prepared to reform and for preventing contagion, private investors must not simply be bailed out. those who enter greater risks in the expectation of higher yields ought also be ready to bear any consequent losses. the imf should therefore refocus more on its role as a catalyst for preventing and overcoming crises. for example, in the latest financial package for brazil, amounting to us $ 41. 5 billion, only around us $ 5 billion comes from the imf ’ s own resources. by contrast, us $ 27 billion is being raised by what is basically bilateral funding through the facilities of the bis and the activation of the new arrangements to borrow. the activation of the nab must not be a model for other cases, however. the nab are, strictly speaking, a ‘ reserve tank ’ for cases of extreme emergency. activating them is acceptable now only as a ‘ precautionary ’ agreement because of brazil ’ s special role for the stability of the global financial markets. funding through the bis must not become standard practice either. imf programmes should, as a matter of policy, be funded by the imf. rather than tying up larger financial packages with the aid of other organisations, the imf should involve private creditors in crisis solutions to a greater extent than hitherto. the imf should also call for internal structural reforms in the national financial markets. above all, the imf can play a major role in improving the transparency of the international financial markets and thus in dismantling the asymmetrical distribution of information. – 8 – that is an aspect which should not be underrated. if a lack of transparency is among the causes of processes of contagion and herd behaviour and if a credit crunch is ultimately due to asymmetrical information, increased transparency will make a crucial contribution to the stability of the global financial system. the operational efficiency of the markets will be strengthened ; investors will be able to make an appropriate assessment of risks ; and the risk of contagion will be significantly reduced. i would even go one stage further. if the markets do not create optimum transparency themselves, there is much to be said for providing transparency in some cases as a public good as well – by the international community, such as through the imf, through the g - 10 and the supervisory authorities in the national financial markets. obviously, transparency belongs on the agenda of international cooperation. any approach to international cooperation extending beyond that must not ignore world economic

process of disinflation. in part, this is being fostered by international developments in the prices of commodities and crude oil – incidentally, with quite positive terms of trade effects for the oil - importing euro countries. in germany, for example, core inflation is about 1 %. – 3 – ‘ deflation is not on the agenda, ’ stanley fischer, the imf ’ s deputy managing director, recently underlined. the present price stability and the low level of interest rates in the capital market indicate the absence of inflation expectations. that provides the opportunity for longer - term inflation - free growth. iii if it appears rather unlikely that the crises in parts of the world economy will spread to america and europe through the real economy, is it not possible – given a loss in confidence – that this could happen through the channel of the financial markets? keyword ‘ credit crunch ’ a number of observers fear, for example, that the current uncertainties in the financial markets might cause financial institutions to refuse financial resources even to first class borrowers in future – with matching implications for investment and growth. there would be various reasons for that : • first, financial institutions change their risk preferences, especially as a result of disappointed confidence or an expected recession. at least for a while, there may be a higher risk aversion overall. • second, financial institutions find themselves subjected to an erosion of their capital base. they then have to show restraint in terms of further exposures – even to top - rated borrowers – in order to restore appropriate financial ratios. a rise in the cost of equity can even reinforce that. • third, the assets deposited as collateral decline in value, say, as a result of a fall in asset prices in the real property or equity markets. in some cases, however, what is worrying about a credit crunch is the idea that the normal price mechanism balancing supply and demand is being paralysed in the credit market for specific reasons. in a ‘ credit crunch ’ scenario – so the theory goes – financial institutions do not respond to a rise in demand for credit by raising the lending rate and extending their supply of credit. that is because they fear a disproportionate rise in the share of demanders of credit with comparatively risky projects – the keyword is ‘ adverse selection ’. moreover, after receiving credit, the debtors would have an incentive to enter greater risks – the keyword is ‘ moral hazard ’. if banks have difficulty in assessing their