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International Banking &finance
Pages 4 (1004 words)
It was in 1994 when a series of financial crises struck the emerging market countries of Latin America, East Asia, and Eastern Europe. Although the sequence of events for each country differed, the crises followed similar patterns. In each case the local currency collapsed, stock and bond markets plunged, the national banking system was overwhelmed by bad debt, and foreign investors fled the region.
Robust current account surpluses and renewed non-debt-creating capital flows have reduced east Asia's external vulnerabilities considerably, but they also confront authorities with new policy challenges. (Michael Petis 1994). To meet these challenges, exchange rate policies need to find the right balance between additional reserve accumulation through intervention and further gradual currency appreciations. A case can be made for acquiring some additional international reserves in view of still relatively high ratios of short-term external debt obligations to international reserves. At the same time, the sizable current account surpluses and other indicators of relatively strong external competitiveness, including real effective exchange rate s that are still significantly below pre-crisis levels, suggest that there is still scope for further currency strengthening before possible overvaluation becomes an issue. In this regard, the implications for monetary policy also need to be considered. As interest rates have to be kept at relatively low levels to facilitate corporate and financial restructuring, further exchange rate appreciation could provide the tightening in monetary conditions that is required to keep inflationary pressures in check. ...
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