After the resolution of the crises of the 1980s and 1990s, many emerging markets implemented key reforms, pursued prudent macroeconomic policies, strengthened banking and financial institutions and built up significant central bank reserves. In spite of their reforms, many of these countries have been caught in the downdraft of this credit crisis. They are the victims of financial stress that is both not of their making and is beyond their control. It could affect their real economies. The situation is deteriorating; these countries should not be left adrift. It would be imprudent to risk undermining the efforts in the Group of Seven leading industrialised countries to stabilise conditions by allowing the strains in emerging markets to evolve into an acute situation. Now is the time to act.

The establishment in the US of the troubled asset relief programme, plus the decision to use a portion of Tarp funds to recapitalise the banking system, can help stabilise market turmoil, as can the European measures to provide liquidity and debt guarantees, and recapitalise banks. In time, we can also expect positive results from thecollaboration of central banks in the US, Europe and Japan to mitigate dollar funding pressures in their markets by greatly expanding reciprocal currency arrangements (so-called swap agreements) to extend unlimited dollar funding. But corresponding moves on the emerging markets front are essential.

The lesson of the Latin American debt crisis and Asian financial crisis is that mechanisms must be put in place rapidly to shore up these vulnerable markets. The International Monetary Fund must assume a leadership role as it has in the past.