Falls at bourses around the world are causing tremors. Not a few voices are alluding to a looming crisis in financial markets. Even statements of leading central bankers sound pretty worryingly when expressing concern as to how world credit markets have been evolving.

A global financial turbulence would be more than a serious matter. It could happen in the financial realm per se, or it could be triggered indirectly by a major shock -as it was the brutal rise in the price of oil several decades ago. Ultimately, a crisis would show up in economic recession/slowing down worldwide and severe pains to firms, industrial and service sectors, to various countries.

History provides illuminating lessons. One famous episode is linked with the Vietnam War. Lax American monetary policy in the 70s, for the sake of financing large budget deficits (the war), resulted in double-digit inflation. The additional liquidity injected in the American economy meant surplus liquidity for the world economy and falling interest rates on world capital markets. Many developing economies were able to finance large external deficits quite cheaply (at even real negative interest rates). Once Paul Volcker took over the helm at the Fed the stance of monetary policy changed radically; his mission was to subdue high inflation ant that goal implied a severe tightening of monetary policy -namely, a sharp rise in interest rates. That rise entailed a tightening of credit conditions on international markets. The S&LAs debacle in the US can be related to that period as well.

Many countries, mostly in Latin America, had borrowed, at floating rates, hugely from North American banks. The turnaround in US monetary policy caught them off guard and not a few of those countries were incapable of honoring their external dues. The Brady bonds are a legacy of that period. This episode shows, quite gla