the dangers inherent in adjustable peg exchange rate systems. it is still far too early to draw the firm conclusion that the only viable exchange rate regimes, in all circumstances, are a free float on the one hand and a currency board or a monetary union on the other. nevertheless, one common characteristic of the main crises of the recent past – mexico, thailand, indonesia, korea, russia, brazil and, for that matter, my own country sweden – has been that the authorities had adopted a more or less rigid exchange rate regime that ultimately proved to be unsustainable. one clear lesson seems to be that, in many circumstances, once a weak peg comes under fire, defending it is often a losing battle, especially if the exchange rate does not properly reflect the development in the real economy. another drawback to a fixed, but adjustable, peg is that it may stimulate excessive short - term capital inflow and thus in itself generate vulnerability because the central bank is seemingly absorbing the exchange rate risk. against this background, a key question is the appropriate exit strategy to another exchange rate regime or a timely adjustment of the pegged exchange rate should the need arise. an additional insight is that the simultaneous occurrence of foreign exchange rate crises and banking crises is probably the single most important reason why some countries have suffered much deeper recessions when their currency pegs collapsed or came under a severe speculative attack. the contractionary shock to most european countries in 1992 - 93 was clearly much smaller than for sweden and finland in the early 1990s and for mexico in 1995 and asian countries in 1997 - 98. thus, authorities in countries that receive capital inflows should prepare for the day when the movement might reverse. countries that are vulnerable in this regard should carefully consider the adequacy of their foreign exchange reserves, particularly in relation to their short - term external debt. since large numbers of countries cannot build up their reserves by increasing their trade surpluses simultaneously, this would seem to argue for greater use of contingent lending facilities provided by the private sector. given such arrangements, recourse to the new imf contingent credit lines would then add public sector to private sector affirmation that the domestic policies being followed by the borrowing country are sensible and sustainable. … but the international dimension should also be recognised to say that the key to avoiding future crises in emerging markets must be found in domestic reforms is not to deny that part of the solution may still lie in measures that change the way in which international financial markets sometimes operate. while

where the emphasis is on possible ways of creating a more orderly environment for restructuring external debt, on principles to guide the restructuring of banking systems in the wake of a crisis, and on handling corporate insolvency. much of this work involves international institutions like, for instance, the international monetary fund, the world bank, the bank for international settlements, the basel committee on banking supervision, and the oecd, as well as the newly created financial stability forum. governor backstrom is also chairman of the board and president of the bank for international settlements. before becoming governor of the riksbank in 1994 he was state secretary in the ministry of finance with responsibility for fiscal and financial affairs, which included the responsibility, under the minister, for the handling of the swedish banking crisis in the early 1990s. however, the work, often hard, of implementing policies and codes lies with national authorities. these measures will contribute to improved financial stability only if countries actually adopt and implement them. a crucial ingredient in achieving this is of course to involve countries, formally or informally, in the development of the policies, codes and standards. but even if that is achieved, i know from my own experience how difficult the actual implementation sometimes can be, not least for political reasons. i would also like to make the point that today ’ s favourable trends in the world economy should not lead us to conclude that the danger is over. instead, policymakers throughout the world must continue to work on forestalling new problems both because some evident threats to international financial and economic stability still remain and because there may well be vulnerabilities that are not so evident. the run up to the financial turbulence of the 1990s during the past twenty years, the financial systems in many countries have been deregulated. for the first time since the outbreak of world war one, capital can again pass more or less freely across national borders. moreover, major changes in communication and information technology have paved the way for new instruments and methods for risk management. taken as a whole, this has led to the financial system being more extensive and global today than ever before. this holds even though capital flows relative to gdp were also large at the end of the last century. the rapid financial development and internationalisation are per se a logical consequence of the production of goods and services being globalised, with a massive increase in cross - border trade. they also have to do with growing wealth in many parts of the world. this in turn has increased the need for