Managing International Financial Instability

Managing International Financial Instability

National Tamers versus Global Tigers

Fabrizio Saccomanni

Recurrent instability has characterized the global financial system since the 1980s, eventually leading to the current global financial crisis. This instability and the resultant disruptions – sovereign debt defaults, exchange rate misalignments, financial market illiquidity and asset price bubbles – are linked, in this book, to the shortcomings of the global financial system which tends to generate cycles of boom and bust in credit flows. These cycles are set in motion by the monetary impulses of major industrial countries and are amplified and propagated through the operation of global financial markets. Fabrizio Saccomanni argues that to counter such systemic instability requires that national authorities give adequate weight to financial stability objectives when formulating their monetary and regulatory policies. He maintains that appropriate multilateral strategies to deal with unsustainable trends in credit aggregates and asset prices should be devised in the International Monetary Fund in the context of a strengthened framework to deal with global payments imbalances and exchange rate misalignments.

Chapter 10: Double play in Hong Kong (1998)

Fabrizio Saccomanni

Subjects: economics and finance, money and banking


It was a contrived game with clearly destructive goals in mind – drive up interest rates, drive down share prices, make the local population panic and exert enough pressure on our linked exchange rate until it breaks. Donald Tsang (1998, p. 4)1 In the midst of the Asian financial panic and the Russian debt crisis of August 1998, extreme downward pressure was exerted simultaneously on the fixed exchange rate of the Hong Kong dollar and the local stock exchange, the Hang Seng. The Hong Kong Monetary Authority (HKMA) established that the pressures were being fuelled by hedge fund transactions conducted jointly on the currency and equity markets and moved to reinforce its support of the exchange rate through massive intervention purchases in the stock market. The decision to intervene, viewed by many as being in breach of orthodox practices and the professional code of conduct of central banks, was severely criticized both within Hong Kong and abroad, but nonetheless proved effective in withstanding market pressures. Indeed, Goodhart and Dai (2003, p. 4) consider the event ‘a rare example of waging a successful battle against speculators’. In 1983 Hong Kong adopted a currency board regime that involved setting a fixed rate of exchange of 7.80 Hong Kong dollars per US dollar. The HKMA maintained currency stability by increasing or restricting domestic liquidity in equal proportion to the inflows or outflows of capital from and to other countries. International financial players were reassured of the regime’s credibility by the...

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