*EPF413 12/12/2002
Global Markets Steady but Investor Confidence Shaky, IMF Says
(Heightened perceived risks can slow recovery, report warns) (380)

By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- While the global financial system has remained resilient, rising concerns over the strength and durability of the global economic recovery have undermined investor confidence and threatened to shake financial markets, the International Monetary Fund (IMF) says.

The IMF said that from August through October, the period covered by its latest quarterly report on global financial stability, released December 12, concerns about economic rebound have risen "significantly."

The fund said that further declines in major equity markets constitute the most immediate risk to growth prospects. While corporate revenue improved in the third quarter, pushing equity markets up to the level of "historic averages," the IMF said, additional weakening cannot be ruled out if corporate revenue growth fails to materialize. Such declines would, in turn, erode financial standing of U.S. households and key European financial institutions, the IMF said.

The IMF said that as a result of heightened investor risk aversion, investment grade borrowers benefited from a decline in borrowing costs while lower grade borrowers experienced financing difficulties. It cautioned that reinforcement of this trend in coming months could further limit access of emerging markets to capital markets.

The fund said, however, that so far financial markets, "while unusually volatile, remained orderly and the financial system functioned smoothly," and risks to international financial stability remain limited and manageable. It said that certain policy actions and private-sector initiatives -- such as lowering of U.S. interest rates, pushing through corporate governance law and regulations, and cutting costs by financial institutions -- have contributed to this outcome.

Nevertheless, additional steps by national governments to rebuild investor confidence are needed to calm financial markets even more and maintain financial stability, the fund said. These measures should include:

-- macroeconomic policies responsive to economic uncertainty.
-- regulatory initiatives to reassure investors that corporate governance and accounting problems are being fully addressed.
-- vigilance against capital erosion in non-banking financial institutions, particularly insurance companies.
-- improvements in disclosure and regulatory regimes related to credit risk transfers.

The IMF said emerging markets need to adhere steadfastly to policies consistent with macroeconomic and financial stability and avoid debt structures that potentially can amplify external shock. They also must commit firmly to good governance and develop "deep" local securities markets that can provide alternative sources of financing and act as a buffer against adverse global financial conditions, the fund said.

(The Washington File is a product of the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

Return to Public File Main Page

Return to Public Table of Contents