We do not know to what extent the present course of events is affecting how households and firms appraise both their own and their country’s economy. A good many people and businesses will no doubt become more cautious about buying a car or making investments for the future, for example. Here we have a potentially larger effect that must be monitored very carefully. Some guidance is to be had from various countries’ survey data. A number of the results point to a fall in consumer confidence. Neither can one draw any precise conclusions about the magnitude of the effect that may come from increased prudence in banking around the world. The global unrest has left its mark. No one foresaw that Malaysia would introduce foreign exchange controls. Nor did any banker believe that Russia would go so far as to suspend payments on debt denominated in roubles. People BIS Review 83/1998  -3-  seem to be thinking that if such things could happen in Malaysia and Russia, perhaps they can happen elsewhere. The problems with the hedge fund Long-Term Capital is another matter that has made international bankers more wary. Although their loans to this fund were secured, the total stock of loans from all banks and the total amount of collateral were too large for direct disposal in the market; that would have caused prices to fall, leading to losses for the banks. Under such circumstances it is hardly surprising that international banks also review their lending commitments to other funds.
The problems showed up first in Thailand but soon spread to South Korea, Malaysia and Indonesia. While the deterioration in these countries was partly a consequence of the economic stagnation in Japan, perhaps the main cause of the acute crisis was that a strong capital inflow from the West, above all from the United States, suddenly turned into an outflow. For various reasons, political as well as economic, assessments of the development potential in the countries in question had been gradually revised. More recently the problems have spread to Russia, where the economic situation - as in Japan - was already troublesome. The situation became so precarious that the Russian government suspended payments on government debt denominated in the domestic currency. That was a very far-reaching decision. Since then, capital outflows have also hit Latin America. For a long time it seemed that the Asian crisis would not have sizeable repercussions in industrialised countries in the West. The direct real economic impact was judged to be small and at first it looked as though the main effect would be a tendency to keep inflation down, while growth would remain good. As Russia also encountered increasing problems, however, there was growing concern and the crisis BIS Review 83/1998  -2-  accordingly began to spread even to financial markets in the West. During the summer, share prices began to fall. Credit risks rose. Investors and banks started to become increasingly cautious, partly on account of some losses.