In 1997, the Clinton Administration requested that Congress provide additional funds to the International Monetary Fund (IMF) as part of a quota increase and for U.S. participation in the New Arrangements to Borrow program. All through 1997 and 1998, Congress resisted intense pressure from the Administration and various interest groups to provide the funding. Finally, as part of the Omnibus and Consolidated Appropriations Act for fiscal year 1999, Congress appropriated $14.5 billion for the quota increase and $3.4 billion for the New Arrangements to Borrow. Congress attached additional conditions to the appropriations, which aimed at reforming IMF policies and practices.
The financial crisis in Asia formed the background for both proponents and opponents of IMF refunding. For proponents, the crisis is proof positive of the need for more IMF funding. For opponents, the crisis illustrates the IMF's failures. IMF policy in Asia motivated congressional calls for reform. It is important to review recent events in Asia both to understand the reason for the congressional mandates and to assess the likelihood of successful implementation of these reforms.2
AN OVERVIEW OF THE ASIAN FINANCIAL CRISIS
The Asian financial crisis began in mid-1997 in Thailand; by year's end, it had spread to Indonesia, South Korea, and other countries. The details of how the crisis affected each of the countries vary. Typically, however, there was a collapse in currency values after a period of turmoil in foreign exchange markets. Asset values declined sharply and economic activity turned negative. The turmoil occurred at great economic cost in these countries, whether it is measured in terms of output, investment, or jobs.
Although peaceful changes in the government occurred in Thailand and South Korea, in a number of countries political upheaval followed the economic dislocation. In Indonesia, for example, a long-time political leader, President Suharto, resigned in the face of violent political protests. Violence and loss of human life accompanied the political upheaval. In Malaysia, Deputy Prime Minister Anwar Ibrahim, an heir-apparent to the office of Prime Minister, was ousted from power. Hong Kong's new political system was stressed as its flexible and resilient economy was tested in ways it had not been heretofore.
The common economic factor in each country is a conjunction of currency and banking crises. There is a reason for this conjunction: Each country had an exchange-rate system that linked its currency to the U.S. dollar. Systems that fix or peg a local currency to the dollar provide a guarantee to short-term investors that they can make a quick exit with their funds at little or no cost to themselves. That assurance, in turn, tends to diminish risk monitoring by investors. Exposure to loss generates risk management, while financial guarantees anesthetize investors to underlying risk.
As short-term funds (so-called hot money) surge into countries with already questionable banking systems, lax banking practices are exacerbated and ever more dubious lending is funded. Any shock that undermines investor confidence is likely to lead to a run on both the currency and the banking systems.
To understand what occurred in much of Asia in 1997, it is instructive to look back to Mexico's peso crisis in 1995. Mexico was both a watershed for global public policy and a turning point in international capital markets. As illustrated in Chart 1, the size and scale of the IMF's Mexico bailout was unprecedented. That chart presents the largest use of IMF funds in each year from 1980 through 1998, and identifies recipient countries. The funds provided to Mexico in 1995 were out of proportion to any prior disbursement and set a new standard for IMF involvement in a country's finances.3 IMF funding for Russia and South Korea followed in turn.
Readers will note that in the 1980s and 1990s, Mexico frequently was the largest recipient of IMF funding. Chart 2 details Mexico's use of IMF funds throughout the 1980s and 1990s. Case histories like Mexico's help to explain the reason that critics of multilateral lending assert it establishes dependency on future such loans instead of fostering sustainable economic growth.4
After the Mexico bailout, investors perceived that the IMF henceforth would bail out any large international debtor-country. Thus, the resolution of the Mexican peso crisis established globally the syndrome known as moral hazard.5
The Moral Hazard of IMF Bailouts
Moral hazard occurs when the provision of insurance against a calamity, such as fire, alters behavior in such a way as to increase the probability of the calamity. Insurance policies typically contain provisions constraining the behavior of those insured to mitigate against moral hazard. By analogy, the concept has been extended to behavior in financial markets in those cases in which investors are offered insurance-like guarantees.
In the wake of the Mexico bailout, traders began consciously to invest based on perceived IMF guarantees. In 1995, for example, one official of a major investment house privately told this author that he viewed investments in Russia as possessing an IMF guarantee. Colleagues have told this author of similar conversations with traders.
After the Mexico bailout, then, the existence of moral hazard in international lending became a fact in capital markets and cannot be dismissed as the speculation of free-market economists. That some within the IMF still question its existence is testimony to this agency's continuing state of denial.
If Russia--otherwise a financial black hole--could be viewed as a safe investment, still more were Asian countries. Countries like Thailand, Indonesia, and South Korea were viewed as fundamentally sound. Even if some doubted their ability to absorb all the incoming capital, there was no need for investors to worry in the post-Mexico world of IMF bailouts. Similarly, officials in countries experiencing large capital inflows were under no pressure to engage in any needed financial reforms.
One consequence of the ill-advised IMF policies in Mexico is that much of Asia now is in economic shambles.6 Political instability is on the rise. To the extent that the important regional allies of the United States have been weakened economically, U.S. national security interests in the region may have been damaged, too. Yet at each step in the crisis, the IMF repeatedly applied as solutions programs that contributed to the crisis in the first place. The agency's policies unfortunately have laid the groundwork for future financial crises.
THE ASIAN CRISIS IN DETAIL
The Asian financial crisis began in Thailand in mid-1997. IMF officials have stated publicly that they in fact observed early warning signs of a real estate bubble and a sharply deteriorating current account. They delivered warnings to Thai officials for two years before the crisis, but those warnings went unheeded.7 Considering the moral hazard scenario outlined above, it is not entirely surprising that their warnings went unheeded.
Banking and Development Policies
Nevertheless, IMF officials should be credited with identifying these financial problems in Thailand. The IMF officials did not anticipate, however, a full-blown regional financial crisis. Nor were they prepared for the magnitude of the problems in the banking sector.
It was in the banking system of the Asian countries that all the flaws of the Asian economic model became evident. Banking policy and practice have been the linchpins of the Asian model of economic development. To varying degrees, Asian governments utilized the banking system to direct funds into favored investments or toward favored investors.
There certainly were differences in the economic policies of South Korea, Thailand, and Indonesia. The South Korean government, for example, pursued policies to upgrade the skills of the country's labor force and shift output from low-wage, labor-intensive activities to high-wage, capital-intensive production.
Thailand's government relied on a large supply of low-wage, relatively unskilled workers to produce such goods as apparel, footwear, and toys. Pegging the baht to the U.S. dollar was a key policy decision by the government to maintain Thailand's competitiveness.
In Indonesia, much of the industrial policy was aimed at ensuring that the family and friends of President Suharto benefited from new investment funds. It was perhaps in Indonesia that the system of "crony capitalism" reached its apogee.
Although the specifics of economic development policy differed in each of these countries (as well as in other Asian countries), the common thread was the use of the banking system and foreign exchange policy to manage development. And, in each case, the cumulative effects of the policies led to unsustainable borrowing and investments. In each country, there was a crisis waiting to be triggered by an economic event.
It must be noted that, in contrast to debt crises in Latin America, the Asian economies generally did not have fiscal deficits. Their economies did have large current account deficits, which reflected high private-sector demand for foreign capital. Although annual savings rates in South Korea and Thailand exceeded 30 percent (as a percent of gross domestic product [GDP]), private investment was even higher. (Indonesia was an exception, with its savings and investment rates roughly equal in 1996.)
A pegged exchange rate fueled private-sector borrowing. Asian borrowers preferred borrowing in U.S. dollars at low, short-term interest rates, even to finance long-term projects. In Thailand, for example, foreign capital inflows supported rapid growth in private-sector lending, much of it to finance a property boom. Thailand's foreign debt rose to 50 percent of GDP, of which 80 percent was private-sector borrowing.
Thailand's case illustrates, as do the experiences of other Asian countries, that there is plenty of blame to be apportioned in the Asian financial crisis. It is eminently understandable that, provided the opportunity, a Thai borrower would prefer cheap, short-term loans denominated in U.S. dollars to the more expensive local sources of credit denominated in Thai bahts. Thailand, by pegging the baht to the dollar, facilitated such international arbitrage. That action, although a necessary condition for the eventual crisis, was not a sufficient one.
Here is the point at which the Mexican peso crisis and U.S. and IMF policy responses to that earlier crisis become key. Foreign investors had to be convinced that there was a quick exit option in the event of a crisis. Thailand's exchange-rate policy certainly provided a level of comfort, but that country by itself lacked the credibility to guarantee that foreign investors could withdraw dollar credits as readily as they had made them. Only the implicit backing of a credible international agency like the IMF--backed by the U.S. Department of the Treasury and the Federal Reserve System--could provide the required level of comfort. Mexico was the test case, and investors drew their comfort from that episode. As one Executive Director of the IMF recently put it,
Banks and other financial institutions have the IMF very much in mind as a source of comfort when making decisions about whether to lend to risky countries, where higher yields can be obtained.8
Much blame has legitimately fallen on the lax lending practices of South Korean, Thai, and Indonesian banks, poor banking supervision, and financial accounting that was anything but transparent. If South Korea's banks were lax in their lending practices, however, what do we say of the European and American banks that provided interbank funding to Asian banks? That Western banks willingly lent is testimony to a series of guarantees that the banks felt they had been provided. First, the Western banks believed that Asian countries, such as Thailand, would not permit their banks to fail. Second, European and American banks believed that fixed exchange rates insured against currency risk. Third, they had come to believe that there was an IMF guarantee in the event the first two guarantees proved insufficient.
The seeds of the crisis were sown by the decision to peg local currencies to the dollar. In 1994, a weakening dollar improved the price competitiveness of Asian exports. In that year, however, China devalued its currency in order to maintain its competitiveness, an action that put competitive pressure on exporters in Southeast and Northeast Asia. In 1995, the foreign exchange value of the dollar began to rise. By 1996, growth rates for exports had slowed in Asian countries, even declining in Thailand.
Early in 1997, the baht came under pressure as traders began to doubt the viability of its peg to the dollar. Thailand's central bank intervened actively on foreign exchange markets and imposed capital controls in May 1997. On July 2, 1997, its reserves nearly exhausted, the Bank of Thailand floated the baht. The currency fell 10 percent immediately and then weakened further. On July 28, 1997, Thailand formally sought IMF assistance.
On August 20, 1997, the IMF announced an assistance package of $4 billion for Thailand. Thus began the IMF's involvement in the Asian financial crisis. As the crisis spread, the IMF's commitments grew in both size and scope. IMF assistance to Thailand now totals $17.2 billion. Commitments to other countries grew in similar fashion. South Korea's total commitment from the IMF and other creditors now stands at $57 billion.
In Thailand, Indonesia, and South Korea, the IMF established a list of reforms that the countries needed to implement ("conditionality"). These reforms were designed to deregulate and liberalize the economy; open the economies to trade and investment; restructure the corporate sector; and resolve bad loans in the financial sector. Success at implementing the reforms has varied by country.
Thailand responded quickly to some of the recommendations. On December 8, 1997, the government permanently closed 56 of 58 suspended finance companies. A government agency assumed control of the assets for liquidation. On February 9, 1998, the government nationalized two banks that had not submitted acceptable recapitalization plans. The capital of two previously nationalized banks was written off. The government's efforts at reforming the bankruptcy laws were thwarted in 1998 by strong opposition. Since that time, the first of a series of laws reforming bankruptcy have been passed.9
The case of Thailand illustrates the limits of the IMF's influence. The IMF deals with sovereign states and cannot impose its policies at will. In democratic countries, opposition parties must be placated. Even when a government is genuinely committed to implementing reform, as it is in Thailand, progress can be slow.
Even in countries that have strong leaders but weak democratic institutions, political opposition can halt reform. Indonesia is another example of the limits of the IMF's influence. A severe economic contraction led to political upheaval involving violence, property damage, and even loss of life. Many observers now believe that IMF reforms in Indonesia were overly harsh and attempted to transform the economy too quickly. Political reaction to the IMF reforms has slowed, if not halted, the reform process there.10
South Korea has been an Asian model for democratic political reform and political liberalization. Comparatively little economic reform has been implemented, however. Korean policies generally promoted economic development through large conglomerates known as chaebol. At the time of the economic crisis, the 30 largest chaebol accounted for 80 percent of the country's output. Their growth, however, occurred at the expense of small and medium-sized firms. Admittedly, it is a daunting task to break up these conglomerates and foster a more entrepreneurial economy. The government reportedly has taken its first steps in that process.11 One of the problems the government has encountered in instituting reform is excessive debt financing by the chaebol.
It is generally true that Asian economies relied excessively on debt financing, making too little use of equity investment. The reliance on debt financing is a by-product of using the banking system as the mechanism by which investment is directed into favored sectors (and, by implication, denied to other parts of the economy). In South Korea, however, such leverage reached astounding levels. The average leverage ratio for the 30 largest chaebol was 330 percent.12
South Korea's entire economy was leveraged like the real estate sector of the U.S. economy. No market economy can weather normal volatility with such leverage, and the Koreans paid the price in bankruptcies and business failures. The real estate analogy actually points the way to an alternative free-market approach to resolving international debt crises.
Operating as they do with high leverage, many U.S. real estate developers periodically find themselves unable to service their debts. Frequently, the projects are viable if debt-service payments can be reduced. And it is often the case that the original developer is the most qualified individual to complete the project. In such cases, lenders and borrowers agree to a loan workout, in which debt is reduced (or the term of the loan extended), and often debt is swapped for equity. Investors may inject additional funds as needed. And some short-term lenders may become medium-term lenders. As the saying goes, "in for a dime, in for a dollar." And, it might be added, "in for six months, in for six years."
In essence, South Korea's entire economy, along with those of other affected Asian countries, needs a debt-for-equity swap to reduce leverage. IMF programs are not geared for that solution. IMF programs emphasize additional lending, and that is sovereign lending. What is needed in South Korea and elsewhere is new private equity investment. The IMF cannot be the source of such funds, and it has no expertise in securing them.
U.S. lenders and law firms are masters at real estate workouts. Instead of calling in international bureaucrats, countries would be well advised to call in bankers and lawyers from the United States who are veterans of real estate workouts. The outcome not only would avoid international bailouts, but also would contribute to the efficiency of the economies. In fact, the seemingly hopeless debt problems of the major Indonesian conglomerate Bakrie & Brothers were resolved recently by bringing in a skilled U.S. bankruptcy lawyer to do a corporate workout.13
Given the choice, of course, lenders always will prefer a simple bailout to the tedious process of working out individual bad loans. All the banks and savings and loans in the Southwest region of the United States would have been delighted to have had the equivalent of an IMF bailout during that region's real estate bust.14 And so, too, would have lenders during New England's downturn. Even though regional banking crises were a consequence, policymakers in the United States did no such thing because of the obvious moral hazard problem that such policies would have engendered. And the economies and financial systems of both regions are demonstrably stronger as a result. Yet policymakers in the United States are complicit in wreaking harm on other countries that they would not inflict on their own.
The Need for Reform and Private Equity Investment
In each country receiving IMF support, the agency has established conditions for the banking and financial systems. As already indicated, Thailand has made great progress toward instituting reforms. Indonesia's political upheaval has obstructed, if not set back, reform. South Korea has laid the groundwork with political reform, but the promise of opening up the banking system to competition has been slow to occur.
Allowing foreign banks and securities firms to establish branches in these countries is a critical element of reforming the financial sector. That is true for four reasons: First, foreign firms bring well-capitalized institutions to the economy with fresh sources of funds; second, foreign institutions basically import higher supervisory standards because they must meet the generally more stringent requirements of home-country supervisors; third, in similar fashion, foreign institutions bring their more-transparent accounting standards with them; and finally, foreign financial institutions often have better business practices, which they also bring with them.
BACKLASH TO IMF PROGRAMS
When implementation of IMF recommendations on financial liberalization falls short, it is a reflection of the obstacles that national sovereignty places on internationally imposed reforms. Indeed, it is a fact of life that nationalist opposition is strengthened in reaction to internationally imposed reform, whatever its merits.
But on top of this is the perception that the IMF is a mere instrumentality of U.S. policy. As a visiting delegation of legislators from one Asian country recently observed during separate visits to the U.S. Department of the Treasury and the IMF, not only are the same policies recommended, but in the very same words.15 For foreigners, there is no doubt that the script for the IMF is written in the U.S. Department of the Treasury; consequently, anti-U.S. feelings are on the rise in such countries.
It is important to recognize that IMF intervention generates a nationalist and populist backlash. Many policymakers believe that international organizations, like the IMF, can force governments to implement needed reforms, which they never could accomplish on their own. IMF-imposed programs set in motion a complex political dynamic, however, which makes it difficult to pronounce confidently that the participation of the IMF in the domestic reform process is helpful.
The political dynamic may explain the reason that the IMF frequently must revise its initial conditions, as happened during the current Asian financial crisis. IMF conditionality first brings economic pain and then political reaction. Political reaction slows reform, which leads the IMF to revise its conditions so as to conform to political reality in the debtor country. Instead of an externally imposed reform process, the reform process is adjusted to domestic political conditions.16
Reforming the IMF
On October 23, 1998, Congress passed the 1999 Omnibus Appropriations Act, which mandates actions that U.S. officials must take before funds can be released. These limited steps toward reform of the IMF must be lauded even if much more needs to be done. Even more important, however, than this legislation is the congressional debate surrounding its passage. That debate shifted the focus from how much money should be provided to the IMF to whether such an organization still is necessary.17
Unfortunately, the language in the Omnibus Appropriations Act fails to specify concrete actions that the IMF itself must take or specific reforms that it must implement. Instead, thelanguage requires certification that the Secretary of the Treasury has instructed the U.S. Executive Director to the IMF to support congressional reforms. It requires the Executive Director to use the U.S. "voice and vote" in support of reform. On numerous occasions in the past, Congress has adopted this approach, but to no avail. IMF policy has changed little in response to previous congressional reforms, and it is unlikely to change as a result of the most recent congressional effort.18
There are two major reasons that the "voice-and-vote" requirement is an ineffective means to achieve the stated goals:
First, the IMF operates by consensus rather than formal votes. For example, Karin Lissakers, the U.S. Executive Director to the IMF, testified before Congress that, since she became U.S. Executive Director, there had been only 12 formal votes out of more than 2,000 decisions made by the Board.19
Second, and more important, the U.S. Department of the Treasury exercises influence over IMF policy far in excess of the explicit percentage vote possessed by the United States. IMF policy does not, and will not, deviate in any important or fundamental way from the policy of the U.S. Department of the Treasury. If Congress is displeased with IMF policy, it should express its concerns to Secretary of the Treasury Robert Rubin and Deputy Secretary Larry Summers. IMF policy originates with them and can be altered effectively by them.
Congress also can influence IMF policy in the same way it influences policy in any executive branch agency: through oversight hearings, like this one, and the power of the purse. Any other route, such as requiring the U.S. Executive Director to use her "voice and vote" in IMF deliberations, diminishes the influence of Congress and is unlikely to have a major impact on IMF policy.
In a real sense, the long delay in effecting U.S. funding for the IMF and the vigorous congressional debate that took place in 1997 and 1998 had more of an impact within the IMF than "voice-and-vote" instructions. The IMF has become visibly more open and transparent about its policies. Today, it publishes more information on its programs and policies, and does so in a more timely manner, than heretofore was the case. What has not really changed, however, are the policies themselves.
The crucial problem for reforming the IMF is that, from a democratic perspective, the agency is not held accountable for its policies or programs. In a democracy, the electorate holds legislators accountable for their actions. Executive branch officials are subject to legislative oversight. In constitutional systems, the judiciary's independence is protected; but in the United States, even judges can be removed for cause (and in many states, judges are subject to recall or election). Independent agencies, such as the Federal Reserve, are subject to congressional oversight and must stand ready to defend their policies.
International agencies, by their design, are insulated from such democratic accountability. Yet they are amply funded, to the tune of many billions of dollars. Human beings even with the best of intentions will begin to behave irresponsibly when they are shielded from accountability or realistic financial constraints. Nothing short of fundamental institutional reform will alter behavior. Congress did not accomplish such institutional reform in the 1999 Omnibus Appropriations Act. The only effective interim measure to gain some accountability is to look to the U.S. Department of the Treasury, to which the U.S. Executive Director of the IMF reports. It is here that accountability can be imposed.
Too often, policymaking takes place in a vacuum in which policymakers either are unaware of the historical dimension of the problem or fail to link the current problem with past policy actions. The Asian financial crisis is embedded not only in the history, culture, and policies of each country, but also in the history of international economic policy in developing countries. That is particularly true with respect to IMF policy in Asia today.
The Asian financial crisis had its roots in the Mexican peso crisis of 1995. The IMF's handling of the Mexico crisis firmly established moral hazard in international lending and sowed the seeds for the Asian crisis.20 Thus far, IMF policy in Asia largely repeats the policy mistakes in Mexico.
The reforms enacted by Congress are an important first step toward reforming the IMF. Even more important than the reforms, however, was the congressional debate over IMF funding. That debate focused attention on the process and substance of IMF policymaking, and even questioned the need for that organization in the post-Bretton Woods world.
Continued congressional oversight of the IMF and, more important, the Department of the Treasury is crucial to taking the next step toward fundamental reform. Reform requires moving beyond greater transparency to accountability and genuine institutional reform.
Gerald P. O'Driscoll, Ph.D., is Senior Fellow in Economic Policy in The Kathryn and Shelby Cullom Davis International Studies Center at The Heritage Foundation.
1. This analysis is based on the author's testimony before the Subcommittee on International Trade and Finance of the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate, 106th Cong., 1st Sess., March 9, 1999.
2. In the coming months, The Heritage Foundation will publish a series of papers that evaluate more fully the policy lessons from the Asian financial crisis.
3. This statement is true whether one looks at the absolute size of the IMF program or its size relative to Mexico's quota in the IMF.
4. See, for example, Doug Bandow, "The IMF: A Record of Addiction and Failure," in Doug Bandow and Ian Vasquez, eds., Perpetuating Poverty: The World Bank, the IMF, and the Developing World (Washington, DC: The Cato Institute, 1994), pp. 15-36.
5. The IMF supplied only part of the funds for the Mexico bailout. The Exchange Stabilization Fund (ESF) of the U.S. Department of the Treasury and the Federal Reserve were important additional sources of funds. See Anna J. Schwartz, "Time to Terminate the ESF and IMF," Committee for Monetary Research and Education Monograph No. 54, December 1998, pp. 4-27.
6. Nobel Laureate Milton Friedman recently put the case even more strongly: "In my opinion, if there had been no IMF, there would have been no East Asian crisis." Statement made in an interview with Ed Carson for the series entitled "Econ One on One." See Ed Carson, "Milton Friedman on Asia, Inflation, and `Asset Bubbles,'" Investor's Business Daily, March 24, 1999, p. 4.
7. See Karin Lissakers, "The IMF and the Asia Crisis--A View from the Executive Board," draft speech before a conference on "Asia: An Analysis of Financial Crisis," co-sponsored by the Federal Reserve Bank of Chicago and the IMF, October 8, 1998, p. 2.
8. Onno De Beaufort Wijnholds, "Maintaining an Indispensable Role," Financial Times (London), March 1, 1999.
9. Thomas L. Friedman reports optimistically on Thailand's reforms and outlook in "The Reverse Domino," The New York Times, March 19, 1999.
10. The decision to close a number of banks led to a banking panic. Critics view the banking problems as a consequence of the IMF program. The IMF has a different view; see Timothy Lane et al., IMF-Supported Programs in Indonesia, Korea, and Thailand: A Preliminary Assessment (Washington, DC: International Monetary Fund, January, 1999), pp. 61-66.
11. See Sandra Sugawara, "South Korea Takes on Family Business Groups," The Washington Post, March 11, 1999, p. E1.
12. The leverage ratio is conventionally defined as the ratio of debt to equity.
13. "A Survival Guide," The Economist, January 30, 1999, pp. 58-59.
14. At the time, there were suggestions for a new Reconstruction Finance Corporation, but the idea never got off the ground.
15. Comments made this year at an off-the-record lunch by visiting officials from an Asian country.
16. See Bandow, "The IMF: A Record of Addiction and Failure," pp. 21-22.
17. See Bryan T. Johnson and Brett D. Schaefer, "IMF Reform? Setting the Record Straight," Heritage Foundation Backgrounder No. 1237, November 25, 1998, p. 1. This Backgrounder contains a detailed list of actions mandated by the 1999 Omnibus Appropriations Act.
18. See Edwin J. Feulner, Jr., Ph.D., "The IMF Needs Real Reforms, Not More Money," Heritage Foundation Backgrounder No. 1175, May 5, 1998.
19. Karin Lissakers, U.S. Executive Director of the IMF, in "Review of the Operations of the International Monetary Fund," Testimony before the Subcommittee on General Oversight and Investigations, Committee on Banking and Financial Services, U.S. House of Representatives, 105th Cong., 2nd Sess., April 21, 1998, pp. 27, 46, and 47.
20. This is not to suggest that moral hazard did not exist before 1995. Indeed, Chart 2 suggests that, certainly for Mexico, moral hazard might be at work. As indicated in the text, however, the 1995 peso crisis was a watershed event.