Massive inflows of private capital into emerging markets are frequently followed by sudden reversals. Crises ensue, e.g. Mexican 1994, Asian 1997, Russian 1998. Recent crises have tended to be shorter compared to the debt crisis in the 1980s, due to the higher share of FDI and portfolio equity flows, which are more stable than bank lending, and equity tends to flow back into the crisis-countries while asset prices are low. However, there is also a systemic threat in portfolio investment if investors, such as hedge funds, are highly leveraged and rely on bank loans to finance their investments. However, developing countries may find it difficult to comply with these requirements and may need a special and different treatment.
Liquidity needs to be managed actively in recipient economies.
Governments should retain the right to apply disincentives or controls on capital flows, particularly short-term flows, in times of capital surges or during severe crises. Concerns have been raised about the pro-cyclicality and contagion sensitivity of sovereign ratings by credit rating agencies. The Secretary-General Report encourages credit rating agencies to rate sovereign risk according to criteria that are as objective and transparent as possible. Borrowing developing and transition economies are also encouraged to give priority to the development of reliable local systems of credit information. At the international level, the reforming of multilateral institutions is still an open debate.