The dilemma is solved, at the domestic level, by the provision of eligible collateral. This may prove very uneasy for international liquidity: transferring ownership of substantial amounts of sovereign assets between countries or to international institutions would meet with huge legal and political difficulties. This is the rationale for conditionality. But, of course, conditionality creates an uncertainty which is incompatible with the purpose of instant supply of liquidity. A conditional facility will never be a perfect substitute for reserves. Many countries fully eligible to the Flexible Credit Line (FCL) have used foreign swaps instead. Anecdotal evidence suggests that swaps are often perceived as carrying less of a stigma effect. One way to deal with moral hazard would be to distinguish explicitly between two different risks facing each country: on the one hand idiosyncratic risk, created by national policies and country specific shocks; on the other hand, “systemic” risk stemming from aggregate liquidity shocks occurring on a broader – global or regional – scale. At the moment, foreign exchange reserves are meant to cover both risks. Since systemic risk is not related to a country size or GDP level there is potentially no limit to the demand for self insurance. A the same time, if systemic risk is defined in such a way that it is truly independent from individual countries behaviour or policies, protection through a multilateral mechanisms would not create any moral hazard problem.
Keynote address during a seminar organised jointly by the Bank of Thailand and the World Bank entitled “Good Governance for Financial Institutions” on 10 June 2000. 7  BIS Review 111/2000  There are, therefore, no one-size-fits-all solutions. Each country will have to pick up from the experiences of others, and adapt these experiences to their own conditions. Each will have to judge for itself the right balance and speed of changes to suit its own needs and circumstances. Nobody else has the same stake in the outcome. Conclusion The crisis has been a major setback for ASEAN and its member economies. Many external observers and investors still consider our economic prospects doubtful, and see ASEAN as an ineffective sunset organisation. These perceptions are political facts which can define political reality. If ASEAN economies do not deliver by way of structural reforms and strong, sustained economic recovery, and North East Asia continues to pull ahead, international investors will relegate us to the sidelines, and we will be marginalised. Perceptions, however, can be proved wrong. The best answer to them is real action and change. We must strengthen our economies and make ourselves more competitive, while safeguarding ourselves against external shocks. We must press on with economic cooperation among ourselves, and with the rest of the world. And each country must set its own house in order, by creating the political preconditions, restructuring its corporate sector, and reforming its banking system. Then the resilience of individual members will result in a strengthened ASEAN as a whole.