http://www.findarticles.com/p/articles/mi_m1093/is_1_44/ai_71359950/pg_8excerpt:
Although only Mexico and Thailand had current-account deficits that could be considered problematic, the peso crisis gave warning that external current-account deficits, regardless of the factors underlying them, are not sustainable for long. Furthermore, current-account deficits cannot be assumed to be benign just because the private sector generated them. Also, what matters is not the size of the current-account deficit, but what they are used to finance and the form that the financing takes. If in Mexico much of the investment was used for consumption, in Asia (except in the case of South Korea) much of the investment went into financing asset price inflation and nontradable activities with relatively low returns. The peso crisis also underscored that the correct sequencing of the domestic financial sector and capital account liberalization are essential. Although Mexico had a better supervised and regulated banking sector (a result of the reforms introduced following the banking crisis of the 1980s), it nevertheless suffered a banking crisis like the Asian countries. The lesson is very clear: Transparency m financial operations is critical, and the banking sector should be supervised closely, especially if it wishes to tap international capital markets. All recent financial crises in emerging markets have shown that weak banks and financial institutions worsen a currency crisis. Finally, both in Mexico and in Asia, investors panicked, as they had little or no reliable information about the prevailing economic situation. Given this situation, it is prudent for governments to release and disseminate relevant economic information in a timely and transparent fashion. Awareness of the fundamental economic conditions prevailing in each country would arm investors against rumors and the herd instinct--thereby greatly reducing, if not averting, an economic crisis.
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and you should also read
http://www.cato.org/pubs/journal/cj16n2-4.htmlexcerpt:
The second phase came with the Baker Plan when it became evident that developing countries were not growing out of their debt and in fact were becoming more indebted. The new plan, introduced by U.S. Treasury Secretary James A. Baker in 1985, emphasized new lending to the highly indebted countries based on market conditionality. Thus, the proposal promised $9 billion from the multilateral agencies and $20 billion from commercial banks in exchange for market-oriented reforms in recipient countries--for example, tax reductions, privatization of state-owned enterprises, reduction of trade barriers, and investment liberalization.
By 1987-88, it became apparent that the Baker Plan too had been unsuccessful at either reducing debt or allowing the target countries to grow their way out of debt as had been intended. Like the strategy before it, the Baker Plan was unable to provide the proper incentives for developing countries to introduce consistent market reforms, or for banks to supply new money that would finance such reforms. From the end of 1985 to the end of 1988, net lending from the public sector to the Baker Plan countries amounted to $15.7 billion, while new money from private banks amounted to $12.8 billion (Cline 1995: 210). Paul Krugman (1994: 700) showed that the stock of official creditor loans to the Baker countries rose from $50 billion to $120 billion from 1982 to 1987, while that of bank loans remained at $250 billion from 1982 to 1987, then fell to $225 billion in 1988. It appeared that as commercial banks decreased their debt stock in the Baker countries, the official lenders increased theirs. <1> In short, a slow transfer of private debt to public debt was occurring without a corresponding resolution to the underlying debt crisis.
When the Bush administration assumed office in 1989, the new Secretary of the Treasury, Nicholas Brady, announced that the only way to address the sovereign debt crisis was to encourage the banks to engage in "voluntary" debt-reduction schemes. Countries were to implement market liberalizations in exchange for a reduction of the commercial bank debt, and, in many cases, new money from commercial banks and multilateral agencies. Initial skepticism abounded and much remained into the early 1990s. One observer noted that the plan could be "compared to an offer to sell fire insurance at bargain rates in a town where half the people are arsonists" (Meltzer 1989: 71).
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