Oil and Water

Abstract

AbstractThis chapter describes how emerging economies rebounded from the late 1980s and reentered the global debt market, building on their experience with Brady bonds. However, the 1997–98 East Asian crisis was a brutal reminder that external borrowing had to be carefully managed. Among the lessons from the crisis was a realization that currency and maturity mismatches exposed governments and banks to serious risks in the event of capital flight. Following the crisis, policymakers in emerging economies accumulated foreign exchange reserves and sought to create local-currency markets for public debt. This addressed some structural fragilities but ignored others, such as excessive dependence on domestic banks, a problem that would return with a vengeance in the new millennium.