This paper reports the on-off nature of emerging market access to international capital markets appears to have become a key characteristic of international financial markets. Emerging market borrowers have begun to adapt: when the market for US dollar-denominated bonds has closed, these borrowers turn to the syndicated loan markets, attempt to issue in bonds denominated in euro or yen, or issue in local-currency bond markets. In addition, they employ staff with extensive experience in investment banking and securities trading, exploit “windows of opportunity” to prefund their yearly financing requirement, and engage in debt exchanges to extend the maturity of their debt and avoid a bunching of maturities. The consolidation of financial institutions is driven by attempts to exploit economies of scale and scope, and technological advances such as the Internet and deregulation that facilitate universal banking activities are making it easier to reap such economies. Advances in technology are also transforming the securities trading industry.
Following a review and assesment of recent developments in capital market and banking systems, this year's International Capital Markets report review and assesses recent developments in mature and emerging financial markets and continues the analysis of key issues affecting global financial markets. It examines the systemic implications of the continued rapid development of the global over-the-counter derivatives markets and the expansion of foreign-owned banks into emerging markets. The report also analyzes market participants assessments of the proposals for private sector involvement in the prevention and resolution of crises.
This study reviews the developments and issues in the exchange arrangements and currency convertibility of IMF members. The principal information source for this report is the Annual Report on Exchange Arrangements and Exchange Restrictions prepared in consultation with national authorities.
This year's capital markets report provides a comprehensive survey of recent developments and trends in the advanced and emerging capital markets, focusing on financial market behavior during the Asian crisis, policy lessons for dealing with volatility in capital flows, banking sector developments in the advanced and emerging markets, initiatives in banking system supervision and regulation, and the financial infrastructure for managing systemic risk in EMU.
The economic and financial crisis that erupted in southeast Asia in July 1997 had continued to deepen and broaden as of December, and spillover effects from investor deteriorating confidence in emerging market economies were being felt throughout the global financial system. This special Interim Assessment of the World Economic Outlook revises regional and global economic projections made by the IMF staff, as published in the October 1997 issue, in light of the crisis; charts the buildup to the crisis and its onset and evolution; assesses effects on the advanced economies and on private financing for developing countries; and raises policy issues that the crisis has posed.
This paper summarizes major measures taken in the international exchange and trade systems in 1988 and developments in exchange arrangements and the evolution of exchange rates. The exchange arrangements adopted by members since 1973 cover a broad spectrum of degrees of flexibility, from single-currency pegs to a freely floating system. Most countries have adopted arrangements that fall clearly into one or another of the major categories of the present classification system adopted by the IMF in 1982, and countries with dual markets usually have one market that is clearly more important than the other, which allows accurate classification by major market. Changes in IMF members' arrangements for their currencies during this decade have shown a distinct tendency to move toward more flexible arrangements and away from single-currency pegs, continuing a trend that began in the mid-1970s. A qualitative sense of the significance of the trend toward more flexible arrangements can be conveyed by the degree that world trade is affected by countries adopting different arrangements.
During the year ending May 2001, the global economic slowdown and greater synchronization between economic and financial cycles gave rise to reappraisals of financial risk, portfolio rebalancing, and asset repricing in a wide range of financial markets. As discussed in previous International Capital Markets reports, past financial market adjustments, such as that which occurred in 1998, often seemed to have originated in concerns that excessive leverage, market illiquidity, and other potential financial fragilities could engender real economic consequences such as a “credit crunch.” By contrast—and contrary to concerns expressed by market participants last year that the U.S. and global economies might experience overheating—the recent adjustment reflected perceptions, and then the reality, of deteriorating economic conditions and prospects. Concerns later arose that the attendant financial repercussions, including downward pressure on corporate earnings growth and rising default rates, would adversely affect prospects for real economic growth.
During 1999 and into the first half of 2000, global financial conditions generally improved in tandem with the strong rebound in the global economy. Following the most severe market turbulence—especially for emerging markets in the postwar period—entailing a succession of regional crises that enveloped the major financial markets, credit concerns have eased and global investors became more willing to engage in risk taking. This was especially evident in their rush to invest in technology-related companies that underpinned the “new economy.”
Slowing economic growth and mounting concerns about corporate earnings and high corporate leverage initially caused a sharp decline in equity prices and widening credit spreads in late 2000. The fall in equity prices was especially pronounced among technology stocks, which experienced virtually simultaneous dramatic declines in all the major economies. Fixed-income markets deteriorated in response to concerns about credit risk. In the high-yield market, in particular, flows dried up and spreads peaked at the highest levels since the 1990–91 recession. Markets revived in early 2001 following significant easing in U.S. monetary policy, with a particularly pronounced rebound in the high-yield market. Nevertheless, on balance, equity prices were lower and credit spreads generally higher at end-May 2001 than a year earlier. Despite the sharp repricing in U.S. financial markets, the record U.S. current account deficit, and substantially more monetary policy easing in the United States than abroad, the dollar continued to strengthen, as international investors showed a sustained strong appetite for private U.S. assets. Deteriorating market conditions weighed on bank earnings but, except in Japan, no concerns arose about the stability of any major banking system.
Throughout most of the 12-month period ending in June 2000, developments in international capital markets continued to be strongly influenced by the perception that the U.S. economy offered the highest risk-adjusted asset returns in the major currency areas. Favorable perceptions reflected the continued strong performance of the U.S. economy, uncertainty about growth prospects in Europe, and the halting economic and financial recovery in Japan. While this combination of factors might not explain all of the international reallocations of capital and risks, or all asset-price movements, it was an important part of the background against which these adjustments occurred. Beginning with the April–June 2000 period, this favorable sentiment about U.S. returns may have changed.