By Gustavo Capdevila
GENEVA, Jul 9 2002 (IPS)

The global economy and financial system have shown “enormous resilience” to recent turmoil, the Bank of International Settlements (BIS), which coordinates central banks and is governed by countries of the industrialised North, said Monday.

The three developments with the greatest repercussions on financial markets were the collapse of U.S. energy giant Enron, the Argentine crisis, and the Sep 11 terrorist attacks on New York and Washington, according to the BIS’s annual report.

Their “cumulative impact,” added to the slowdown of the world economy, could have been much more severe, said the report released at BIS headquarters in Basel, Switzerland.

“Far from continuing to contract, the global economy appears to have begun expanding again,” and “the financial sector too has responded flexibly to these recent developments,” it added.

The president of the BIS, Nout Wellink, said the financial markets have continued “to perform well, and a deep recession has been avoided during the last, very difficult, year.”

The BIS, which is currently governed by Belgium, France, Germany, Italy, the United Kingdom and the United States, ascribed that positive performance to the prospect of recovery for the international financial system.

But after painting a hopeful picture, it warned that it would be premature to think that everything would go smoothly now. “A number of last year’s shocks may prove to have longer-lasting implications,” it noted.

And if new terrorist attacks occur, confidence would be undermined and consumption and investment would be curbed, while the already weakened insurance industry would be dealt yet another harsh blow.

In addition, a further escalation of the conflict in the Middle East and the consequent interruptions of oil supplies would drive up prices and further reduce buying power in most countries, it predicted.

The BIS report added that the main lesson to be learned by the financial community from the events of Sep 11 involves the operational risks that arise when financial institutions, markets and infrastructure are heavily concentrated in geographic terms.

But the BIS is not only concerned about physical concentration, but economic and financial as well. “When the firms involved are few in number, but account for a very high proportion of the global business, the risk of a massive systemic shutdown are clearly compounded,” it stated.

The BIS board of directors is made up of the presidents or governors of the central banks of Belgium, France, Germany, Italy, the United Kingdom and the United States. Each of the six directors designates another member of the board, who must be of the same nationality and represent finance, industry or trade.

Although it began to operate in 1930, the origin of the BIS dates back to the mechanisms put in place after World War I (1914-1918) to regulate the payment of reparations by the defeated Germany.

The report expressed concern over the “deep erosion of that sense of trust, in both market information and people,” caused by events like the Enron collapse and the Argentine debacle.

“In the Enron case, it became clear that the profit and debt figures were not at all what they seemed. This has led in turn to a growing distrust, not just of innovative accounting at other firms, but even of some of the accounting conventions themselves.

“The Enron developments called into serious question the professional competence and even ethical standards of many people in positions of great responsibility.”

With respect to Argentina, the BIS criticised the failure to act, and said passivity in the face of “untenable” situations leads to a substantial rise in the “ultimate costs.”

The report focused on the economic prospects of developing nations, which it said would be affected to a great extent by the performance of industrialised countries.

“Broadly speaking, Asia looks set to perform much better in terms of both growth and inflation than does Latin America, with the transition economies in Europe occupying an intermediate position,” said the bank, which noted that the main risks to Latin America came from outside the region.

“Should financial flows dry up, reflecting either increased risk aversion or domestic political instability, current account deficits would have to be reduced through corresponding cuts in domestic spending.”

The BIS warned that the process may be painful, as already seen in Argentina and, previously, in Turkey.

The report also stated that Turkey seems to be on the road to recovery, while “the outlook for Argentina is more uncertain than ever.”

The bank made a positive assessment of the International Monetary Fund (IMF), which has been the target of criticism due its reluctance to assist countries in crisis.

“What does seem generally agreed is that the IMF is right to generate expectations that the size of its emergency loans to countries in crisis will be more limited,” said the BIS.

“The decision to make such sums available will presumably involve more demanding and more transparent criteria,” it concluded.

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