has left its mark. no one foresaw that malaysia would introduce foreign exchange controls. nor did any banker believe that russia would go so far as to suspend payments on debt denominated in roubles. people seem to be thinking that if such things could happen in malaysia and russia, perhaps they can happen elsewhere. the problems with the hedge fund long - term capital is another matter that has made international bankers more wary. although their loans to this fund were secured, the total stock of loans from all banks and the total amount of collateral were too large for direct disposal in the market ; that would have caused prices to fall, leading to losses for the banks. under such circumstances it is hardly surprising that international banks also review their lending commitments to other funds. the key question is whether the international banks ’ review of lending commitments will be extended to include other groups of customers. perhaps their lending policies will become generally more restrictive. one sign of this is that the flow of loans to many countries which are regarded as emerging markets has virtually dried up. the interest rate differential between treasury securities issued by such countries and by the us, for instance, has widened dramatically this autumn. in turbulent times, moreover, banks have difficulty in fulfilling their function, which is highly important in a market system, of distinguishing sound borrowers from others. the result may be that their provision of credit is completely suspended. it is already evident that in their assessments, various players are tending to disregard more fundamental factors. an example of this is the weakening of the krona. despite good economic fundamentals in sweden, since the summer the krona has weakened sharply and last week this tendency accelerated. in a matter of days the exchange rate with the german mark declined by up to 5 per cent. in that situation the riksbank decided to intervene in the foreign exchange market, which nowadays is unusual. we did so to demonstrate that we considered the krona ’ s fall was excessive in relation to the fundamental state of the economy and that the time had to come to pause and reconsider the situation. instances of “ follow - the - leader ” behaviour occur not just in bullish stockmarkets but also in the currency market when many countries with different conditions are lumped together in a general assessment. market players must assess each country separately. central bank interventions under certain circumstances are uncommon with a flexible exchange rate regime but they do occur. i cannot exclude the possibility of the riksbank intervening again if this were to be

element here ; another is a stable exchange rate. sweden must fulfil the convergence criteria in both these respects. in practice this means that there may be grounds for continuing to produce inflation forecasts and to publish inflation reports in much the same way as at present. we should also do what we can with the interest rate to direct inflation onto our target. but the closer we come to adopting the euro, the smaller will be our repo rate's effect on longer term interest rates. that is because as the entry date approaches, the swedish yield curve will be increasingly determined by european interest rates. the fact remains that exchange rate stability is one of the convergence criteria for sweden's full participation in the monetary union. this may affect the formation of monetary policy. the risk of conflicts between the inflation target and the need for exchange rate stability is sometimes emphasised in discussions. for several reasons i do not believe we need to be particularly concerned about that. for one thing, erm2 participation is not an ordinary system of fixed exchange rates but the preliminary stage of acceding to a monetary union in which exchange rates are irrevocably locked. so currency unrest during this period should really only occur in the event of uncertainty about sweden's emu participation on account of problems either in sweden or in emu. note that these risks are not really economic but political. presumably they would also be extremely small in a situation where accession to erm2 has been preceded by political agreement both in sweden and in the rest of the european union. moreover, currency risks arise as a rule when economic policy is out of step with the fixed exchange rate. if swedish monetary policy before and during the erm2 period is focused on price stability and economic policy in other respects is also in line with the direction in the monetary union, the risks of a currency crisis would no doubt be even smaller. furthermore, the erm2 period will presumably be comparatively short and directly connected with sweden's subsequent full participation in the monetary union. if the swedish economy is in step with the euro area on accession to emr2, the probability of any serious imbalances having time to arise is therefore small. a question that is raised from time to time is whether a decision to join the monetary union should lead to the riksbank's inflation target being replaced by the ecb's. as i see it, the grounds for doing so are weak in the time perspective of one to two years that