International Monetary Fund. Monetary and Capital Markets Department
INTERNATIONAL MONETARY FUND
This September 2003 issue of the Global Financial Stability Report highlights that since March 2003, further progress has been made in addressing the lingering effects of the bursting of the equity price bubble. Household and corporate balance sheets have continued to improve gradually and corporate default levels have declined. Companies in mature markets have cut costs, enhancing their ability to cope with slower growth and other potential difficulties. Corporations-particularly in the United States-have made good progress in their financial consolidation efforts and are in a better financial position to increase investment spending.
Low interest rate policies in the major financial centers were a key driver of financial market developments in the first half of 2003. Low rates induced investors to move out along the risk spectrum in search of better returns, investing in corporate and emerging market bonds and then in equities. They also allowed corporate and household sectors to lock in longer-dated borrowing and enabled many emerging market sovereigns to complete early their 2003 borrowing program. However, low rates presented problems to some financial institutions, such as life insurers and defined-benefit pension funds.
Since mid-June, mature market government bond yields have rebounded and yield curves have steepened, raising the possibility that a transition to a higher interest rate environment has begun. The rises in yields have at times been sharp, and the total increase has already been significant. At the same time, the U.S. dollar has shown signs of stabilizing, most notably against the euro, as a result of market expectations that growth in the United States would outpace that in the euro zone.
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