mr. grenville discusses the asian economic crisis and how such problems might be avoided in future speech by mr. stephen grenville, a deputy governor of the reserve bank of australia, to australian business economists and the economic society of australia ( nsw branch ) in sydney on 12 / 3 / 98. it is much too early to draw definitive conclusions about the economic crisis currently being played out in asia, but there is some point in trying to bring together the emerging ideas as to what went wrong, what might be done to fix the immediate problems, and how, in a more fundamental sense, these problems might be avoided in future. one of the things that strikes me is how much thinking has evolved, already, in the months since the crisis broke. with that in mind, lessons which now seem to be appropriate will, no doubt, be modified over time. historians can wait to compose the definitive, fully - digested version when the dust settles, but others need to call it continuously, refining and modifying our understanding as we go along, knowing perfectly well that what we write today may seem unperceptive or simply wrong when we come back to it in a year ’ s time. ross garnaut has recently written that : “ the shock of 1997 is a defining event in the economic history of east asia. like the great depression in the west, it has the capacity to change thought about economic development and economic policy in fundamental ways. ” 1. this process is currently underway, and if it sounds more like a damage report rather than the anatomy of a paradigm shift, this may reflect the close range of our current perspective. among the jumble of likely causes and hypotheses, it is difficult to fit all the pieces together and assign proper weights. that said ( and to anticipate one of the later conclusions ), the individual elements of the crisis are neither new, nor were they ignored beforehand. but the conjuncture of events produced outcomes that no - one forecast. and once the critical break had come, it was not possible to restore the status quo ante by fixing the individual elements that had gone wrong. general lessons the first lesson, which stems directly from the fact that no - one forecast the nature or the extent of the crisis, is the need for humility. while plenty of observers worried about various aspects of these emerging markets, no serious commentator could be said to have forecast these crises, in the sense of defining the nature of the unfolding story with

avoid further emergency procedures. these changes involve : removing the scope for taking on excessive leverage via regulatory arbitrage ; making sure that adequate capital is held against risk that is being incurred ; ensuring better management of funding liquidity ; countering, to the extent possible, the inherent tendencies in both human nature and regulation to form assessments of risk in a pro - cyclical way ; and improving resolution processes to ensure orderly and rapid crisis management and to help manage the issue of “ too - big - to - fail ” institutions. these are all very important goals. the australian authorities support them. but as we have said before, the really serious problems were generated in a relatively small number of very large, internationally active banks. they did not stem from the thousands of other banks around the world which have not needed to be “ bailed out ” and whose capital resources have, in most cases, proved adequate to cover normal losses in a cyclical downswing. hence it is important not to shackle unnecessarily the latter group in our efforts to constrain the relatively small number which caused much of the problem. challenges from sovereign debt turning from banks to markets more generally, a recent development has been the increasing focus on sovereign debt and creditworthiness. the initial manifestation of this was late last year when dubai world requested a six - month standstill agreement on its debt repayments. more recently, the focus has been on greece, after it was revealed that the greek government ’ s current borrowing requirement was much larger than had been previously disclosed. greece is a small country – accounting for only half of one per cent of the world ’ s gdp. the significance of greece is that it is a euro area country, which means two things. first, its adjustment to its predicament cannot involve currency depreciation ( unless it were to leave the single currency ). the only way it can grow out of the problem is by gaining competitiveness against other european economies via domestic deflation, which will be a difficult and lengthy process. a very large fiscal consolidation is an unavoidable part of this path. second, the euro area has an interest in this effort succeeding, which is why there has been intense discussion about whether, and in what form, european assistance might be forthcoming. any assistance would of course have to pass the test of credibility more generally in europe, and would need to be applicable under similar terms to other euro area countries if needed. this is obviously a difficult problem,