And when it became apparent that the official bilateral financing was in practise available only as the very last resort we had to turn to the commercial bank lenders in the major creditor countries and persuade them to extend the maturity of their loans. It was a dangerous moment. But their constructive response went a long way to resolving the immediate crisis and helped to restore greater financial stability to the region as a whole. The creditor banks are also now in negotiation with Indonesia’s commercial debtors. The discussion in Washington turned to preventative measures for the future. It would have been understandable in the light of the Asian experience if there had been some turning back from the path towards greater freedom of international capital movements, and there was some suggestion of this. But on the whole the long term benefits of free capital flows were upheld, and the mood was to continue cautiously down that path, but to emphasise the need, not only for sound macro-economic policies which everyone accepts as a sine qua non, but also for steps to accompany capital account liberalisation designed to reduce the risks of volatility. These related in part to the process of capital account liberalisation, where there was a good deal of stress on ‘sequencing’ - that is on liberalising potentially more stable, longer-term, capital inflows initially, rather than short-term borrowing. But they related particularly to three key conditions for living with freedom of capital movements. The first was “transparency”.
There were certainly adjustments to macro-economic policy that needed to be made - a more flexible exchange rate regime in some cases, for example, or a somewhat tighter overall macro-economic stance, with perhaps some adjustment between fiscal and monetary policy. And, once the capital outflow had started, macro-economic adjustment had to be harsher than might otherwise have been necessary, in order to re-establish confidence. But there are real dangers in extreme market movements or in excessively severe macro-economic adjustment to contain them. That could cause a vicious circle of domestic default and systemic financial weakness in the affected country. And that could have seriously adverse implications - in terms of both financial and economic knock-on-effects - for the global economy. That, essentially, is why it may be in the self-interest of the international community to attempt to mitigate the market and macro-economic adjustment pressures by providing financial support. It is why the international community responded to the crisis in Asia by promptly offering very large amounts of official assistance - $ billion in the case of Thailand, $ billion for Indonesia and $ billion for South Korea. But such official financial help cannot be unlimited and it cannot be provided without strings. It, too, has real dangers. If it were too readily forthcoming it could encourage “moral hazard”, especially by encouraging commercial lenders - particularly foreign currency creditors - in the belief that they will be bailed out if things go wrong.