The emerging-market crises of the 1990s were characterized by crashes in exchange rates, credit flows, and output, and the currency crashes caused the other two. Because local banks and firms had large foreign-currency debts, the sharp depreciations of their countries' currencies had huge balance-sheet effects that led to an implosion of domestic credit flows, causing sharp falls in investment and output. It is wrong to blame the IMF for these calamitous outcomes. Nevertheless, the strategy adopted by the IMF for dealing with the Asian crisis was partly responsible for the severity of the crisis. By calling for extensive structural reforms, it delayed the restoration of investor confidence by causing investors to believe that recovery could not occur until the reforms were implemented. And though it assembled huge amounts of official funding, it made far less funding available up front--too little to arrest the collapse of the Asian currencies. In future, the international community must rely less heavily on massive official financing and seek instead to achieve the rapid restructuring of external debt, including private-sector debt. Standstills must replace massive official financing as the first line of defense against debt-related crises.
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