By Gustavo Capdevila
GENEVA, Aug 31 1998 (IPS)

The worsening world financial situation is once again raising the issues of taking precautions and administering remedies to confront the crisis, states the latest Bank for International Settlements (BIS) report.

The BIS, a sort of world central bank based in Basel, Switzerland, sees the resurgence of financial turbulence in the second quarter of 1998 adding new pressure to the urgent need to confront the issue crisis prevention and resolution.

Despite multiple initiatives sparked by the Asian crisis, national and international authorities are still under a varity of forms of pressure, says the bank.

Administrators must reconcile internal and external demands and provide liquidity while avoiding violating moral principles through inappropriate distribution of the financial costs of the crisis, warned the BIS, which generally follows the dominant neoliberal line.

Although these neoliberal guidelines are opposed to controls, the BIS states recent events have also underlined the need to reconsider the “architecture” of the world financial system, which is going increasingly further beyond the reach of national regulatory powers.

Other recent episodes, like the wave of megamergers and alliances in the financial industry and the restructuring underway in the derivatives market, also probably stimulate the reconsideration of regulations and monitoring, it insists.

And these challenges are added to by issues related to the coming of the euro and the transition toward the new millenium.

The bank warns these events will put to the test the competence of various groups of agents, in both public and private areas, in facing up to greater interdependence in the world financial markets.

The BIS report deals with the world financial situation up until the first half year of 1998, before the worsening of the crisis where waves of insecurity spread out from Russia to almost all other regions.

The study notes the increasing vulnerability of emerging markets due to the reluctance of lenders and investors to supply funds to these countries as a consequence of the crisis.

After a certain easing of tensions in the Asian markets in the first part of this year, there were fresh financial turbulences in the second quarter, says the study.

Fear caused by financial and economic conditions in Japan heightened mistrust of shares in yen, it adds.

At the same time, problems of political credibility in several Asian country are pushing regional currency values down, while the markets were holding their breath given the risk of a devaluation of the Chinese yuan.

These facts, added to the weakness of raw material prices and the political uncertainty of some countries, sparked a new wave of contagion toward other emerging markets, unleashing capital flight toward more secure marketplaces – like the United States and Europe.

Thus, the performance of long term-bonds in the United States and Western Europe returned to their declining trend, sustained in the case of Europe by the increase in confidence in the establishment of the monetary union, says the BIS.

In this unstable environment, announced emissions of international debt obligations recede in relation to the unprecedented levels registered in the first quarter.

This behaviour was partly a natural consequence of the feverish rate of emissions seen in the first quarter.

In any case, activity was well sustained, suggesting these positive factors maintained sufficient vigour to compensate for deep fears over the risks.

In the first place, these stimulus elements include the continued diversification of international financing, the quest for high yields, the wave of mergers and acquisitions and the development of a pan-European stock market.

By way of contrast, increasing consciousness of the risk of countries and counterparts reflected in an increase in risk premiums linked to syndicated bank loans and obligations agreed for securities in emerging markets.

Simultaneously, credit derivatives were used more frequently for the regulated expositions as an alternative to sales on secondary markets, contributing to progress in the area of credit risk management.

Complete banking statistics presented by the BIS, now running up until the first quarter of 1998, show the unprecedented expansion of banking debenture in the last quarter of last year was not maintained.

This change reflects the withdrawal of Japanese banks from negotiation of final and interbank loans and covers up the continual fluctuation of activity in the US banks.

Expansion in this sector in the United States was mostly directed toward intraEuropean transactions, reflecting a certain reorientation of activities back to Europe again, as a consequence of the crisis in Asia and positive reactions to European Monetary Union.

In contrast, despite the broad offer of credit funds worldwide, the banks clearly reduced exposure in Asia. This phenomenon only appears to benefit other regions of the developed world in a marginal manner, although specific factors strengthened borrowing in a small number of countries.

The BIS noted activity in the international market of syndicated loans shot up enormously in the second quarter of 1998 due mainly to the agreement of business deals of an exceptional size.

Total transactions increased 18 percent in relation to the revised total of the first quarter, to reach a sum of 259 billion dollars.

There was a certain recovery in securities for the countries with emerging markets, but taken all together, total loans to this part of the world remained depressed.

Consolidation of the banking sector, the withdrawal of the Japanese and other Asian banking groups from the syndicated loans market, and the new wave of turbulence in the emerging markets of the world, mean harsher loan conditions for low qualified entities.

This phenomenon pressed creditors to seek financing alternatives in the bond markets.

At the same time, and also partly as a reflection of the conduct of the Japanese banks, in the first quarter there was intensified reduction of the exposition of banks before Asia’s emerging economies.

This characteristic also appears to have been accompanied by some displacement of attention toward Latin American and Eastern Europe.

However, the movement was more apparent than real, as improvements in the two regions were mainly due to specific factors affecting only two countries: Brazil and Russia.

The general calm in premium risk on debt obligations of the top- flight debt of Latin America creditors suggests, for the most part, the contagion was checked in the first quarter.

In any case, the increasing reluctance of international lenders and investors to provide funds for the emerging market economies has undoubtedly increased the vulnerability of these countries, warned the BIS.

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