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Avoiding Breakdown: Asia's Crisis Demands New Inte

NEW YORK: The international financial system is suffering a systemic breakdown, but we are unwilling to acknowledge it. The abandonment of fixed exchange rate regimes in south-east Asia touched off an unraveling process that has exceeded everyone's worst fears, including my own. So far the large bail-out programed implemented by the International Monetary Fund have not worked.

Lending by the international financial institutions can never replace lending by the private sector. The rescue packages are supposed to do their work by re-establishing private sector confidence. Unfortunately, the currencies of the debtor countries have continued to depreciate, aggravating their debt problems and further undermining confidence.

The countries concerned were over-indebted to start with. The decline in their currencies, coupled with the drastic rise in interest rates, has rendered the debt burden even more crushing.

We are dealing with a self-reinforcing process. Once it is reversed, it could become self-reinforcing in the opposite direction. The trouble is that the process is still moving away from equilibrium. It is impossible to tell how far it may go. What started out as a minor imbalance has become a much bigger one that threatens to engulf not only international credit but also international trade. We are on the verge of worldwide deflation.