Moreover, much of this was funded by short term capital inflows. When the asset bubble collapsed the banks and the companies or individuals who had borrowed foreign currency to finance the investments were unable to repay. The problem was compounded by the depreciation of domestic currencies that increased the real burden of debt repayments. •  Second, banks in a number of economies were ordered or persuaded by governments to lend heavily to companies that were not commercially viable. This “policy” lending destroyed the banks’ incentive to exercise credit judgment and allowed the companies concerned to become overleveraged and thus vulnerable to economic downturn. 1  BIS Review 53/1999  •  Third, over-exposure to connected parties was endemic in some economies. Such lending is not usually made at arm’s length and will seldom satisfy normal credit criteria. •  Fourth, partly because much lending in the region was politically influenced or insider in nature, there was not much opportunity to develop a proper credit culture or adequate credit skills. Name lending and relationship lending were widespread. This went hand in hand with an over-reliance on collateral whose value of course diminishes sharply when asset values collapse - assuming of course that the security can be enforced in the first place, which has certainly not been the case in countries such as Thailand. •  Fifth, a feature of the lack of credit skills was a failure to recognize bad debts and to face up to the full scale of the bad debt problem.
Global fiscal and current account imbalances The negative correlation recorded during the crisis between the current account and the fiscal balances has been largely in line with expectations. In the long run, however, current account deficits could well increase again globally if the fiscal expansion which has taken place in recent years is not reined in. In fact, the available evidence suggests that the adjustment of current account imbalances has so far been largely cyclical. The reduction in trade imbalances following the crisis has slowed and, in several cases, has started to reverse. In both the United States and China we are already close to pre-Lehman levels in absolute terms. The sheer asymmetry in size and composition of the fiscal stimulus in advanced countries compared with any measures taken in emerging economies is likely to magnify the expected resurgence of current account imbalances. Similarly to the pre-crisis situation, advanced economies’ indebtedness would be financed with capital flows from emerging economies. This implies not only a massive misallocation of global capital, but also undermines the credibility of any initiative to rebalance savings and investments both within and across the main regions of the global economy. As a result, it risks creating – once again I should say – delusional expectations in financial markets about the sustainability of imbalanced financial and trade flows. Policy discussions are likely to return to where they were a few years ago. The crisis has given us the opportunity to question their analytical and practical basis.