A cycle of competitive devaluations is the most dangerous potential chain of events the IMF prevents. Imagine that an emerging market in trouble over its balance of payments decides that it must export its way out and so devalues or depreciates its currency. Economies with similar exports and markets find themselves competitively disadvantaged, so they too devalue, hoping to offset the first country's currency gambit. Yet, if many countries pursue this strategy simultaneously, none of their positions improve significantly, while their purchasing power drops along with their currencies. It must be considered a triumph of the IMF's rapid response to the recent Asian crisis that no ongoing spiral of competitive devaluation has arisen despite the pressures on Hong Kong and China, and even on Brazil and Russia.
Moral hazard exists whenever insurance is provided against any kind of risk.
Anyone who has worked in the banking industry knows that government guarantees, or even the perceived possibility thereof, can create perverse incentives for financial risk-taking. The prospect of a rescue can encourage investments that otherwise would not be made. This increases the herdlike behavior of global capital, since financial firms often watch what other investors do more than they watch the performance of the actual investments. This tendency certainly contributed to the surge of capital flows into South Korea, Indonesia and their neighbors, and the subsequent drain of that capital. It is a huge exaggeration, however, to suggest that the so-called bailout guarantee played more than a minor role in creating the Asian crisis.