The key question is whether the international banks’ review of lending commitments will be extended to include other groups of customers. Perhaps their lending policies will become generally more restrictive. One sign of this is that the flow of loans to many countries which are regarded as emerging markets has virtually dried up. The interest rate differential between treasury securities issued by such countries and by the US, for instance, has widened dramatically this autumn. In turbulent times, moreover, banks have difficulty in fulfilling their function, which is highly important in a market system, of distinguishing sound borrowers from others. The result may be that their provision of credit is completely suspended. It is already evident that in their assessments, various players are tending to disregard more fundamental factors. An example of this is the weakening of the krona. Despite good economic fundamentals in Sweden, since the summer the krona has weakened sharply and last week this tendency accelerated. In a matter of days the exchange rate with the German mark declined by up to 5 per cent. In that situation the Riksbank decided to intervene in the foreign exchange market, which nowadays is unusual. We did so to demonstrate that we considered the krona’s fall was excessive in relation to the fundamental state of the economy and that the time had to come to pause and reconsider the situation.
Instances of “follow-the-leader” behaviour occur not just in bullish stockmarkets but also in the currency market when many countries with different conditions are lumped together in a general assessment. Market players must assess each country separately. Central bank interventions under certain circumstances are uncommon with a flexible exchange rate regime but they do occur. I cannot exclude the possibility of the Riksbank intervening again if this were to be called for. Growth in the industrialised countries may thus be affected by the real economic crisis which has hit the emerging markets and resulted in a sharp fall in output there. The magnitude of such an effect will be highly dependent on confidence - confidence among households and firms so that they are prone to consume and invest, confidence among banks so that they are prone to provide credit. The Riksbank’s appraisal In the Riksbank’s most recent Inflation Report we counted on an OECD area growth rate of around 2 per cent in the years ahead. It should be borne in mind that this figure represented the latest in a series of downward revisions over the past twelve months. Since the publication of the September Report, our assessment of tendencies in the rest of the world has not changed. Considering the mechanisms to which I have just referred, however, it is not surprising that our Report highlighted the risks associated with the external situation. This situation is unusually difficult to evaluate and has to be followed closely.