§  6  Increases and decreases in financial flows - - and the fluctuations in pricing that naturally accompany positive or negative trends in policies and economic and financial performance - - are a reflection of, and act as a natural brake on, the development of imbalances. BIS Review 61/2002  §  G  But an assertion of control by the international community risks diverting attention from the policies of the local authorities. As a result, denial and delay, aggravating factors in almost every crisis, may well continue and be exacerbated. And then, as a practical matter, once market processes have been stopped, how and when do you get things started again, particularly if needed corrective policies still have not been convincingly and transparently implemented? To sum up, I believe the one-size-fits-all disposition inherent in a preemptive approach risks making situations much worse than they need to be. The only thing that strikes me as predictable under such an approach would be that market access would be harmed across the board. Just as bailouts risk encouraging too much risk taking, efforts to orchestrate preemptive bail-ins may encourage too little. •  Underlying the suggestions that I have made is a firm belief that the success of our approaches to crisis management needs to be viewed and assessed with a wide focus. Certainly, there is the question of efficacy in containing the crisis at hand, and the balance between this and the costs, actual and potential, to the public sector.
The approach needs to be marketbased, in part because that is what the game is all about. Today, the relevant considerations for crisis management relate more to markets and the problem of restoring market confidence, than to individual borrowers and creditors. G  To the extent that systemic concerns pertain, they more often relate to the risks of market disruption and over-adjustment than to potential domino effects caused by the failure or impairment of key institutions. Also, in today’s environment, a marketbased approach is much more feasible, because financial recoveries can proceed more rapidly than in the past. G  To be more specific, in my view, although much has been made of the difficulties in achieving debtor workouts, the truly thorny issues associated with emerging market financial crises usually relate to the following:  G  4  §  containing the fallout to domestic financial systems and to local consumer and investor confidence,  §  minimizing contagion and spillovers to other cases and markets,  §  maintaining or restoring market access, particularly for private sector borrowers, and,  §  most importantly, encouraging policy reform so that a given crisis falls as closely as possible to the liquidity, rather than the solvency, end of the spectrum. Working with the grain means recognizing the realities and limitations inherent in the current market structure and its functioning, and tailoring approaches to the specifics of individual cases. This involves acknowledging that attempts to impose solutions from outside are unrealistic and potentially counterproductive.