movements, other than normal repayments, into or out of the borrowing country. Sustained access to foreign markets if another matter; if depends on the market's continued positive assessment of the borrower, the liquidity of the borrower's paper, and the borrower's compliance with market rules. If circumstances lead to price volatility in foreign markets, new placements will be inhibited.
In some East Asian countries (Indonesia, Korea, and Thailand) domestic banks have been major issuers of bonds into external markets. Since 1990, 40 percent of placements have been by financial institutions, with banks accounting for 27 percent. Large banks obviously have better credit rating than many of their clients and are thus able to raise funds less expensively. This is a legitimate intermediation function and has opened financing opportunities to many domestic firms that would otherwise have had less access to funds. For the ultimate borrower, lower interest rates, not foreign exchange rates, are typically the critical factor. For the intermediating banks, the spreads and volumes are attractive, and the operations help establish the bank's international presence. These actions, however, pose two risks. First, there may be a relative decrease in the effectiveness of monetary police, since in the effectiveness of monetary policy, since the financial system can miligate or offset government attempts to expand or contract credit by modulating its foreign borrowing for domestic clients. When foreign interest rates are lower than domestic rates, borrowers will be tempted to seek more funds abroad, which may undermine domestic policies of monetary restraint. Second, banks (especially public or quasi-public banks) may be borrowing abroad with the implicit or explicit expectation of a government quartette. They may not take full account of the exchange risk and may face interest risks as well, since they are intermediating across currencies and between short-term liabilities and long-term assets. These risks are likely to be passed on to the government, should they adversely affect the banks. The recently reported instance of BAPINDO, a troubled Indonesian bank that borrowed internatinally, seems to have involved an implicit guarantee, as that bank would not have been able to borrow on its own account. More generally, central banks may be forces to intervene to protect the banking sector with official reserves if there are major disruptions of commercial banks 'capacity to refinance abroad. For some large borrowers, domestic markets may not yet be deep enough to absorb the size and other requirements of their financing needs, so that these enterprises must turn to international markets.
FPI in domestic markets is a different matter. The bulk of this inflow has been in equities, as investors have been seeking high yields, mostly through appreciation. These flows purchase existing portfolio assets and sometimes...
