This March 2002 issue of the Global Financial Stability Report highlights that financial markets ended the year 2001 on a positive note. Equity markets recovered and rallied noticeably from their lows of late September. In bond markets, yield spreads of corporate and high-yielding bonds, particularly emerging market bonds, narrowed against the U.S. Treasury. At the same time, the U.S. Treasury yield curve steepened, and the U.S. dollar has strengthened. Financial markets thus anticipate, and have priced in, a recovery in economic activity and corporate earnings during 2002.

© 2002 International Monetary Fund

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Cover: Massoud Etemadi

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ISBN 9781589061057

ISSN 0258-7440

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The experience of the past decade with the rapid expansion of financial markets has underlined the importance of a constant evaluation of the private sector capital flows that are the engine of world economic growth, but sometimes at the core of crisis developments as well. This experience demonstrates that the opportunities offered by the international capital markets for enhancing global prosperity must be balanced by a commitment to prevent debilitating financial crises.

The challenge facing the international community is to deepen our understanding of the potential systemic weaknesses and fault lines that have the potential to lead to crises. The International Monetary Fund is working on a comprehensive strategy aimed at safeguarding the stability and integrity of the international financial system by better understanding how to cope with the dynamics of rapidly evolving capital markets.

The founding of the IMF's International Capital Markets Department in 2001 was an important step in this effort to deepen our understanding of international capital flows and to strengthen the IMF's surveillance of developments in financial markets. The inauguration of the Global Financial Stability Report, which now will become a quarterly publication of the IMF under the direction of the International Capital Markets Department, is aimed at this same purpose. I believe that this report will make an important contribution to the effort to better understand the trends and issues that influence the capital markets—thereby contributing to global financial stability and the prosperity of all our member countries.


Horst Köhler

Managing Director

  • Foreword

  • Preface

  • Chapter I. Overview

  • Chapter II. Recent Developments in International Capital Markets

    • The Recovery Rally

    • What Are Markets Anticipating About Recovery?

    • Emerging Market Financing

    • References

  • Chapter III. Stability Implications of Global Financial Market Conditions

    • Financial Market Implications of Financial Imbalances and a Subdued Recovery

    • How Effectively Is the Market for Credit Risk Transfer Vehicles Functioning?

    • References

  • Chapter IV. Early Warning System Models: The Next Steps Forward

    • Current EWS Models at the IMF

    • EWS: A Way Forward

    • Conclusion

    • References

  • Chapter V. Alternative Financial Instruments and Access to Capital Markets

    • Alternative Financial Instruments: What Are They and How Do They Work?

    • Policy Implications

    • Concluding Remarks

  • Boxes

    • 2.1. Anticipating Economic Turnarounds: The Record of the Stock Market

    • 2.2. Argentina and the Asset Class

    • 3.1. Financial Implications of Enron's Bankruptcy

    • 4.1. The IMF's Core Early Warning System Models—A Primer

    • 4.2. Alternative Measures of Contagion

    • 5.1. Recent Bond Warrants

    • 5.2 The Structure of Future-Flow Securitizations—Modalities and the Case of PEMEX

  • Tables

    • 2.1 Total Return Performance of Mature Equity Markets

    • 2.2 U.S. Corporate Bond Total Returns

    • 2.3 Emerging Market Financing

    • 2.4 Performance of Emerging Bond Markets

    • 2.5 Currency of Issue

    • 2.6 Total Dollar Return Performance of Emerging Equity Markets

    • 3.1 U.S. Financial Conditions During the 1990-91 and 2001 Recessions

    • 3.2 Performance of Large European Banks

    • 3.3 Performance of Major Japanese City Banks

    • 5.1 Emerging Market Sovereign Bond and Loan Issues by Type

    • 5.2 Market Conditions and Alternative Financial Instruments

  • Figures

    • 2.1 Global Risk Aversion

    • 2.2 Global Equity Markets

    • 2.3 Net Purchases by Foreigners from U.S. Residents

    • 2.4 U.S. Treasury Yield Differentials

    • 2.5 S&P 500 Earnings Growth Forecasts for 2002

    • 2.6 U.S. Treasury Credit Curves

    • 2.7 U.S. Domestic Bond Issuance

    • 2.8 The U.S. Dollar

    • 2.9 Twelve-Month Forward Price-Earnings Ratio for the S&P 500

    • 2.10 Twelve-Month Forward Price-Earnings Ratio of the Group of Three

    • 2.11 Expected Policy Rates: Federal Funds Futures

    • 2.12 Expected Changes in Forward Rates in the Group of Seven

    • 2.13 Emerging Market Spreads

    • 2.14 Average Cross-Correlation of Emerging Debt Markets

    • 2.15 Emerging Market Spread Correlations with Argentina

    • 2.16 Monthly Bond Issuance

    • 2.17 Loan Issuance

    • 2.18 Cumulative Gross Annual Issuance of Hard Currency Loans

    • 2.19 Loan-Weighted Interest Margin

    • 2.20 Net Foreign Purchases and Monthly Returns on Emerging Equity Markets

    • 2.21 Capital Flows to Emerging Economies

    • 3.1 United States: Financial Conditions, 1987-2001

    • 3.2 Probability Density Functions for Group of Three Exchange Rates Implied by Option Prices

    • 3.3 Household and Corporate Sector Balance Sheets in the Euro Area and Japan

    • 3.4 Japan Premium

    • 3.5 United States: Household and Corporate Sector Balance Sheets and Debt Services Ratios

    • 3.6 Performance of Bank Stock Indices

    • 3.7 Implied Earnings Growth Rates

    • 3.8 Global Credit Derivatives Market Size and Structure

    • 3.9 Key Characteristics of Credit Derivatives Markets

    • 3.10 Spread Between Credit Derivatives Premium and Underlying Bond Spread

    • 4.1 The IMF Early Warning System Models: Developing Country Studies Division (DCSD) and Kaminsky, Lizondo, and Reinhart (KLR) Probabilities of Crisis

    • 4.2 Forward Exchange Rates for Argentine Peso

    • 4.3 Spot Price and Implied Probability Density Function for the Brazilian Real

    • 4.4 Argentina and Turkey: External Liquidity and Debt Service Ratios

    • 4.5 Slope of Default Swap Curve

    • 4.6 Korea: Financial Institutions Index (1991-2001)

The following symbols have been used throughout this volume:

  • … to indicate that data are not available;

  • — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

  • – between years or months (for example, 1997-99 or January-June) to indicate the years or months covered, including the beginning and ending years or months;

  • / between years (for example, 1998/99) to indicate a fiscal or financial year.

“Billion” means a thousand million; “trillion” means a thousand billion.

“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to 1/4 of 1 percentage point).

“n.a.” means not applicable.

Minor discrepancies between constituent figures and totals are due to rounding.

As used in this volume the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.


This is the first Global Financial Stability Report, a quarterly publication produced by the IMF's International Capital Markets Department. It replaces two IMF publications: the annual International Capital Markets Report (published since 1980) and the quarterly Emerging Market Financing (published since 2000). The report was created to provide a more frequent assessment of global financial markets and to address emerging market financing in a global context. The report focuses on current conditions in global financial markets, highlighting issues of financial imbalances, and of a structural nature, that could pose a risk TO financial market stability and sustained market access by emerging market borrowers. As a quarterly, it will focus on relevant contemporary issues and not try to be a comprehensive survey of all potential risks, and on analyzing the financial ramifications of economic imbalances highlighted by the IMF's World Economic Outlook. It will regularly contain, as a special feature, articles on structural or systemic issues relevant to international financial stability. Thus, the report is part of a broad effort by the IMF to strengthen bilateral and multilateral surveillance of international financial markets, with a view to promoting financial stability as a global public good. Other components of this broad effort include integrating financial market assessment with the World Economic Outlook, the World Economic and Market Developments review, work on private sector involvement in the resolution of financial crises, work on standards and codes, the Financial Sector Assessment Program (FSAP), and Special Data Dissemination Standards (SDDS).

The Global Financial Stability Report was prepared in the International Capital Markets Department, under the direction of the Counsellor and Director, Gerd Häusler. The Global Financial Stability Report project is directed by an Editorial Committee comprised of Hung Q. Tran (Chairman), Bankim Chadha, Donald J. Mathieson, and Garry J. Schinasi, and benefits from comments and suggestions from William E. Alexander, Charles R. Blitzer, Matthew Fisher, Peter Dattels, Ronald Johannes, and L. Effie Psalida. Other contributors to the report from the International Capital Markets Department are Torbjorn Becker, Peter Breuer, Jorge Chan Lau, Anna Ilyina, Charles Kramer, Subir Lall, Gabrielle Lipworth, Jens Nystedt, Jorge Roldos, Srikant Seshadri, R. Todd Smith, Krishna Srinivasan, Amadou Sy, and James Yao. Mar tin Edmonds, Patricia Gillett, Silvia Iorgova, Anne Jansen, Oksana Khadarina, Yoon Sook Kim, Advin Pagtakhan, and Peter Tran provided research assistance. Maame Baiden, Caroline Bagworth, Lucia Buono, Vera Jasenovec, Sheila Kinsella, Ramanjeet Singh, Adriana Vohden, and Joan Wise provided expert word processing assistance. Jeff Hayden of the External Relations Department edited the manuscript and coordinated production of the publication.

This particular quarterly issue of the report draws, in part, on a series of informal discussions with commercial and investment banks, securities firms, asset management companies, insurance companies, pension funds, stock and futures exchanges, and credit rating agencies in London, New York, and Tokyo. The report contains data available up to February 8, 2002.

The study has benefited from comments and suggestions from staff in other IMF departments, as well as from Executive Directors following their discussions of the Global Financial Stability Report on February 27, 2002. However, the analysis and policy considerations are those of the contributing staff and should not be attributed to the Executive Directors, their national authorities, or the IMF.