Market movements also revealed how much the U.S. outlook had led to a reevaluation of growth prospects in other regions. An appreciation of the euro implied investor optimism about the European economy, but a downward shift in the euro swaps curve showed that Europe is not immune to the impact of a U.S. slowdown. The yen depreciated and the Tokyo stock market declined—signs that investors perceived a return to weaker growth in Japan (see chart).
International banking market
Emerging market countries deposited a record $54 billion in BIS-monitored banks in the third quarter. Members of the Organization of the Petroleum Exporting Countries (OPEC) accounted for one-third of that figure. Among developing countries outside OPEC, the largest deposits came from Taiwan Province of China and China. Unlike in the 1970s, however, these deposit flows were not recycled back into developing countries. In fact, cross-border claims on developing countries have remained broadly unchanged since the last quarter of 1999, with further repayments from Asia offsetting modest amounts of credit extended to Argentina, Brazil, and Turkey and a few other emerging market countries. During the first three quarters of 2000, cross-border claims on Turkey rose by substantially more than on any other developing country, and more recent data suggest that these claims continued to increase in the fourth quarter, despite concern about the stability of Turkey’s financial system. Claims on Russia dropped most sharply among emerging market countries, down over $3 billion, owing to debt restructuring rather than a cutback in credit.
International debt securities market
Borrowing conditions deteriorated in the fourth quarter of 2000. Although aggregate net issuance actually rose 21 percent from the previous quarter, to $328 billion, the increase was concentrated in the money market, where the widening of credit spreads was less pronounced. Issuance of long-term fixed-rate instruments declined sharply as wide credit spreads squeezed out lower-rated borrowers. Also, net issuance by emerging market borrowers declined to $34 billion—17 percent less than in 1999—with the bulk of those funds raised in the first quarter. Investors carefully distinguished among countries according to their perceived credit quality.
Equity issues for selected countries
1 Germany, Japan, and the United Kingdom.
Data: Bloomberg; Capital DATA; BIS
Derivatives market activity
The dollar value of exchange-traded derivatives activity rose by 6 percent in the fourth quarter, led by equity contracts, which were up by 22 percent to $11.4 trillion. Worries over a U.S. economic slowdown and unfavorable prospects for technology firms apparently moved investors to hedge their positions; derivatives trading on technology stock indices was especially active, the report observes. Expectations of U.S. monetary easing led to lively trading in U.S. money market contracts, counterbalancing declines in Europe and Asia.
Implementation of standards
A feature article in the BIS review reports on the broad strategy framed by the Task Force on Implementation of Standards, established in 2000 by the Financial Stability Forum in the wake of recent financial crises. (The Task Force’s report is available on the Internet at WWW.fsforum.org/reports/.) Key elements to build stronger financial systems include fostering country ownership, setting appropriate priorities, regularly assessing current practices, providing market and official incentives, and mobilizing human and financial resources. The report cites two IMF–World Bank joint initiatives: the Financial Sector Assessment Program (FSAP), which involves a range of national agencies and standard-setting bodies in assessing financial sector vulnerabilities and identifying development priorities, and Reports on the Observance of Standards and Codes (ROSCs), which provide a vehicle for public information on implementation.
The implementation of standards in itself, the review concludes, is not sufficient to ensure financial stability, nor are standards an end in themselves or a “magic cure-all”. They should be viewed, rather, as a means for promoting sound financial systems. In particular, the report notes, by helping to improve the functioning of the financial sector, standards can help minimize the buildup of risks and vulnerabilities in the financial system that can lead to crises with heavy costs in output and employment.