheet. The imperative is the old adage: borrow long not short. A credible legal and institutional infrastructure for private investors would go a long way to encourage equity inflows. Reserve requirements on short-term debt inflows, as adopted in Chile, might help to modify the pace of vulnerable capital inflows, but will in themselves do little to help in times of rapid capital outflow. It is also time to reconsider the incentive to the provision of short-term finance provided by the Basel Accord risk weights. (4)  Promote the better design of debt contracts which provide a framework for negotiation between creditors and debtors when financing difficulties arise. The particular proposal – advanced initially by a G10 Deputies’ report in 1996 and subsequently endorsed by the G7 – for the use of collective action clauses in sovereign debt contracts has stalled.
Mr King gives a speech on reforming the international financial system: the middle way  Speech delivered by Mr Mervyn King, Deputy Governor of the Bank of England, to a session of the Money Marketeers at the Federal Reserve Bank of New York on 9 September 1999. *  1. *  *  Introduction  One of the roles which international financial officials are sometimes required to play is to describe disasters as triumphs and to make the dramatic seem bland. So, on 16 September 1992, following massive speculation against sterling and its withdrawal from the Exchange Rate Mechanism, the then Chancellor of the Exchequer, Norman Lamont, opened his statement with the words: “Today has been an extremely difficult and turbulent day”. In the seven years since, several finance ministers have had cause to echo those words. Officials have spoken of the risks associated with capital flows. Well they might. Sharp reversals of capital flows to emerging markets have caused crises with a frequency and on a scale that threaten support for an open, market-led international economy. These crises have created millions of victims, whose circumstances and aspirations were totally unrelated to financial markets. In Korea unemployment tripled, in Indonesia several years of economic growth were wiped out leading to political instability and similar results have been visible in other parts of Asia as well as Latin America. Over the past century, governments in the industrialised world have, in the wake of domestic financial crises, taken steps to regulate and strengthen the financial system.