However, by adopting the euro early, a country forgoes the flexibility of altering its exchange rate to absorb economic shocks.

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It is not just how banks manage their own exposures to interest rate movements, currency shocks and market swoons, but increasingly, it is a business in and of itself.

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In the emerging-markets crisis that currently threatens the world economy, exchange-rate movements have not been absorbers of shocks but amplifiers and even creators of them.

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This is the value of an exchange-rate peg in an economy such as Hong Kong's: adjustment to external shocks takes place through changes to domestic prices, rather than through exchange-rate levels.

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Governments cannot use the exchange rate to help the economy adjust to outside shocks, such as a fall in export prices or sharp shifts in capital flows.

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Worries are now growing that the pattern of previous oil price shocks may be repeated: inflation, interest rate hikes and, finally, years of painful recession.

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"A flexible exchange rate is one more channel for absorbing both positive and negative shocks, " he told the conference.

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Precisely because the exchange rate cannot adjust, it reduces a country's ability to cope with shocks, such as a big change in commodity prices.

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It should lend only to pre-certified countries facing temporary liquidity shocks, on a short-term basis, at a penal interest rate, and without economic conditions attached.

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