, falling commodity prices and potential spillovers from the possible exit of exceptional monetary policy in advanced economies? and second, how can we manage the tension between the need to recognise when one sovereign ’ s debt has become unsustainable and the need to avoid contagion across countries in times of stress? there are many ways in which sovereigns are like banks in terms of the liquidity risks they face. cross - border capital flows can “ run ” – just as deposits can “ run ” for banks. and the majority of a sovereign ’ s assets – claims on future taxpayers, are both hard to value and inherently illiquid – so, like banks, they are susceptible to runs by international investors, which even if not based on fundamentals, could threaten their solvency by raising borrowing costs. sovereigns are particularly exposed to run risk or a sudden “ stop ” if they have borrowed in foreign currency – the so called “ original sin ” – as large depreciations raise the domestic burden of repaying the debt, particularly if there is a shortage of foreign exchange reserves. in the euro - area, countries have become painfully aware of the risks of borrowing in a domestic currency that individual sovereign states have no right to issue. but of course, sovereigns are also very different from banks. by definition, their finances are not regulated by any authority, and there is no legal framework for dealing with bankruptcy or resolution, giving them more discretion to default. instead, we have imf surveillance ( which is weaker than bank supervision ) and a complex and often messy process whereby markets and the official sector deal with sovereign debt restructurings. while there are important differences between sovereigns and banks, i think there are enough parallels to draw some insights. 4. problems with the global financial safety net hume himself recognised that the nature of sovereign flows created an incentive to insure against a sudden stop, lamenting : “ there still prevails, even in nations well acquainted with commerce … a fear, that all their gold and silver may be leaving them 7. ” there are different ways for countries to insure against the risk of sudden stops in capital flows : ( i ) individually through the stockpiling of foreign exchange reserves, ( ii ) via collective arrangements with other countries, for example regional reserve pooling or swap arrangements or ( iii ) through the international monetary fund ( imf ). this multi - layered global safety net has some advantages but it seems to me that the current configuration is sub

an official asset to provide international liquidity, as shown in the decline in the relevance of the sdr. but since the asian financial crisis in the late 1990s, a number of central banks in that part of the world have increased their dollar reserves in order to protect themselves from possible future crises by creating what i have termed a “ diy lender of last resort ” facility in dollars. is the dominance of the dollar in world reserves a reflection of historical factors that are less and less relevant today? or are there fundamental reasons for the world's central banks to continue using one main currency as a source of liquidity? second, given that each bloc ’ s policy choices reflect domestic objectives, what could be achieved through international meetings? the starting point is the need to find a common analysis. domestic policies should at least be based on mutually consistent assumptions. only when there is agreement on the nature of the risks inherent in current international monetary arrangements will there be the possibility of a cooperative outcome that is an improvement for all, not just for some. third, how might we arrive at such a common analysis? the g - 7 arose out of an earlier episode of concern about exchange rate movements in the 1980s. most smaller countries can choose their exchange rate regime without worrying about its impact on the rest of the world. but the large countries – especially the three blocs i identified at the outset – cannot ignore their interdependency. that is why it is important to expand the group of countries that discuss these issues beyond the g - 7 to include those, such as china and india, whose actions increasingly have global economic consequences. my main conclusion is that the international monetary system should be seen not as a series of bilateral relationships, but as a multilateral arrangement, albeit one where a small number of the key players can usefully communicate with each other. i believe that we need to rethink the role of the imf in the international monetary system. i encourage the fund to articulate a positive vision for the management of the international monetary system in its forthcoming strategic review. i am not convinced that the future of the fund is primarily as an occasional international lender of last resort for middle - income countries suffering financial crises. at this conference the emphasis is naturally on ways to promote productivity and enterprise. monetary stability at home is now widely recognised as a necessary condition for a successful economy. it provides, as i said at last year ’ s conference, a springboard for enterprise. but international monetary