ABSTRACT
This chapter examines key aspects of financial globalization and the reaction of emerging markets. It considers what changes have occurred in the external environment, which – given improper internal government policy – can cause a financial crisis and even the resignation of the government. The liberalization of the banking sector in the 1990s and the deregulation of the whole financial sector took effect in conditions where there was not enough supervision and control over the activities of banks and other credit institutes. Moral hazard clearly played a role in the buildup of claims on Russia in a way that cannot realistically be said for any of the other crisis countries. But in addition to this moral hazard, there is also clear evidence that Russia represents a case where many investors bought securities that they did not fully understand, and where they did so in the face of developments that should have raised concerns.
