No.10   August 1, 2000   The Mechanisms of "21st-Century-Type" International Financial Crises   Toshiki TOMITA        The 1990s experienced a series of international financial crises in places such as Mexico, Asia and Russia. These crises are seen as the result of sudden, large flows of international capital, and have earned themselves the name of "21st-century-type" international financial crises. They are characterized by a vicious cycle--triggered by currency depreciation (itself triggered by sudden capital outflows) and a domestic financial crisis--that spreads to other economies.    These crises occurred suddenly. However, they were preceded by huge capital inflows, which stimulated economic growth and yet further capital inflows. The sustainability of such inflows was called into question, however, and the conditions under which predictions of a crisis could become self-fulfilling fell into place.    The Russian crisis spread to the industrial economies. Russia's default made international investors aware once again of credit risks that had been hidden by international safety nets and hedge fund convergence trades, causing them to seek to avoid risk and leading to a flight to quality and liquidity. Japanese government-guaranteed dollar bonds still have a risk premium.    International capital is fleet of foot, and risk can be transmitted instantly. At the same time, however, international capital mobility allows capital to be allocated efficiently at a global level and assists economic development. Crises should be seen as occurring because markets detect undisciplined and contradictory economic policies rather than as the result of markets going out of control. If financial and economic systems are to continue to be integrated, national governments need to adopt and maintain disciplined political and economic policies. Contents I Emerging Market Crises During the 1990s 1 A Series of International Financial Crises 2 The Growth of International Capital Mobility 3 The Mexican Tequila Crisis 4 The Asian Flu 5 The Russian Virus II Crises as Self-Fulfilling Predictions 1 The Dollar Peg as a Catalyst of Capital Inflows 2 The Sustainability of Capital Inflows 3 The "Twin" Crisis: Why Predictions Tend to Be Self-Fulfilling 4 Limitations of Traditional Remedies III The Spread of the Russian Virus to the Industrial Economies 1 The Differences Between the Asian Flu and the Russian Virus 2 Convergence Trades and the LTCM Crisis 3 The Flight to Quality and Liquidity 4 The Effects on Japan IV The Open-Economy Trilemma GO to PDF