While important progress is being made, this has recently been overshadowed by financial turmoil in the region, and the focus of attention has as a consequence been diverted to the provision of credit to assist Asian economies in need in making structural adjustments. We had the financial package for Thailand, and there have since been many ideas put forward for a general facility of some sort. These are being actively considered and we are taking an active part in the discussion, although there are currently still quite significant differences of opinion. The position that we are taking is that whilst regional solidarity is highly appropriate for a region with increasing economic, trade and financial integration and increasing interdependence, any regional financial arrangement must be structured with regard to international standards and practices. It would not be appropriate, for example, for a regional institution, if there is to be one, to prescribe medicine, along with financial assistance, that is different from those prescribed by the International Monetary Fund. It would immediately be seen as a soft window for financial support, thus creating moral hazard problems. I am hopeful that well-structured arrangements will emerge in due course. Certainly the climate is right and the momentum is there. 14. Perhaps I should take this opportunity to put the recent financial turmoil in Asia in a global perspective. First, the world is in very good economic shape. World economic output is estimated by the IMF to expand by 4-4½% in 1997 and 1998, the strongest pace in a decade.
In the OECD countries, especially in the US, there is solid growth with low inflation, BIS Review 112/1997  -4-  while we are seeing signs of broad-based recovery in Europe. Only in Asia have we seen a slowing of growth, but the growth rates have still been high by world standard and last year Japan grew by 3.6%, the fastest since the late 1980s. 15. Second, because of high global liquidity and low inflation, asset markets around the world are at record levels. Capital flows have increased with globalization, and added to record high stock and bond prices. The fact that Europe has recently raised interest rates, and the Fed is considering whether to pre-emptively raise rates to prevent wage-push inflation, has made the financial markets much more nervous despite the growth environment. This explains why the financial volatility in Asia has become global in nature. It is very flattering to know that Hong Kong can move even the mighty US and European markets, as much as the other way around. 16. Third, Asian fundamentals, and especially Hong Kong fundamentals, are strong. But there have been different degrees of strength in Asia with respect to the fundamentals. The adjustments in exchange rates of currencies in this region reflect partly the market perception of fundamentals. But as I said recently at the Per Jacobsson lecture, there is no perfect exchange rate regime.