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Abstract
The financial market turbulence experienced by many emerging markets during the past two years has both generated new policy responses to market pressures and highlighted the key role of institutional investors and agencies in mature markets in determining capital flows to emerging markets. This chapter examines two aspects of this experience. First, while the authorities have traditionally responded to speculative attacks through on-balance-sheet sales of domestic currency and other assets converted into foreign exchange, they have begun to expand the set of instruments and markets in which intervention is undertaken. This chapter analyzes three such interventions—namely, Hong Kong SAR’s equity markets intervention, Brazil’s buyback of Brady bonds, and the use of capital controls by Malaysia. The second section focuses on the role of the major credit rating agencies in influencing terms and conditions of access to global securities markets for emerging markets. As global securities markets have become increasingly important sources of funding for emerging markets, the credit ratings assigned to sovereign and private sector issuers have often had an important influence on the demand for these securities. Indeed, some institutional investors often can hold only so-called “investment-grade” securities because of either regulation or self-imposed risk management considerations. Moreover, the Basel Committee on Banking Supervision recently proposed that credit ratings would become key determinants in the risk weights attached to bank exposures to sovereign and other borrowers. However, the sharp adjustments of sovereign credit ratings for many emerging markets in the period since July 1997 have raised concerns about the accuracy and stability of the rating process.
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