Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the Fifth Annual General Meeting of the South Africa - Canada Chamber of Business, Johannesburg.  1. BackgroundAs could have been expected, this year's Annual Meetings of the International Monetary Fund and the World Bank Group held in Washington D.C. during the first week of October, were dominated by a discussion of the global financial crisis.What started off more than a year ago as an East-Asian crisis gradually extended to other emerging market countries and eventually also affected a number of smaller well-developed economies. The most recent extension was an infliction on the financial systems of some of the industrial countries, such as the United States of America. What started off as a more regional problem of the countries surrounding the depressed economy of Japan, indeed became a global problem that is now demanding the serious attention of the total international community. This may be a depressing thought, but it is nevertheless one of the more encouraging outcomes of this year's annual meetings of the IMF and the World Bank. Now that so many countries, and also major industrial countries, are more directly involved in the financial crisis, there is a greater urgency for finding a solution. 2. The causes of the problemMany reasons have been advanced for the world financial debacle. Apart from the adverse effects of a protracted recession in the Japanese economy, East Asian countries were blamed for lax macroeconomic financial policies, for insufficient disclosure of information on foreign capital movements and debt positions, for bad governance at government and private sector levels and for crony capitalism.Private international investors were blamed for irresponsible speculative attacks on the foreign exchange rates of countries, of destabilising activity in the financial markets and of a reluctance to share in the burden of eventual collapse and adjustment.The International Monetary Fund has been criticised and is still under attack from many quarters for not diagnosing the problem at an earlier stage, and for the way the Fund eventually handled the crisis situation in individual countries. The medicine prescribed by the Fund (the Fund's "conditionalities") is blamed for killing the patient, rather than curing the illness.Recent developments added a further dimension and exposed a possibly more important basic cause for the global financial dilemma, and that is the excessive leverage positions that certain financial institutions were allowed to create in funding international capital flows, including speculative investments in emerging markets. The near-collapse of the Long-Term Capital Management Fund (LTCM) in the United States of America in September exposed an astonishing balance sheet position for an important operator in the world financial markets -- a balance sheet for a non-bank financial intermediary that used more than $50 of borrowed funds (mostly bank funds) for every one dollar of own capital!Finally, the nature and functioning of the present international financial system of floating exchange rates, unrestricted capital movements and liberalised financial markets is also now being questioned. This system which gradually developed through an evolutionary process over the past two decades after the final demise of the system of fixed par values in the 1970's, has some built-in elements that encourage periodic occurrences of international financial instability. Particularly the smaller economies of the world find it increasingly difficult to maintain orderly domestic financial conditions in an environment of financial globalisation, financial market integration and exchange control liberalisation.The truth is perhaps that no solitary cause can be singled out as the only reason for the development of the present international financial crisis. The erosion in the quality of the system took place over a long period of time and the possible causes identified above most probably all contributed to the weakening and eventual