Instead, a real contribution could be made if borrowers were given an incentive to achieve a proper liability structure, overcoming their reluctance to pay the higher margins required to secure longer maturities. Indeed, poor liability management was a key factor triggering the Asian crisis. On the other hand, other countries, like India, have successfully implemented regulations enforcing medium to long term maturity requirements for foreign borrowing by private and government sector borrowers. The total stock of outstanding international bonds issued by EME has increased fivefold since 1994, and the average maturity of bond finance lengthened from 5 to 10 years during the 1990s. By their nature, bonds are difficult to restructure in the event of a crisis.
Bondholders have a significant information gap compared to banks.
Moreover, while banks have multiple and frequently long term relationships with their borrowers, a bondholder's relationship with an issuer is usually limited to holding the issuer's bonds, with the options either to sell or hold the bond until maturity. Gray felt that some volume of emerging market bond borrowing by sub investment grade issuers might have been better carried out in the bank loan market. Summary of main recommendations. A mature financial system is an important precondition to capital account liberalisation. A strong domestic capital market is the best protection against volatile capital flows.