Coolum, Australia: Recent financial market volatility is a healthy sign of a reassessment of risk, a senior IMF official said on Thursday (2 August), as Asia-Pacific finance ministers studied ways to limit any contagion.
While the readjustment in financial markets was painful for some, it was a necessary return to a more appropriate assessment of credit risk by investors, John Lipsky, the IMF’s first deputy managing director, said.
“The realignment of risk ... is not necessarily unsettling,” he told reporters on the sidelines of a meeting of Asia-Pacific finance ministers in Australia, adding that lending conditions had become too easy.
Financial markets worldwide have been racked in recent weeks by the fallout from the US subprime mortgage crisis, which has led to concern that global economic growth could suffer.
Australian Treasurer Peter Costello, who is chairing the 21-member meeting of the Asia-Pacific Economic Cooperation (APEC) group, said that 10 years after the Asian financial crisis, the region was in better shape to weather the latest storm.
“We have discussed the risks of global instability and how we can avoid global imbalances affecting the region in adverse ways,” Costello told reporters.
World stock markets rallied and credit markets stabilised on Thursday (3 August), a day after investors sold riskier assets such as shares and high-yielding currencies on fears that trouble in the US housing market would trigger a global credit squeeze and hit otherwise robust global growth.
Global outlook bright
The upbeat comments were echoed by new World Bank President Robert Zoellick.
“The underlying fundamentals for growth and development remain quite strong,” Zoellick told reporters at the APEC meeting, although he added that solid growth should not be taken for granted.
Lipsky said the wild swings in financial markets and a rise in energy costs had not yet dimmed the bright outlook for global growth. Oil prices reached record highs this week above US$78 a barrel.
The IMF recently upgraded its forecasts for world growth, seeing a rapid 5.2% pace in both 2007 and 2008. That was up from an April forecast of 4.9% for both years.
“The latest market volatility has not substantially changed our outlook on the global economy,” Lipsky said, although he acknowledged the risks were to the downside.
In Tokyo, a senior executive of Bear Stearns Cos., which has been hit by the collapse of two of its hedge funds, shrugged off concerns about a global credit crunch and said the recent market decline was healthy.
“I think it’s a healthy correction. We’ve seen excess in terms of leverage and there was not enough premium for the risk structures,” said Michel Peretie, chief executive of Bear Stearns International Ltd.
In Singapore, Hong Kong-based HSBC economist Frederic Neumann said he expected market volatility to persist for another couple of months.
“It’s a bond market bubble and it’s a correction that is almost necessary,” he said. “But economic fundamentals look so sound across the world, it’s difficult to see this being a full-blown financial crisis.”
The APEC meeting, at a golf resort on Australia’s Sunshine Coast, brings together policy makers from countries as diverse as the US, China, Japan, Indonesia and Peru.
Costello said ministers had also discussed currency movements but he would not confirm if they had talked about what some see as the undervaluation of the Chinese yuan.
US Treasury Secretary Henry Paulson was in China this week, pressing the case for a faster appreciation of the yuan. US manufacturers say its weakness makes Chinese exports artificially cheap. His deputy, Robert Kimmitt, is attending the APEC meeting.
Originally, long-term goals such as managing the economic impact of climate change were top of the APEC agenda but the ructions in financial markets have elbowed their way to the fore. (Additional reporting by Fayen Wong in Coolum, Kevin Yao in Singapore, David Dolan and Emi Emoto in Tokyo)