World financial markets 'fragile' despite pickup in economy 11.32 a.m. ET (1536 GMT) September 8, 1999

By Martin Crutsinger, Associated Press

WASHINGTON (AP)  Despite a pickup in the global economy since last fall, world financial markets are still "fragile,'' facing a number of potential risks from a sharp plunge in U.S. stock prices or the value of the dollar to lingering jitters from the Asian currency crisis, the International Monetary Fund said today.

In its annual assessment of the state of international capital markets, the IMF found a number of encouraging signs that the world is beginning to recover after nearly two years of turmoil caused by plunging currency values and deep recessions in many Asian nations.

The turbulence reached a crescendo last fall following the default in August 1998 by Russia on billions of dollars in foreign debt. That event sent shockwaves through financial markets around the world, causing the near-collapse of a large U.S. investment fund, Long-Term Capital Management.

Central banks, led by the Federal Reserve, rushed to the rescue with interest rate cuts which the IMF report credited with "staving off the risk of a global crisis.''

So far this year, the IMF said there had been a number of favorable signs that the risks of a worldwide recession have lessened significantly. These include "surprisingly robust'' growth in the United States and signs that Japan, which has been struggling with its worst recession in 50 years, was beginning "to take important measures to stabilize its economy and address its banking sector problems,'' the IMF said.

But the IMF cautioned, "Notwithstanding these favorable developments, conditions in financial markets remain fragile, as evidenced by continued high levels of volatility ... and capital flows to the emerging markets that are running well below the rates during the boom years.''

Among the current risks, the IMF listed the possibility that the high-flying U.S. stock market could suddenly plunge if corporate earnings falter and the threat that the U.S. dollar could drop sharply in value if foreigners become worried about record monthly trade deficits.

IMF officials stressed that they were not predicting a stock market crash or a sudden drop in the dollar's value but only noting that these are two of the major risks to the United States and the global economy going forward.

Another potential threat could come as financial markets deal with the Year 2000 problem in which there are fears that computers could malfunction because of an inability to read dates.

The IMF said that currently many market interest rates have already been driven up by as much as a half-percentage point because of increased borrowing by corporations and some foreign governments to have enough cash on hand to deal with any possible disruptions.

The IMF report and a companion document of economic forecasts will serve as starting points for discussions when finance ministers and central bank presidents from around the world gather in Washington in two weeks for the annual meetings of the 182-nation IMF and its sister lending agency, the World Bank.

The preliminary economic forecasts was released prematurely on a Web site Monday of the Dutch finance ministry. It showed the IMF believed the world economy would expand 2.8 percent this year and 3.4 percent in the year 2000, representing an upward revision from IMF projections made in the spring.

IMF officials said that the figures released were preliminary and subject to change before their formal release later this month.

The Dutch report on the upcoming meetings also said the IMF was close to abandoning efforts to sell 10 percent of its gold reserves on the open market because of strong objections by members of Congress that such sales would further depress the price of gold.

The Dutch report said that the IMF was considering an alternative way to raise money to provide debt relief for poor nations that would involve selling the gold to central banks of a group of nations.

These nations would then sell the gold back to the IMF in a process that would allow the agency to revalue the gold at world market rates of around $256 per ounce instead of the $47 per ounce at which the IMF now values its reserves.

-- Roland (nottelling@nowhere.com), September 08, 1999

Answers

Why does the IMF value their gold at only $47.00 an ounce?

-- Boz (boz_inc@yahoo.com), September 08, 1999.

They assign that value because that's what the market value was when they purchased it (or were given it by member countries) back when we had just gone off the gold standard in the early 70's.

Their accounting rules probably require them to use the purchase price when determining the value of the gold as reserves.

-- nothere nothere (notherethere@hotmail.com), September 08, 1999.