It depends upon the good sense and judgment of key players all around the world - the governments and central banks as well as major market participants in both the major creditor and the debtor countries, as well as the international organisations. My impression is that after the initial shocks, in which market adjustments have been massively overdone, the key players are now co-operating more effectively to bring about stabilisation. Within the constraints imposed upon it, the IMF in particular is playing a very positive leading role. And I particularly welcome the constructive part which the major commercial banks, from all the main creditor countries, are now playing in rolling over their loans to Korea. This has already helped to begin to stabilise the situation there, and it has provided a breathing space while new market financing is organised. Together with the availability of the further official support already committed, this, I am reasonably confident, will enable Korea to regain control of its external position, and go on to rebuild confidence on the back of the underlying strengths of its economy and an already rapidly improving current account. That, in turn, would do more than anything to help to re-establish stability elsewhere. Stabilisation, of course, is not the end of the story - it is simply the necessary first step. Even assuming, as I do, that we are able in fact to contain the immediate financial turmoil, there is bound to be a substantial economic aftershock.
Complex and opaque links between government, financial institutions and non-financial companies made it difficult for outsiders to understand the real nature of their exposures. Financial markets were not well developed, leaving the system heavily dependent upon the banks. There was inadequate regulatory or supervisory oversight. There was widespread government influence over financial flows, which importantly also contributed to a perception that much of the borrowing was effectively under-written by the government. The list could go on. The problem was compounded by the absence of any real perception of exchange rate risk. Borrowers were evidently confident that governments would maintain their exchange rate pegs against the dollar so that unhedged foreign currency debt, much of it at short term, appeared a cheap alternative to domestic currency borrowing. The result was a build-up of short-term private sector foreign currency liabilities, by banks and non-banks, which was not fully appreciated, and which left the Asian economies especially vulnerable to a flight of capital in the event of a change in sentiment. The problem is that national authorities can create their domestic currency, if they choose to do so, even if it leads to inflation, but they cannot simply create foreign currencies in the same way. So, once the run started, it was violent and contagious. There are certainly all sorts of lessons to be drawn from Asia’s experience for the future relating to the structural weaknesses in the financial system that allowed the problem to emerge.