Should disturbances occur in a creditor country, their banks may tend to rein in their reaches to preserve liquidity thus worsen the affect on the borrower country. Another reason may be that lenders outside Asia tend to look at Asia as a block, not differentiating one country from another much. Therefore, in order to lessen the risk of crisis and contagion, we have to find ways for the Asian countries to prevent crisis or deal better with imbalances. This means dealing better with capital flows, or rather the sudden reversal of capital flows. Now comes the third question: Which initiative can be most effective in dealing with capital flows? The Asian governments have cooperated in certain schemes. The Chiang Mai Initiative whereby Asian countries sign swap agreements with each other to provide temporary financing to each other in emergencies. Even though the combined amounts exceed $ billion, it is still small compared to the volume of foreign exchange trade in the world. We also have a system of mutual surveillance, but Asian culture sometimes does not go for direct confrontation to such particular issues. The best safeguard, in my opinion, is therefore to have stronger structures in Asian countries to deal with financial shocks. This is why I attach much hope in the Asian Bond Markets Initiative being proposed. BIS Review 28/2003  1  This leads me to the fourth question: What is the Asian Bond Markets Initiative? What does it involve? The Asian Bond Markets Initiative can be viewed at 2 levels.
However, when the country faces a nationwide economic crisis, a lot of companies would tend to suffer losses at the same time. And they cannot all together tap additional equity in such an environment. This pushed them into defaults. A lot of what seemed, before the crisis, to be long-term foreign borrowings, therefore, suddenly became callable almost overnight. The second problem is that of currency mismatch. Unlike the major countries, the emerging markets in Asia cannot borrow from the international market in our own currencies. In the case of Thailand, when our currency was floated in 1997, it depreciated more than 65 per cent before backing up to the 40’s. Many companies that had US dollar debts were forced to convert to Thai baht along the way, suffering massive exchange losses as a result. It was an important factor, among others, causing the NPL ratio to go so high, peaking at 45 per cent. In future, if the local bond market could be developed, and made attractive to foreign investors, there could be the option of foreign investors taking the foreign exchange risk instead of the borrowers. Liquidity risks will also be less. If foreign investors want out, they can sell the bonds. Prices will fall. But the borrowers who already had the money would not be affected by the sale in the secondary market. The third risk was that of an interbank market breakdown. At the height of the crisis, foreign banks just stopped lending to local banks.