IMF concerned over booming U.S. stock prices, Y2k and impact on banksgreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
By Janet Guttsman
WASHINGTON, Sept 8 (Reuters) - A drop in high-flying U.S. stock prices could hit markets around the world, but it is hard to say how far and how fast the impact could spread, the International Monetary Fund said on Wednesday.
The IMF's International Capital Markets report, its annual review of prospects for markets, banks and financial systems, said a fall in U.S. share prices could hurt other countries.
It warned of risks to currencies and to banking systems and said current account imbalances between Europe and the United States could put pressure on the dollar in the medium term.
``The general expectation is that exchange rates could adjust in an orderly fashion, but there is a risk they will not,'' said Gary Schinasi, one of the authors of the report.
He told a news conference it was not clear whether a stock market correction was inevitable. But the report said U.S. shares were vulnerable to sharply higher interest rates, weak earnings growth or worsening investor sentiment.
``The remarkably high level of valuations in the U.S. equity market, reached after a nearly unprecedented period of gains, poses a risk in global financial markets,'' the report said. ``Although a correction in the U.S. market might have domestic origins, it could well have international consequences.''
The IMF has long expressed concern about high U.S. share prices, but this was its bluntest warning to date about the possible impact of a price correction in other countries.
The IMF's report is the first in a string of documents due for release before and during the IMF's annual meetings later this month.
The meetings will include a gathering of finance ministers and central bank chiefs from the Group of Seven industrialized countries and a separate meeting of the 24 finance ministers making up the IMF's policy-making Interim Committee.
Monetary sources said they expected British Chancellor of the Exchequer Gordon Brown to be the next chairman of the committee, replacing Italy's Carlo Azeglio Ciampi.
Y2K PROBLEMS MAY HAVE ADVERSE IMPACT ON BANKS
The IMF also said that corrections to stock prices and to currency levels and the uncertainties of the Y2K computer glitch could all have an adverse impact on banks.
Banks in developed countries had prepared well for Y2K, which may cause computers to malfunction when Jan. 1 rolls around, but non-banks and banks in emerging markets could be at risk, it added. ``Market reactions could range from a moderate flight to quality to an extreme flight to cash and large cutbacks by major banks in their exposures to emerging markets,'' the IMF said.
The IMF acknowledged that there was sometimes justification for ``nonstandard'' methods like the capital controls Malaysia introduced during Asia's deep financial crisis and a separate report on the Malaysian economy said the results of these controls had been better than expected.
``Directors broadly agreed that the regime of capital controls -- which was intended by the authorities to be temporary -- had produced more positive results than many observers expected,'' the IMF said.
Charles Adams, assistant head of the IMF's Research Department, said the fund had been taking a much more cautious approach to the idea of amending the IMF's articles of agreement to include a call for free capital markets.
``I think the whole experience (of the Asian financial crisis) has caused a substantive rethinking in terms of the issues to do with the sequencing and packing of financial sector liberalization,'' he said.
``We need to do a much better job in terms of thinking about the liberalization process.''
IMF figures showed the crisis, which started in Thailand in July 1997 and spread relentlessly around the world, led to a steep drop in capital flows to emerging markets. Net capital flows to emerging markets were $64.3 billion in 1998, down from $149.2 billion in 1997 and a record $212.1 billion in 1996.
-- (M@rket.watching), September 09, 1999
Analysts warn of Y2k-related credit crunch
-- (M@rket.watching), September 09, 1999.
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