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Committee chairman says any IMF gold sales will be stopped in Congress
Markets Are Quiet. Maybe Too Quiet.
IMF Frets that Good Times Have Led to Complacency
By Greg Robb
CBSMarketWatch.com
Tuesday, April 5, 2005
http://www.marketwatch.com/news/story.asp?guid=%7B56563BE9%2DE027%
2D4D21%2DA934%2D240E860E99F8%7D&siteid=mktw
WASHINGTON -- Global financial markets might not be prepared for
potential shocks like worse-than-expected inflation data,
particularly if the era of low interest rates is coming to a close,
an IMF report said Tuesday.
"There is little cushion for bad news regarding asset valuations if
expectations for continued favorable fundamentals change," the IMF
said in its Global Financial Stability report.
The biannual IMF report seeks to alert policymakers and investors to
potential systemic weaknesses in financial markets in order to
prevent crises similar to the Asian financial crisis of 1997.
Financial markets have largely priced in a moderate and gradual
monetary tightening, and "they might be less prepared if market
interest rates ... were to go up abruptly," the IMF said.
A sharp drop in the dollar or worse-than-expected inflation data
could trigger these concerns, leading to corrections in many asset
markets, the report said.
Past Federal Reserve tightening cycles have led to turmoil in
financial markets, the report noted.
The IMF said it doesn't have a crystal ball to forecast where trouble
might develop.
"The locus of such vulnerabilities has typically become apparent only
after the fact," the IMF said.
"The Fed's strategy to gradually raise interest rates in a way that
is well anticipated by the markets could buy some insurance against
potentially volatile and destabilizing developments," the IMF said.
The IMF noted that the global financial system has further improved
in the past six months with continued solid global economic growth.
The IMF latest economic outlook to be released in coming days will
forecast continued solid growth with inflation under control, the IMF
said.
"Such an environment will allow financial institutions, and other
market participants, to further improve their financial conditions,"
the IMF said.
"At a time when the financial sector is in solid shape, the risks
are -- by definition -- more on the downside," the IMF said.
The IMF was clearly troubled by the untested elements in the risk-
management systems underlying the booming credit derivatives business.
There is still the risk that credit derivative models "are overly
similar in their construction" which will force investors to "rush to
the exits" at the same time, leading to market liquidity shortages.
"The question of liquidity shortage as a potential amplifier for
market price shocks is still one of the major 'blind spots' in our
financial market landscape," the IMF report said.
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