The fact that they first stop lending and investing and then pull out contributes greatly to making their worst nightmares come true. As a result, there can be much overshooting. Exchange rates can collapse, as can stockmarkets and property prices. Governments or central banks are forced to raise interest rates to defend the currency. As a result, banking systems become far more fragile than they were before, as previous weaknesses are magnified and new faultlines emerge.
Currency crises have punitive development costs.
This makes preventing them absolutely essential. A condition for crisis prevention is that countries follow prudent macroeconomic policies. This is a necessary but not sufficient condition, in particular as capital surges distort key macroeconomic variables. It follows that additional measures are needed, nationally and internationally, to discourage excessive surges of potentially reversible capital flows. Chile's reserve requirements are one example.