Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the Convention of the Institute of Life and Pension Advisers (ILPA)Johannesburg.  1. The international financial rises of 1997/1998The past eighteen months witnessed disrupting turbulences in world financial markets that led to the collapse in financial structures in many countries, and to a serious decline in economic growth in the world at large.A chronic weakness in the Japanese economy over a prolonged period of time should perhaps be regarded as the major cause of the financial crisis, which is generally linked to the collapse of the economies of a number of countries in East Asia. These included Thailand, Korea, the Philippines, Indonesia and Malaysia -- countries that managed their economies with great success for many years. What went wrong in these countries is now part of history, and some consensus has been found on an ex post basis of the reasons for the collapse in the economies of what used to be referred to as the East Asian Tigers. In general, the following can be offered as a summary of mistakes that were made in the economic management of the afflicted countries: Governments failed to react timeously to overheating economies. This was manifested in unsustainable high levels of economic growth, inflated property and share prices, as well as large deficits on the current account of the balance of payments.Prolonged pegging of currencies to the United States dollar at unsustainable levels, making monetary policy less effective and making the exchange value of domestic currency appear to be guaranteed. This encouraged huge external borrowing, leading to excessive exposure to foreign exchange risks for borrowers in the public and in the private sectors.Insufficient supervision of financial institutions and poor enforcement of prudential rules, reinforced by cronyism.Lack of sufficient and accurate data to enable market players to make a correct assessment of economic fundamentals.In the situation, international investors under-estimated risks as they searched for higher income yields. In particular, investors failed to grasp inevitable links between market (liquidity) risks and credit risks.The expanding world financial market and lax controls over multi-national financial institutions encouraged excessive leveraging based on a relatively small capital base for hedge funds and certain banking institutions.A herd-like reaction by international investors, once the bubble burst, that led to an almost panic-withdrawal of funds from economies that could not in a short period of time absorb the shock of the turnaround in the sentiment of international investors.The adverse developments in East Asia almost immediately affected emerging markets all around the world. Initially, that is from the middle of 1997 up to the second quarter of 1998, most of the other emerging markets succeeded in keeping afloat and there was still a chance to keep the crisis restricted to the East Asian region. The situation was exacerbated, however, by the complete collapse of the situation in Indonesia, and by the early signs of an emerging second crisis in Russia. The effective devaluation of the rouble and unilateral restructuring announced by Russia in August 1998, triggered a further series of sharp market corrections, indicating a generalised increase in perceived risk or risk aversion.A third threat to a major collapse of the global financial system came towards the end of last year with the deterioration of the financial situation in Brazil, mainly because of chronic fiscal imbalances and large-scale speculative attacks on what markets perceived to be an overvalued currency.In general, the immediate effect of a loss of confidence of investors in any specific economy was reflected in a decline in the inflow of foreign capital or, in many cases, a large withdrawal by non-residents of previously invested funds from the country.The widespread flight to quality and liquidity gave rise to a severe tightening of credit conditions in the affected countries: equity pr