debt up to their eyeballs. indeed, those attitudes were sensible from an individual ’ s point of view, with negative real interest rates and rising asset prices. those attitudes no longer make sense. part of the problem in recent years may have been the less - than - ideal mix of monetary conditions, with interest rates too low to encourage saving or discourage borrowing and with the exchange rate too high to allow the export and import - competing sectors to grow. this mix of monetary conditions was particularly unhelpful when most of the inflation pressures were in the domestic parts of the economy, especially the housing sector, and not in the export and import - competing sectors. the reserve bank began to tighten monetary policy early in 1994 to head off the inflationary pressures which we projected at that time. by the end of that year, 90 day interest rates had risen from around 4. 5 per cent in january to close to 10 per cent, while the exchange rate had increased from 57 on the trade - weighted index ( twi ) to 60. through the next nine quarters, to the end of march 1997, interest rates never went much above 10 per cent, but the exchange rate continued to increase until the twi reached 69. as a consequence, lending by major financial institutions to the private sector continued growing at rates more than double that of nominal gdp growth. in other words, although the exchange rate was putting great pressure on the exposed parts of the economy, interest rates were not nearly high enough to restrain a huge surge in private sector borrowing. but hold on, you may be saying. don ’ t we have some of the highest inflation - adjusted interest rates in the developed world? and so we do, if one compares interest rates with inflation in the cpi. but of course few of us borrow to buy the goods and services in the cpi basket. rather, most of us borrow to buy assets, and particularly real estate. and when our interest rates are compared with changes in an index of house prices, as shown in graph 3, it can be seen that our - 10 - mortgage interest rates adjusted by house price inflation have been very low in recent years, and well below those in australia. for whatever reason, our real interest rates have not been seen as particularly high by new zealanders - despite all the protests to the contrary. if they had seemed high, we would not have been increasing our borrowings by 10 to 15 per cent per annum, and we would have been increasing our saving. as

and the borrower, and the parties should be expected to honour that contract. if it is treated otherwise, then the basis for all future relationships crumbles. but in practice the situation is hugely complicated if there is a syndicate of lenders, giving rise to problems of co - ordination and potential free riding, or if the world bank or imf are involved, which typically expect to be at the front of the queue for repayments. at the end of the day, commercial banks may decide that a degree of debt forgiveness ( possibly disguised as a generous rescheduling ) is advisable as the best means of minimising overall losses and, perhaps, preserving longer - term business opportunities with the country or customer in question. but this should be a commercial decision. if governments wish, for political or humanitarian reasons, to ease further the contractual debt burden of an indebted country, this should be carried forward as a conscious and transparent policy decision, which would surely involve usage of taxpayers'money unless it was reliant on coercion of banks. in practice, there are many developing countries which are effectively cut off from commercial bank finance because of a track record of default, political instability, economic mismanagement, corruption and so on. banks generally need certain minimum assurances, relating to the political climate, the legal system, transparency, corporate governance, etc, over and above the narrower assessment of the servicing capacity of the borrower. fortunately, most economies in the apec fold can be classified as open for bank finance. but there are many other countries in the world which are passed over by the international banking community because of the lack of the basic essential attributes, or because they are simply too poor to afford credit on commercial terms, in which case they become dependent on concessional finance from the international institutions as the only reasonably accessible source of external funding. banks have to abide by prudent standards. regulators, depositors and shareholders all expect as much. most banks would leap at the chance to lend more to assist development, if such lending was assessed to be commercially viable. but as a general rule banks should not be prevailed upon against their better judgement to be providers of economic aid or social services, whether domestically or internationally, unless there is the political consensus that taxpayers are willing to fund them in that role. the internet turning now to the internet, i believe that this has some relevance to the overall theme of this symposium, not so much because of questions