Sound Financial Systems Would Help Avert Crises
WASHINGTON -- Future currency crises could be avoided or their damage at least lessened if developing countries strive to improve the soundness of their financial systems, Federal Reserve Chairman Alan Greenspan said yesterday.
Greenspan said that the serious global financial crisis of the past two years dramatically underscored the need for developing countries to pay attention to such issues as how they regulate their banks and whether they are pursuing the correct policies needed to build sound financial systems.
"Improving deficiencies in domestic banking systems in emerging markets will help to limit the toll of the next financial disturbance," Greenspan said in a speech to financial leaders at the annual meetings of the International Monetary Fund and the World Bank.
The currency crisis began in Thailand in July 1997, then jumped to Indonesia and South Korea later that year before leveling the Russian economy in August 1998 and forcing the devaluation of the Brazilian real in January of this year.
"The failure of normal adjustment processes to contain the financial turmoil made this crisis longer and deeper than any of us had expected in its early days," Greenspan said.
To support his contention that sound financial systems can lessen turbulence, Greenspan pointed to the functioning of the U.S. economy during the recent instability.
After Russia defaulted on billions of dollars in foreign debt in August 1998 and a large U.S. hedge fund nearly collapsed, "public capital markets in the United States virtually seized up," Greenspan said. Even top quality borrowers were unable to find takers for their bonds in a nervous market unwilling to take on any new risks.
The Fed stepped in last year and cut interest rates to restore confidence and avert a severe credit crunch from dragging the United States into recession. …