The global economy, according to the Bank for International Settlements 70th Annual Report, is entering an uncertain period. Some observers think that the economy is at the beginning of a long boom, driven by technology and deregulation and accompanied by continuing low inflation, while others say there is a larger possibility of a downturn. There is also uncertainty about how financial markets will react to possible adverse macroeconomic shocks. Finally, the report notes, it is unclear whether, in this more globalized financial system, policymakers have all the tools required to avert problems and manage them should they arise. One thing is clear, however: liquidity injections, which may be needed to manage one crisis, can encourage unwise behavior and thus lead to the next crisis. The report concludes that “a balance needs to be found between the provision of liquidity by the IMF and the moral hazard that such assistance engenders.”
The report cites two central issues surrounding the provision of needed liquidity to emerging markets and points out that little concrete progress has been made with respect to these issues. The first is how the private sector can be encouraged to provide liquidity by rolling over maturing debt and by providing new money when necessary. A temporary suspension of payments, the report suggests, can accomplish the first action—all creditors are treated equally—but it is not likely to encourage new credits. Moral suasion is another possibility, but ultimately, the report concludes, “such arm-twisting comes close to coercion.”
Another problem is how to coordinate this financing. Borrowers in emerging markets and lenders in developed countries are becoming more diverse, making it difficult to determine who has the authority...