consuming. however, it is important to make use of the market that is there, with different analysts. a large number of agents closely linked to one another can lead to the liquidity in the market becoming more important - in short, that there is someone there when you want to sell at a reasonable price. there are greater risks that liquidity problems will arise when there are more links in the chain and if all of the market agents risk running in the same direction. then there may be several agents trying to sell the same asset at the same time. although many market agents have become much better at managing risk, many models are based on historical data which provides little information on risks in new, untried products. if one of these very improbable events were to occur, it could lead to increased uncertainty and willingness to rapidly change holdings, which would perhaps be difficult if everyone else had become more cautious. during the russia crisis in 1998, for example, the models could not predict that the russian government would default on payments – this type of event is generally very difficult to build into a model – and the slump in prices this would lead to on many markets. nor could they predict that liquidity would decline so severely that the banks were unable to sell their securities without this leading to a slump in prices. asset prices that had earlier moved in the opposite direction and thereby reduced the total risk in the portfolio were now suddenly moving in the same direction. the risks were thus much greater than the models had indicated. these rapid adjustments in market prices with reduced liquidity are one scenario we have repeatedly pointed to as a risk scenario in our assessments of financial stability. if the risk premiums are too low on asset prices in the financial markets, changes in expectations can lead to instability with large price fluctuations and reduced liquidity. if prices of various assets covary to a greater extent than before, the financial agents ’ risk exposure could increase rapidly. the fact that many investors have gone over to new types of asset could in this situation lead to declining interest in these assets and to liquidity partly or wholly disappearing from some markets. the events following the collapse of the us hedge fund ltcm in autumn 1998 are an example of this. do the risk models take these difficulties into account? yes, or at least in theory. when making their risk assessments, the banks test their risk models with a number of different assumptions, including the risk that asset prices which had not previously covaried suddenly completely covary

mr. backstom remarks on the swedish economy address by the governor of the bank of sweden, mr. urban backstrom, at svenska handelsbanken ’ s seminar in new york on 7 / 10 / 98. first of all i should like to thank svenska handelsbanken for the invitation to meet with you today here in new york. i arrived late yesterday from the 1998 annual meeting of the international monetary fund in washington d. c. the discussions in washington over the weekend focused on the current problems in the world economy. at the centre was of course the crises in emerging markets that began in thailand last year, which spread to other economies in east asia and russia and which most recently have been pressuring economies in latin america. lately, we have also seen some contagion effects spreading to the industrial countries. stockmarkets have been falling and there have also been some problems in connection with the long - term capital hedge fund. however, today i will talk about the swedish economy. i shall be using a fairly broad brush to paint you a picture of how our economy has developed in recent years and i will conclude by saying a few words about the present situation in my country. positive trend in recent years the swedish economy is now entering its sixth consecutive year of favourable growth. the average annual gdp growth rate since the summer of 1993 is almost 3 per cent. this is an improvement compared to the average that has characterised our economy in the past twenty - five years. it has been accompanied by external surpluses that are larger than for many years, making it possible to repay foreign debt. government finances, moreover, now show a surplus instead of the earlier deficits, which means that government debt is already being reduced in relation to gdp. the latest figures show that prices in sweden ’ s economy are virtually stationary. the falling trend in market interest rates in recent years has been a major factor here in that it has reduced house mortgage interest expenditure and thereby temporarily exerted a downward effect on inflation. the underlying price trend is not, in fact, as low as the cpi figures might suggest but that does not alter the conclusion that in the years ahead, inflation will continue to be low. if sweden sticks to disciplined fiscal and monetary policies, together with other ways of enhancing economic policy ’ s credibility, we have a real opportunity of reinstating the tradition of price stability that existed in sweden prior to the 1970s and 80s. let me give you a short historical background to our current economic