I Introduction

International Monetary Fund
Published Date:
January 1994
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The period running from the beginning of 1993 through the first quarter of 1994 was an eventful one for global capital markets. In the industrial world, the long rally in bond markets since 1990 suffered a particularly sharp reversal in the first quarter of 1994;1 indeed, the surge in government bond yields among the Group of Ten countries from the beginning of February through the end of March 1994 was one of the largest two-month increases recorded during the postwar period. Meanwhile, 1993 turned out to be a boom year for private financing to developing countries, marked by a sharp increase in the volume of flows, an improvement in the terms of borrowing, strong increases in equity prices in many local stock markets, and a significant broadening of the investor base. That market too, however, suffered a sharp dip—some would say, correction—during the first quarter of 1994. Last but not least, the past twelve months has witnessed heavy involvement by policymakers in regulatory and supervisory issues. The spate of large losses suffered by some hedge funds (e.g., Granite Partners, Steinhardt Partners, and Quantum Fund), by some large banks (e.g., Banesto and Crédit Lyonnais), and by some end-users of derivatives (e.g., Metallgesellschaft, Codelco, and Procter and Gamble) has only served to underline the heterogeneous nature of risk in today’s global financial markets.

This year’s international capital markets report takes its cue in part from these recent developments, and in part from some structural changes in capital markets that will have an important influence on the financial landscape over the longer term. The rest of the report is organized into six sections. Section II 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. Section III addresses recent initiatives to reduce systemic risk in the rapidly growing market for derivatives, as well as two ongoing debates about the most appropriate way to design and to implement supervision over banks and nonbanks. Section IV reviews recent trends in external financing for developing countries, with particular reference to the pricing of risk and to the volatility of financial flows. Sections V and VI turn to longer-term structural issues. Specifically, Section V takes stock of the evolution of government securities markets in the industrial countries over the past decade and identifies the main characteristics of recent reforms. Section VI moves the discussion from industrial countries to developing countries by highlighting as a case study China’s emerging capital markets. Finally, Section VII presents the conclusions of the report.

Following the report, a series of annexes provides background information. One of these annexes discusses government securities markets and another the role of capital markets in financing Chinese enterprises. Other annexes report on recent developments in international financial markets, on the regulation of international banking, and on private market financing for developing countries.

In the United States, long-term bond yields troughed earlier—in the fall of 1993. This bout of bond market turbulence was the second major shock to financial markets in industrial countries in the past twelve months. The first was the renewal of exchange market pressures within the European exchange rate mechanism (ERM) during the summer of 1993, which ultimately resulted in a considerable widening of the margins.

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