The removal of exchange controls has led to the rapid growth of cross-country capital flows, including flows to emerging markets. The enormous growth of private pensions, mutual funds and other pooled investment instruments has not yet been really tested by serious external shocks from domestic sources or abroad. These developments, taken together, have introduced greater uncertainty in managing financial risks. There is a third area of concern, and that has to do with timing. We may be on the brink of a major international debt crisis, an acute weakening of stock markets, and a global recession, all of which will destroy asset values and increase the risks of foreign and domestic lending.
Some signs are there.
Since last year the Economist all-items index of commodity prices has dropped by 30 percent. The Russian government is in chaos and its rouble has dropped by over 60 percent. And instability in Brazil and Argentina may be just around the corner. A 35 percent writedown of that debt, as happened in the crisis of 1982, would severely hit all exposed banks and surely trigger a recession.