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Recent crises have revealed major shortcomings in the management of foreign debt and liquidity in emerging market economies. Possible responses were discussed by a small group of senior central bankers at the BIS during a two-day meeting in December 1999. Ideas included an integrated approach to managing risks in a broader national balance sheet and reforms to the government’s own asset and liability management practices. Another important topic was how far the adequacy of foreign exchange reserves should be judged in relation to short-term foreign debt. Policies towards the private sector’s management of liquidity risks also featured. The country papers that follow highlight the main experiences of specific economies. This paper provides an overview of the main issues. The first section looks at lessons from recent crises on the dangers of excessive foreign debt, particularly if it is short-term. The second section considers official policies to manage foreign debt. It begins by evaluating the idea of “national liquidity”, ie comparing the total liquid assets over the whole economy with the total foreign debt, in terms of both conceptual validity and practicality. Drawing on this discussion, the question of how much government debt should be issued domestically and how much externally is then posed. The role of simple guidelines for government debt management and their relationship with reserve management is also discussed.

The third section focuses on the issue of how the “optimal” size of foreign exchange reserves–if this is a useful concept–varies across countries and over time. The so-called “Guidotti rule” is discussed, along with …