start the credit market. ppip, talf, tslf, tarp ; it is even hard to track such an extensive list of programs aimed at supplying liquidity, fresh capital and re - starting securitization but more with the goal of boosting market activity than crowding it out. on the demand side, one drawback going forward is that financial institutions are not likely to take advantage of excessive leverage as it happened in the past. on the supply side, much debate is around exit strategies. particularly, how the fed is going to deal with the massive liquidity provision, which is seen as an increasing inflationary risk. however there is a point to be made on the opposite direction : i mean a deflationary scenario as a result of the unwinding of the liquidity provision. if the fed obtains any profit due to its operation ( given a revaluation of financial assets bought, which would, of course be, a good news ) it would end up withdrawing more cash from the market than the formerly issued. this could trigger a new dry up on the markets. so, it is not just about returning to the pre - crisis balance sheet of fed. in my view, the roadmap for a sustainable recovery of should have several features such as : i ) long term funding, which is still absent ; ii ) households balance sheets repair ( the microfundamentals point to additional adjustment still to come ) ; iii ) banks balance sheets repair ; the banking will be redesigned on the basis of simpler criteria, with lower leverage and more capital. burying the old system and enabling a new one to emerge will take time ; and iv ) long - run fiscal and monetary sustainability. on the other edge of the atlantic, europe is caught in a delicate situation. first, the divergence between policy makers about fiscal and monetary policy measures to prevent a deepening of the slump. and, second, the “ east menace ”, which is the sizable exposure of its banking system to eastern europe risk. currency mismatches and their impact on credit risk still poses significant challenges for the region. in fact, the whole periphery ( both east and west ) is under scrutiny due to the brutal adjustment in aggregate spending that is yielding sky - rocket unemployment. in the emerging world, the adjustment is also taking place. and, in some cases, it is showing up the hard way. we witness asian economies suffering from a collapse on trade which is mostly region - driven.

but also poses significant challenges for our countries. on the one hand, it is reflected in a foreign capital inflow having several effects on our economies such as the following : 1. our region, in spite of its recent achievements, is still very vulnerable to changes in global growth, fluctuations in commodity prices, and sudden changes in international financial conditions. therefore, what in developed countries is a “ correction, ” in the countries of our region – where, besides, there is a higher risk of contagion – may amount to a crisis. 2. on the other hand, our exchange rates tend to overreact, which may affect the financial system, thus hampering stability. 3. due to the very nature of the process, it is difficult to establish ex ante its permanent or temporary nature in order to make policy decisions accordingly. rajan and subramanian ( 2006 ) have highlighted the difference in treatment according to whether the trend is caused by permanent or temporary factors. actually, this dilemma is not new at all, and it was discussed by keynes and ohlin in the 1930s, when they analyzed the issue of compensations in the germany of the first postwar. in my view, it would be preferable to take every positive shock as temporary. 4. it is also important to recognize that, depending on the level of emerging countries ’ development ( depth and recurrence of crises in the past, timing as regards the end of the crisis, degree of economic normalization, institutional development, etc. ), neither our financial markets nor our currencies are always ready to channel such capital flows ( nor their inherent volatility ). the financial systems continue to be small, debt markets in local currency are still in their infancy, and secondary markets are not liquid enough. in fact, prasan, rajan and subramanian ( 2006 ) conclude that, in contrast with predictions from standard models usually calibrated for developed countries, emerging countries that committed themselves to external savings have not grown faster in the long term. this difference is attributable to the local financial systems ’ inability to efficiently allocate foreign capital. 5. finally, the search for other currencies introduces an “ imported volatility ” that distorts relative price signals for consumption, savings and investment decisions in our economies, small economies with inherent sources of instability where it is difficult to know the equilibrium level of real variables. in this context, we see that all emerging markets are