Provides a comprehensive survey of recent developments in international financial markets, including developments in emerging capital markets, bond markets, major currency markets, and derivative markets. The report focuses on efforts by the major industrial countries to strengthen the management of financial risk and prundential oversight over the international banking system. It also critically evaluates existing mechanisms for international cooperation of financial supervision and regulation and proposes the development of international banking standards.
Mr. Peter P Uimonen, Mr. Arvind Subramanian, Ms. Naheed Kirmani, Ms. Nur Calika, Mr. Michael P. Leidy, and Mr. Richard T. Harmsen
This study reviews major issues and developments in trade and their implications for the work of the IMF. Volume I, The Uruguay Round and Beyond: Principal Issues, gives an overview of the issues and developments in the world trading system. Volume II, The Uruguay Round and Beyond: Background Papers, presents detailed background papers on selected trade and trade-related issues. This study updates previous studies published under the title Issues and Development in International Trade Policy.
This paper analyzes the origins of the recent turbulence in government bond markets in the major industrial countries, and considers whether the role of hedge funds in that episode argues for altering present regulatory arrangements. In financial markets, it is possible for such a revision of expectations—if it is shared by all market participants—to alter asset prices almost immediately; indeed, the change in asset prices can occur without any transactions even taking place. In this case, however, trading volumes soared along with the rise in bond yields, as a broad spectrum of market participants sought to undo large positions that had been built up under the projections of a continued rise of European and US bond prices and a strengthening of the dollar against the yen and some European currencies. Although the increase in bond yields was undeniably large for such a short time period, the markets did receive new information in February and March on economic performance—especially on growth rates—and on the likely future course of macroeconomic policies.
This paper reviews major issues and developments in the trade area and outlines the challenges governments face as they seek to liberalize trade in the Uruguay Round of trade negotiations and address new trade issues. In industrial countries, the reorientation of policies was most apparent in steps taken to liberalize financial markets and foreign direct investment, privatize public enterprises, and deregulate services, particularly in the transportation and communication sectors. Among developing countries, a growing number recognized the merits of outward, market-oriented policies and took steps to liberalize their trade regimes and open their economies to international competition. By and large, the increased focus on market principles in industrial countries did not carry over to trade and industrial policies or, most notable, to the agricultural sector. Despite strong growth performance in 1983–1989, little progress was made in rolling back the protective barriers that had risen during the preceding recessionary period; protection persists in agriculture and declining sectors and has spread to newer high-tech areas.
This paper presents the IMF’s annual survey of developments, prospects, and key policy issues in international capital markets. It focuses on how to manage the restructuring of capital markets in an environment of wide-ranging liberalization, intense competition, and growing securitization—in a way that avoids a systemic crisis as well as moral hazard risks and budgetary costs associated with public sector support of weak financial institutions. A key feature of the new financial environment is the competition-driven disintermediation from banking systems—particularly from wholesale banking—into securitized money and capital markets. The more creditworthy corporate borrowers in major industrial countries are increasingly able to satisfy their liquidity, risk-management, and financing needs directly in liquid securities markets. Securitization is forcing adjustments across the entire spectrum of activities and institutions in financial markets. The loss of traditional balance sheet business has led to cost cutting and to consolidation in the wholesale banking sector and to an expansion in off-balance sheet activities, including backup lines of credit and forward interest rate and foreign exchange contracts.
During most of the period under review, a favorable inflation outlook and reductions in official interest rates generally supported an environment of rising bond and equity prices and record levels of fund-raising. Against this background, the major currencies experienced a temporary misalignment beginning in March 1995 and lasting through the summer. The associated currency movements created substantial volatility in the major currency and related money and financial markets, but this volatility subsided as the major currencies became more aligned with economic fundamentals. Overall, the sharp currency movements had no discernible lasting effect on interest rates in the major industrial countries in 1995.
Despite the serious disruptions in early 1995 as a result of the Mexican crisis, total net capital flows to developing countries and countries in transition reached a record $228 billion in 1995. Notwithstanding early fears of widespread spillovers of Liquidity problems in Mexico, markets appeared relatively quickly to distinguish between those countries with sound fundamentals and those that seemed to share some features of the Mexican economy, which then saw at least temporary declines in market access and capital inflows. This regional differentiation is revealed by data on capital flows and securities issues. But even those countries that experienced the most serious contagion effects had almost fully regained access to international financial markets at precrisis spreads by the end of the year. Moreover, some countries that at first glance seem to have been relatively untouched by the crisis, particularly those with pegged or fixed exchange rates, were tested by international investors. In addition to the change in the regional nature of capital flows, there was a change in the composition of capital flows, with a decrease in portfolio investment and an increase in bank lending to developing countries and countries in transition.
This annex begins with a summary of recent developments in the foreign exchange market. Drawing on the BIS’s most recent foreign exchange and derivatives turnover reports.1 current trends in the types of instruments and currencies, trading locations, and market participants are reviewed. The remarkable growth of electronic broking for spot market transactions over the last three years is documented and examined in light of growing concerns about its effects on exchange rate volatility. Market characteristics, such as liquidity—and its components, breadth, and depth—are also examined, providing a broad picture of the current workings of this important 24-hour global market. The second main section of this annex deals with the potential systemic risk posed by the large and numerous cross-border settlements accompanying foreign exchange trading. An analysis of the issues underlying foreign exchange settlement risk is presented along with a discussion of the private and public initiatives designed to reduce it. The section pays particular attention to the advantages and disadvantages of multilateral netting systems and global clearing banks as possible risk-reducing measures.