That would be likely to add to the problem of potentially volatile capital inflows next time around. Not surprisingly, too, there is strong political BIS Review 36/1998  -5-  resistance in many countries, including notably the United States, to the idea that public, i.e., taxpayers’, money should be used to bail out private creditors, especially foreign creditors. External financing need not come solely from the public sector. Private finance would, in principle, serve the same purpose, and in many situations market price adjustments may be sufficient to stem the capital outflow. But, given the extent of the loss of confidence in the Asian case, organising private financial support meant in practice persuading existing creditors that their assets would be better protected if they were prepared to leave them in place, especially if other major creditors agreed to do the same and if official support was made available in parallel. But in this case, too, difficult judgements had to be made. There was a danger that, if private creditors had to be in effect coerced into staying put, they would immediately cut their positions elsewhere, while they still could, adding to the international contagion. In fact, in the critically important case of Korea, the promise of massive official support failed to restore market confidence.
Against that background the G7 surveillance discussion focused particularly on Japan, where financial fragility - in the wake of the bubble and subsequent collapse of asset prices continues, which is itself acting as a drag on the domestic economy and which is compounded by a loss of both consumer and industrial confidence. Both the financial fragility and the domestic economic weakness are now aggravated by the problems elsewhere in Asia. Everyone at the meeting welcomed the Japanese commitment of public funds to strengthen the financial system and the recent announcement of large fiscal stimulus to strengthen domestic demand led growth, which will help to reduce Japan’s external surplus and also to strengthen the Yen. BIS Review 36/1998  -7-  In relation to the other major industrial countries there was general puzzlement at the persistent strength of equity markets and about the implications if it were to continue - or even if it does not. Particular points made in relation to continental Europe were that it is important there, too, that the gathering recovery - hitherto driven largely by external demand - should increasingly be based on sustained growth of domestic demand; and that continuing structural reforms will be necessary to combat persistent high unemployment - especially now in the context of monetary union.