Publication: Uluslararası likidite sorunu çerçevesinde Şili, Meksika ve Asya krizlerinin incelenmesi ve finansal krizlerin değerlendirilmesi
Abstract
1. GİRİŞ Japonya'nın liderliğinde Güney Kore, Tayvan, Singapur, Hong-Kong başta olmak üzere Endonezya, Filipinler, Malezya geçtiğimiz kırk yılda dünyada meydana gelen en çarpıcı ekonomik kalkınma mucizesini gerçekleştirmişlerdir. Japonya haricindeki Doğu Asya ülkelerinin büyük savaşlara girmemeleri, askeri harcamalarını diğer bölge ülkelerinden daha az seviyede tutmaları, uzun yıllar izlenen yatırım-üretim-ihracat bileşkeli teşvik politikaları ve ucuz işgücü hem büyüme hızlarının oldukça yüksek oluşmasına ve hem de ihracat rekabet güçlerinin artmasına sebep olmuştur. Bunun sonucunda Asya ülkeleri ekonomik gelişmişlik yolunda önemli adımlar kaydetmişlerdir. Kriz öncesi son 30 yıllık dönemde kişi başına milli gelir G.Kore'de 10 kat, Tayland'da 5 kat ve Malezya'da 4 kat artmış, Hong Kong ve Singapur'da kişi başına milli gelir rakamları pek çok sanayileşmiş ülkeyi geride bırakmıştır. Krize gelinceye kadar bölge, gelişmekte olan ülkelere akan yabancı sermayenin yaklaşık yarısını kendisine çekmeyi başarmış ve dünya ticareti içerisindeki payını iki kat artırmıştır. 2 Temmuz 1997'de Tayland Merkez Bankası'nın Baht'ı kontrollü olarak dalgalanmaya bırakacağını açıklaması ve IMF'den teknik yardım istemesiyle birlikte Baht kısa sürede %20'ye varan oranda devalüe edilmiş ve bu durum bir anlamda sonun başlangıcı olmuştur. Takip eden günler içerisinde ASEAN-5 olarak bilenen Endonezya, Malezya, Filipinler, Singapur, Tayland ile Güney Kore başta olmak üzere Hong-Kong, Rusya ve gelişmekte olan diğer ülkeler bu krizden etkilenmişlerdir. Tayland para birimi Baht'ın dalgalanmaya bırakılmasıyla başlayan Asya Krizi, bölge ülkelerinde para birimlerinin, menkul kıymet ve emlak borsalarının çökmesine neden olmuş, zincirleme iflasları beraberinde getirmiştir. Kriz öncesi dönemde göstermiş oldukları ekonomik performansla uluslararası ekonomi ve finans çevrelerinde model olarak değerlendirilen ve yabancı sermayenin gözdesi olan bölge ülkeleri, ekonomik ve sosyal anlamda sıkıntılı bir döneme girmiş, yabancı sermaye bölgeden adeta uçarcasına kaçmıştır. Gelişmekte olan pek çok ekonomiyi olumsuz yönde etkileyen bu kriz, bir ara bütün dünyaya yayılma ihtimali olan global bir kimliğe bürünmüştür. Özellikle 1990'lı yıllarda birbirinden coğrafi olarak uzak üç bölgede ortaya çıkan krizleri; (1992-93'de Avrupa Döviz Kuru Mekanizması (ERM) krizi, 1994-95'de Latin Amerika krizi ve 1997-98'de Asya krizi) en basit ifadeyle yatırımcıların para birimlerinin devalüe edileceğine olan inancıyla açıklamak mümkün olmakla birlikte her yeni kriz iktisat yazını alanında yeni soru işaretlerini, yeni teorik çalışmaları ve hipotezleri beraberinde getirmiştir. Bu çalışmalar finansal krizlerin ortaya çıkışını açıklamayı hedef edinmiş teorik modellerin oluşturulmasından, kriz indikatörlerinin belirlenmesine, kriz tahmin modelleri geliştirilmesinden, kriz sırasında ve kriz sonrası dönemde izlenen ekonomik politikaların değerlendirilmesine kadar geniş bir yelpazeyi kapsamaktadır. Bu çalışmada finansal krizlere ilişkin olarak kavramsal bir çerçeve çizilmeye çalışılmış, teorik bir takım bilgiler derlenmiş ve Asya krizi, daha önce ortaya çıkan Şili ve Meksika krizleriyle birlikte, ekonomilerin kimi zaman içine düştükleri uluslararası likidite sıkıntısı çerçevesinde incelenmiştir. Sonuç bölümünde de değinildiği gibi finansal krizlerin belirlenmesinde önemli bir indikatör olan uluslararası likidite sıkıntısını ortaya çıkaran faktörler üzerinde durulmuş, kriz sonrasında daha sık gündeme gelen bazı sorulara kısa yanıtlar aranmıştır.
In the 1990s, currency crisis in Europe, Mexico and Southeast East Asia have drawn worldwide attention to speculative attacks on government-controlled exchange rates. To improve understanding of these events, research has proceeded on both theoretical and empirical fronts. The purpose of this paper is to provide some perspective on this research and to argue that the 1997-98 crisis in Asia were in fact a consequence of international illiquidity. Types of Crisis A number of broad types of economic or financial crisis can be distinguished. A currency crisis may be said to occur when a speculative attack on the exchange value of a currency results in a devaluation (or sharp depreciation) of the currency, or forces the authorities to defend the currency by expending large volumes of international reserves or by sharply raising interest rates. A banking crisis refers to a situation in which actual or potential bank runs or failures induce banks to suspend the internal convertibility of their liabilities or which compels the government to intervene to prevent this by extending assistance on a large scale. A banking crisis may be so extensive as to assume systemic proportions. Systemic financial crisis are potentially severe disruptions of financial markets that, by impairing markets ability to function effectively, can have large adverse effects on the real economy. A systemic financial crisis may involve a currency crisis, but a currency crisis does not necessarily involve serious disruption of the domestic payments system and thus may not amount to a systemic financial crisis. Finally, a foreign dept crisis is a situation in which a country cannot service its foreign dept, whether sovereign or private. Crisis of all types have often had common origins the buildup of unsustainable economic imbalances and misalignments in asset prices or exchange rates, often in a context of financial sector distortions and structural rigidities. A crisis may be triggered by a sudden loss of confidence in the currency or banking system, prompted by such developments as a sudden correction in the asset prices, or by disruption to credit or external financing flows that expose underlying economic and financial weaknesses. Crisis may involve sharp declines in asset prices, and failures of financial institutions and non-financial corporations. Theoretical Models of Crisis The early work now called first generation models show how a fixed exchange-rate policy combined with excessively expansionary pre-crisis fundamental push the economy into crisis, with the private sector trying to profit from dismantling the inconsistent policies. The canonical crisis model derives from work done in the mid-1970s by Stephen Salant, at that time at the Federal Reserve's International Finance Section. Salant's concern was not with currency crisis, but with the pitfalls of schemes to stabilize commodity prices. Such price stabilization, via the establishment of international agencies that would buy and sell commodities, was a major demand of proponents of the so-called New International Economic Order. Salant, however, argued on theoretical grounds that such schemes would be subject to devastating speculative attacks. His starting point was the proposition that speculators will hold an exhaustible resource if and only if they expect its price to rise rapidly enough to offer them a rate of return equivalent (after adjusting for risk) to that on other assets. But what will happen, asked Salant, if an official price stabilization board announces its willingness to buy or sell the resource at some fixed price? As long as the price is above the level that would prevail in the absence of the board - that is, above the Hotelling path - speculators will sell off their holdings, reasoning that they can no longer expect to realize capital gains. Thus the board will initially find itself acquiring a large stockpile. Eventually, however, the price that would have prevailed without the stabilization scheme - the shadow price - will rise above the board's target. At that point speculators will regard the commodity as a desirable asset, and will begin buying it up; if the board continues to try to stabilize the price, it will quickly - instantaneously, in the model - find its stocks exhausted. According to first generation models, canonical crisis model, the logic of currency crisis was the same as that of speculative attack on a commodity stock. Suppose speculators were to wait until the reserves were exhausted in the natural course of events. At that point they would know that the price of foreign exchange, fixed up to now, would begin rising; this would make holding foreign exchange more attractive than holding domestic currency, leading to a jump in the exchange rate. But foresighted speculators, realizing that such a jump was in prospect, would sell domestic currency just before the exhaustion of reserves - and in so doing advance the date of that exhaustion, leading speculators to sell even earlier, and so on ... The result would be that when reserves fell to some critical level - perhaps a level that might seem large enough to finance years of payments deficits - there would be an abrupt speculative attack that would quickly drive those reserves to zero and force an abandonment of the fixed exchange rate. The canonical currency crisis model, then, explains such crisis as the result of a fundamental inconsistency between domestic policies - typically the persistence of money-financed budget deficits - and the attempt to maintain a fixed exchange rate. This inconsistency can be temporarily papered over if the central bank has sufficiently large reserves, but when these reserves become inadequate speculator force the issue with a wave of selling. Newer models, the second generation models, are designed to capture features of the speculative attacks in Europe and in Mexico in the 1990s These attacks differ from the ones studied by the first-generation in two important ways: (1) in the countries experiencing the attacks, the state of the business cycle and the banking system as well as tight borrowing constraints imposed by monetary policies in partner countries handcuffed authorities and prevented them from using traditional methods to support exchange-rate parities; (2) the recent speculative attacks, particularly some of those Europe, seemed unrelated to the economic fundamentals predicted by the first-generation models. Perhaps the best way to describe what is wrong with the canonical crisis model is to say that it represents government policy (though not the market response) in a very mechanical way. The government is assumed to blindly keep on printing money to cover a budget deficit, regardless of the external situation; the central bank is assumed to doggedly sell foreign exchange to peg the exchange rate until the last dollar of reserves is gone. In reality the range of possible policies is much wider. Governments can and do try to condition fiscal policies on the balance of payments. Meanwhile, central banks have a variety of tools other than exchange market intervention available to defend the exchange rate, including in particular the ability to tighten domestic monetary policies. Obviously there are costs to such policies; but it may be important to recognize that the defense of an exchange rate is a matter of tradeoffs rather than a simple matter of selling foreign exchange until the money is gone. So-called second-generation models require three ingredients. First, there must be a reason why the government would like to abandon its fixed exchange rate. Second, there must be a reason why the government would like to defend the exchange rate - so that there is a tension between these motives. Finally, in order to create the circular logic that drives a crisis, the cost of defending a fixed rate must itself increase when people expect (or at least suspect) that the rate might be abandoned. In order for a government to have a real incentive to change the exchange rate, something must be awkwardly fixed in domestic currency. One obvious possibility is a large debt burden denominated in domestic currency - a burden that a government might be tempted to inflate away, but cannot as long as it is committed to a fixed exchange rate. Another possibility is that the country suffers from unemployment due to downwardly rigid nominal wage rate, and would like to adopt a more expansionary monetary policy, but cannot as long as it is committed to a fixed exchange rate. Given a motive to depreciate, why would a government choose instead to defend a fixed rate? One answer might be that it believes that a fixed rate is important in facilitating international trade and investment. Another might be that it has a history of inflation, and regards a fixed rate as a guarantor of credibility. Finally, the exchange rate often takes on an important role as a symbol of national pride and/ or commitment to international cooperation (as in the European Monetary System). Finally, why would public lack of confidence in the maintenance of a fixed rate itself have the effect of making that rate more difficult to defend? Here there is a somewhat subtle distinction between two variants of the story. Some modelers emphasize that a fixed rate will be costly to defend if people expected in the past that it would be depreciated now. For example, debt-holders might have demanded a high rate of interest in anticipation of depreciation, therefore making the current debt burden so large that it is hard to manage without depreciation. Or unions, expecting depreciation, might have set wages at levels that leave the country's industry uncompetitive at the current exchange rate. The alternative is to suppose that a fixed rate is costly to defend if people now expect that it will be depreciated in the future. The usual channel involves short-term interest rates: to defend the currency in the face of expectations of future depreciation requires high short-term rates; but such high rates may either worsen the cash flow of the government (or indebted enterprises) or depress output and employment. International Liquidity Problem and Asian Liquidity Crisis A country's financial system is internationally illiquid if its potential short-term obligations in foreign currency exceed the amount of foreign currency it can have access to in short notice. This condition is crucial for the existence of financial crisis and/ or exchange rate collapses. Illiquidity is partially captured by the ratio of M2 to international reserves. When we turn our attention to Asian crisis, we saw that Asian countries were in a state of international illiquidity, which made them vulnerable to crisis. Three factors are crucial for the deterioration of international liquidity position. Financial liberalization prior to the crisis: In the late 1980s and the 1990s the governments of the Asian-5 countries implemented policies designs to move away from financial repression and towards a freer, more market oriented financial system. This trend included the regulation of interest rates and the easing of reserve requirements on banks; in Korea, for instance, lending interest rates were liberalized between 1991 and 1993, and marginal reserve requirements, which had been as high as 30 percent around 1990, were reduced to seven points in 1996. In addition, policies oriented towards the promotion of competition and entry of financial institution were enacted: requirements on the opening and branching of banks were relaxed in Indonesia and Malaysia in 1988-89; restrictions on activities of foreign banks were eased in Korea and Thailand in 1991 and 1993 respectively. Clearly, lower reserve requirements allow the banking industry to maintain a lower degree of liquidity. While this may be desirable on efficiency grounds, it directly exacerbates international illiquidity and increases the possibility of financial runs. Increased competition typically force banks to offer more attractive terms (higher interest rates) to depositors. This improves social welfare in the absence of bank runs. But it also implies that the short term liabilities of the banking system, in this case the face value of demand deposits, must increase, impairing international liquidity. An unprecedented increase in short term foreign liabilities: It was the explosive growth of short-term international dept, that accounts for the change in the international liquidity position of Asian countries. A notable feature of the Asian crisis was the extent to which foreign investors, especially foreign commercial banks, increased their loans to the Asian economies up to the onset of the crisis. In addition BIS data show that most of the loans by foreign banks were short term ones. For Asia, the share of loans with maturity over a year fell from about 38 percent in 1990 to less than 30 percent in mid 1997. An increase in foreign-currency dept: In the 1990s not only the maturity but also the currency composition of the liabilities of the financial system of the Asian countries was conducive fragility. Since the currency composition of the financial system's domestic liabilities did not change much, the increase in foreign loans implied also sharp rise in the volume of total obligations denominated in foreign currency. Financial systems that are internationally illiquid live at the mercy of exogenous economic conditions and of the moods of depositors and creditors. If initial liabilities are large relative to liquid assets, then an exogenous shock (such as an increase in the worlds interest rate) or a sudden loss of confidence may prompt holders of the system's liabilities to attempt to liquidate them. But they cannot all the successful, since international illiquidity means, precisely, that the foreign currency value of their holdings cannot be covered by the amount of international liquidity available to the system. If a crisis does take place, financial institutions may be forced to call in loans, interrupting productive projects, and sell fixed assets such as land, causing real estate and stock prices to plunge. The government may try to help, but the crisis is one of excess demand for foreign currency, and hence the government may see its own international reserves plunge in the struggle. In conclusion, in the light of Asian episode some policy issues should be considered carefully; these are: financial liberalization and fragility, dealing with troubled banks at a time of crisis, capital inflows and short-term dept, fixed versus flexible exchange rates and a case for an international lender of last resort.
In the 1990s, currency crisis in Europe, Mexico and Southeast East Asia have drawn worldwide attention to speculative attacks on government-controlled exchange rates. To improve understanding of these events, research has proceeded on both theoretical and empirical fronts. The purpose of this paper is to provide some perspective on this research and to argue that the 1997-98 crisis in Asia were in fact a consequence of international illiquidity. Types of Crisis A number of broad types of economic or financial crisis can be distinguished. A currency crisis may be said to occur when a speculative attack on the exchange value of a currency results in a devaluation (or sharp depreciation) of the currency, or forces the authorities to defend the currency by expending large volumes of international reserves or by sharply raising interest rates. A banking crisis refers to a situation in which actual or potential bank runs or failures induce banks to suspend the internal convertibility of their liabilities or which compels the government to intervene to prevent this by extending assistance on a large scale. A banking crisis may be so extensive as to assume systemic proportions. Systemic financial crisis are potentially severe disruptions of financial markets that, by impairing markets ability to function effectively, can have large adverse effects on the real economy. A systemic financial crisis may involve a currency crisis, but a currency crisis does not necessarily involve serious disruption of the domestic payments system and thus may not amount to a systemic financial crisis. Finally, a foreign dept crisis is a situation in which a country cannot service its foreign dept, whether sovereign or private. Crisis of all types have often had common origins the buildup of unsustainable economic imbalances and misalignments in asset prices or exchange rates, often in a context of financial sector distortions and structural rigidities. A crisis may be triggered by a sudden loss of confidence in the currency or banking system, prompted by such developments as a sudden correction in the asset prices, or by disruption to credit or external financing flows that expose underlying economic and financial weaknesses. Crisis may involve sharp declines in asset prices, and failures of financial institutions and non-financial corporations. Theoretical Models of Crisis The early work now called first generation models show how a fixed exchange-rate policy combined with excessively expansionary pre-crisis fundamental push the economy into crisis, with the private sector trying to profit from dismantling the inconsistent policies. The canonical crisis model derives from work done in the mid-1970s by Stephen Salant, at that time at the Federal Reserve's International Finance Section. Salant's concern was not with currency crisis, but with the pitfalls of schemes to stabilize commodity prices. Such price stabilization, via the establishment of international agencies that would buy and sell commodities, was a major demand of proponents of the so-called New International Economic Order. Salant, however, argued on theoretical grounds that such schemes would be subject to devastating speculative attacks. His starting point was the proposition that speculators will hold an exhaustible resource if and only if they expect its price to rise rapidly enough to offer them a rate of return equivalent (after adjusting for risk) to that on other assets. But what will happen, asked Salant, if an official price stabilization board announces its willingness to buy or sell the resource at some fixed price? As long as the price is above the level that would prevail in the absence of the board - that is, above the Hotelling path - speculators will sell off their holdings, reasoning that they can no longer expect to realize capital gains. Thus the board will initially find itself acquiring a large stockpile. Eventually, however, the price that would have prevailed without the stabilization scheme - the shadow price - will rise above the board's target. At that point speculators will regard the commodity as a desirable asset, and will begin buying it up; if the board continues to try to stabilize the price, it will quickly - instantaneously, in the model - find its stocks exhausted. According to first generation models, canonical crisis model, the logic of currency crisis was the same as that of speculative attack on a commodity stock. Suppose speculators were to wait until the reserves were exhausted in the natural course of events. At that point they would know that the price of foreign exchange, fixed up to now, would begin rising; this would make holding foreign exchange more attractive than holding domestic currency, leading to a jump in the exchange rate. But foresighted speculators, realizing that such a jump was in prospect, would sell domestic currency just before the exhaustion of reserves - and in so doing advance the date of that exhaustion, leading speculators to sell even earlier, and so on ... The result would be that when reserves fell to some critical level - perhaps a level that might seem large enough to finance years of payments deficits - there would be an abrupt speculative attack that would quickly drive those reserves to zero and force an abandonment of the fixed exchange rate. The canonical currency crisis model, then, explains such crisis as the result of a fundamental inconsistency between domestic policies - typically the persistence of money-financed budget deficits - and the attempt to maintain a fixed exchange rate. This inconsistency can be temporarily papered over if the central bank has sufficiently large reserves, but when these reserves become inadequate speculator force the issue with a wave of selling. Newer models, the second generation models, are designed to capture features of the speculative attacks in Europe and in Mexico in the 1990s These attacks differ from the ones studied by the first-generation in two important ways: (1) in the countries experiencing the attacks, the state of the business cycle and the banking system as well as tight borrowing constraints imposed by monetary policies in partner countries handcuffed authorities and prevented them from using traditional methods to support exchange-rate parities; (2) the recent speculative attacks, particularly some of those Europe, seemed unrelated to the economic fundamentals predicted by the first-generation models. Perhaps the best way to describe what is wrong with the canonical crisis model is to say that it represents government policy (though not the market response) in a very mechanical way. The government is assumed to blindly keep on printing money to cover a budget deficit, regardless of the external situation; the central bank is assumed to doggedly sell foreign exchange to peg the exchange rate until the last dollar of reserves is gone. In reality the range of possible policies is much wider. Governments can and do try to condition fiscal policies on the balance of payments. Meanwhile, central banks have a variety of tools other than exchange market intervention available to defend the exchange rate, including in particular the ability to tighten domestic monetary policies. Obviously there are costs to such policies; but it may be important to recognize that the defense of an exchange rate is a matter of tradeoffs rather than a simple matter of selling foreign exchange until the money is gone. So-called second-generation models require three ingredients. First, there must be a reason why the government would like to abandon its fixed exchange rate. Second, there must be a reason why the government would like to defend the exchange rate - so that there is a tension between these motives. Finally, in order to create the circular logic that drives a crisis, the cost of defending a fixed rate must itself increase when people expect (or at least suspect) that the rate might be abandoned. In order for a government to have a real incentive to change the exchange rate, something must be awkwardly fixed in domestic currency. One obvious possibility is a large debt burden denominated in domestic currency - a burden that a government might be tempted to inflate away, but cannot as long as it is committed to a fixed exchange rate. Another possibility is that the country suffers from unemployment due to downwardly rigid nominal wage rate, and would like to adopt a more expansionary monetary policy, but cannot as long as it is committed to a fixed exchange rate. Given a motive to depreciate, why would a government choose instead to defend a fixed rate? One answer might be that it believes that a fixed rate is important in facilitating international trade and investment. Another might be that it has a history of inflation, and regards a fixed rate as a guarantor of credibility. Finally, the exchange rate often takes on an important role as a symbol of national pride and/ or commitment to international cooperation (as in the European Monetary System). Finally, why would public lack of confidence in the maintenance of a fixed rate itself have the effect of making that rate more difficult to defend? Here there is a somewhat subtle distinction between two variants of the story. Some modelers emphasize that a fixed rate will be costly to defend if people expected in the past that it would be depreciated now. For example, debt-holders might have demanded a high rate of interest in anticipation of depreciation, therefore making the current debt burden so large that it is hard to manage without depreciation. Or unions, expecting depreciation, might have set wages at levels that leave the country's industry uncompetitive at the current exchange rate. The alternative is to suppose that a fixed rate is costly to defend if people now expect that it will be depreciated in the future. The usual channel involves short-term interest rates: to defend the currency in the face of expectations of future depreciation requires high short-term rates; but such high rates may either worsen the cash flow of the government (or indebted enterprises) or depress output and employment. International Liquidity Problem and Asian Liquidity Crisis A country's financial system is internationally illiquid if its potential short-term obligations in foreign currency exceed the amount of foreign currency it can have access to in short notice. This condition is crucial for the existence of financial crisis and/ or exchange rate collapses. Illiquidity is partially captured by the ratio of M2 to international reserves. When we turn our attention to Asian crisis, we saw that Asian countries were in a state of international illiquidity, which made them vulnerable to crisis. Three factors are crucial for the deterioration of international liquidity position. Financial liberalization prior to the crisis: In the late 1980s and the 1990s the governments of the Asian-5 countries implemented policies designs to move away from financial repression and towards a freer, more market oriented financial system. This trend included the regulation of interest rates and the easing of reserve requirements on banks; in Korea, for instance, lending interest rates were liberalized between 1991 and 1993, and marginal reserve requirements, which had been as high as 30 percent around 1990, were reduced to seven points in 1996. In addition, policies oriented towards the promotion of competition and entry of financial institution were enacted: requirements on the opening and branching of banks were relaxed in Indonesia and Malaysia in 1988-89; restrictions on activities of foreign banks were eased in Korea and Thailand in 1991 and 1993 respectively. Clearly, lower reserve requirements allow the banking industry to maintain a lower degree of liquidity. While this may be desirable on efficiency grounds, it directly exacerbates international illiquidity and increases the possibility of financial runs. Increased competition typically force banks to offer more attractive terms (higher interest rates) to depositors. This improves social welfare in the absence of bank runs. But it also implies that the short term liabilities of the banking system, in this case the face value of demand deposits, must increase, impairing international liquidity. An unprecedented increase in short term foreign liabilities: It was the explosive growth of short-term international dept, that accounts for the change in the international liquidity position of Asian countries. A notable feature of the Asian crisis was the extent to which foreign investors, especially foreign commercial banks, increased their loans to the Asian economies up to the onset of the crisis. In addition BIS data show that most of the loans by foreign banks were short term ones. For Asia, the share of loans with maturity over a year fell from about 38 percent in 1990 to less than 30 percent in mid 1997. An increase in foreign-currency dept: In the 1990s not only the maturity but also the currency composition of the liabilities of the financial system of the Asian countries was conducive fragility. Since the currency composition of the financial system's domestic liabilities did not change much, the increase in foreign loans implied also sharp rise in the volume of total obligations denominated in foreign currency. Financial systems that are internationally illiquid live at the mercy of exogenous economic conditions and of the moods of depositors and creditors. If initial liabilities are large relative to liquid assets, then an exogenous shock (such as an increase in the worlds interest rate) or a sudden loss of confidence may prompt holders of the system's liabilities to attempt to liquidate them. But they cannot all the successful, since international illiquidity means, precisely, that the foreign currency value of their holdings cannot be covered by the amount of international liquidity available to the system. If a crisis does take place, financial institutions may be forced to call in loans, interrupting productive projects, and sell fixed assets such as land, causing real estate and stock prices to plunge. The government may try to help, but the crisis is one of excess demand for foreign currency, and hence the government may see its own international reserves plunge in the struggle. In conclusion, in the light of Asian episode some policy issues should be considered carefully; these are: financial liberalization and fragility, dealing with troubled banks at a time of crisis, capital inflows and short-term dept, fixed versus flexible exchange rates and a case for an international lender of last resort.