This checked the supply of credit, which in some cases caused a dramatic increase in lending rates to these countries relative to countries with a better credit rating. Exchange rate pressure grew and there have been acute currency crises, with collapsing exchange rates and thereby increased uncertainty. BIS Review 52/1999  4  It seems that the stronger the inflow of credit in the first phase, the more serious have been the consequences in the second, with declining production and rising unemployment. The reversal of capital flows, if these were channelled through the banks, has also created difficulties in the financial system. In many instances the financial system proved to lack the resilience to cope with the huge flows. The crisis that began in Asia in the autumn of 1997 had extensive contagious effects in other countries. Some of the latter were countries that had conducted a broadly judicious economic policy and were thus hit undeservedly. Singapore and Australia are two examples. Others were countries with their own economic problems. One was Russia, which was obliged to suspend foreign debt payments in August. This elicited contagious effects that hardly anyone had foreseen. The turbulence spread to financial capital’s citadel when an American hedge fund, Long-Term Capital Management, encountered extensive problems that had repercussions throughout the US capital market. Some of the crises that have begun in emerging markets have also been compounded by problems of a different sort. The Asian crisis, as well as other financial crises, included elements of nepotism and corruption.
The standard for countries wishing to participate in the international capital market—the Special Data Dissemination Standard—is being revised to give a better account of the level of foreign reserves and the debt position in individual countries. At country level, moreover, a code for monetary policy transparency and measures for maintaining financial stability is being drawn up by the IMF together with the BIS, central banks, supervisors, the World Bank and the OECD. A fiscal policy code is already in place. 4. Managing future crises Even with these measures, we have probably not yet seen the last financial crisis. A readiness for the management of future crises therefore needs to be created. A central issue in international discussions is the distribution of risks among the parties concerned. While the IMF has been provided with additional financial resources, it neither can nor should be prepared to contribute the main part of what may be needed in a crisis. This is because expectations that any costs will always be carried by someone else can result in an overall increase in exposure to risks, the problem of moral hazard. Such expectations are liable to drive up credit supply and demand and can influence private agents as well as national policy-makers. One way of dealing with moral hazard among private investors is to arrange for them to carry a larger share of the burden in a crisis.