## Mr George's closing speech at the Euromoney International Bond Congress
Speech by the Governor of the Bank of England, Mr E A J George, at the Euromoney Internat Bond Congress in London on 10/02/99.
Thank you, Padraic. I wasn't quite sure what you had in mind when you asked me to wind u Congress once again this year. I couldn't remember what I'd done to wind you all up last y am happy to join you anyway at what has become - in five short years - an unmissable event calendar for anyone with an interest in the international bond markets.
And what an extraordinary year it's been since we all last met here. Despite all the beginning in Asia, then Russia and most recently Brazil - which had everyone scrambli liquidity and desperate to reduce risk, it proved, on IFR's figures, to be a recor international bond issues, with total issuance rising by some 17% to over a trillion dollar That can't have been bad for fees! And altogether it suggests you had a pretty good year those of you who chose to go on holiday in August leaving someone else to look after yo positions in Russian bonds.
Inevitably issuance by emerging market economies fell away, but issuance by supranation sovereign borrowers in aggregate still accounted for some 30% of total issuance.
At the same time, higher rated corporate borrowers took advantage of lower yields to st their balance sheets, accounting for 45% of total issuance. This was despite a general w credit spreads - which though they have come back some way from the peak levels of the a are - and are likely to remain - substantially wider than before the emerging market reflecting a more sober assessment of relative credit risk. Against that, the bond market benefited substantially from continuing low inflation and a further decline in in expectations, so that yields have declined in virtually all the main currency sectors. government bonds they have come down by 100 basis points in the US, by 150 basis points in by close to 200 basis points in the sterling gilt market, and even by over 100 basis poi before yields there began to back up late last year. Borrowers have been attracted by lowe borrowing costs; and investors in the market have been attracted by the prospect of risin yields have declined. Significantly, the decline in yields in the underlying government bo has typically more than offset the widening in spreads faced by lesser credits. In the U bond market, for example, BBB spreads widened over the year from around 75 basis point around 140 basis points, but because of the underlying fall in yields, yields paid by BBB actually fell from around 6½% to 6%. Similarly, in the sterling market here, lower grad widened from around 80 basis points to over 150 basis points but yields paid fell from jus to around 6%. The result has been a notably effective contribution by the bond market to me financing needs of the corporate sector.
The past year has, also, in a real sense been the year of Europe. In any event, the pr advent of the euro was undoubtedly a major factor driving the increase in bond market Issues by European borrowers accounted for some 25% of the total, and issues in Eur currencies rose to nearly 30%. Many issuers took the opportunity to issue tributary or par which were fungible with the launch of the euro. Others offered large benchmark issue provision for redenomination into the euro. In parallel, 1998 saw a further rapid expans volume of equity issuance by European names, fed partly by privatisation sales, but refle increased corporate use of the equity market to finance expansion and acquisitions. Ev remarkably, merger and acquisition transactions in Europe rose nearly 50% in 1998, conti trend which has seen this area of activity increase by around 35% a year over the past five
Moreover, January 1999 has by all accounts started the New Year in an even more active vei a very high volume of bonds issued, and with the euro accounting for over a third of the to this no doubt reflects the fact that the euro is, for the moment, the new kid on the everyone wants to meet. But more fundamentally it is a clear vote of confidence in the new that such international interest should already be apparent in borrowing and investing i and in adapting and rebalancing portfolios to take account of this major change in the stru capital markets.
A hugely important contribution to this process has, of course, been the vast exercise conventions, processes and systems for the euro, both within firms and in the shared infrastructure. The scale of work undertaken in all centres - but notably in London, b London's pre-eminent position as the international centre for the bond markets - has been and I want to pay tribute to the high professionalism with which the preparations and the itself were conducted. People commented on how empty the bars and restaurants were in the London over conversion weekend - which is remarkable in itself; but inside and indoors, 3 more people achieved a remarkable feat of engineering, all within the space of a three-da weekend. It may not have been everyone's preferred way of spending New Year's Eve, but i certainly a very productive one. The good news is that everyone can come back and do it a year for Y2K!
So there is a lot you can feel positive about in the past year's achievements and in the s made to 1999. But, looking ahead, the world prospect remains uncertain. Notably, the em markets crisis has had an immense impact on international financial flows, and the e adjustments that those shifts will bring in their wake are likely to have important imp bond markets and on your business activity.
As a measure of the impact of the emerging markets turbulence, the Institute of Internation recently published data which show that total net private capital flows to the emergin (broadly defined) fell from some $325 billion in 1996 to around $150 billion last year. W nonbank lending and portfolio equity inflows also fell back by around $60 billion (to ar billion). Although direct investment in the emerging market countries held up pretty well $100 billion), and despite a big increase of nearly $50 billion in official lending, there huge decline in the overall availability of finance to the emerging market economies. And many of them with sharply weakening exchange rates, and little choice but to contract their economies.
The immediate international priority last year was to contain the financial contagion - an some progress in this direction following the initial shocks in Asia. But after the se shocks during last summer - Russia, LTCM, the deepening recession in Japan and the worse position in Brazil - the prospects, at around the time of the IMF meetings in Washing autumn, were looking pretty bleak.
Now I would completely destroy my reputation as a central banker if I were to suggest tha out of the woods. But the darkest financial storm clouds have lifted a little since the Fu The US Congress finally approved more resources for the IMF, the threat of a credit extending to the industrial economies in the wake of LTCM receded, helped also by an ea monetary policy in Europe as well as in the United States. In Asia, Japan took more de policy action to address the fragility of the banking system and to stimulate domestic d yen strengthened; China and Hong Kong both remained admirably resolute; and there have been some encouraging signs of renewed capital inflows to some of the Asian countries. The of the exchange rate in Brazil last month inevitably increased concerns about emerging instability, but it is encouraging that adverse effects on other markets have so far been l
There may be further particular setbacks, as far as the overall financial situation is co think I can confidently say that if it doesn't get any worse it is likely to get better. Ri very well for a time, but it doesn't pay the rent!
What we are now having to cope with are the economic consequences of the earlier fin disturbances. The inevitable counterpart of recession in much of the rest of the world slowdown of net external demand - particularly for manufactures - in the industrial world. been reflected in growing weakness and falling business confidence in large parts manufacturing sector in both the United States and Europe. The prospective growth in economic activity has already roughly halved - from its trend rate of about 4%. Unless this external demand is offset by sustained domestic demand growth in the industrial countries in other words, the industrial economies collectively accommodate the necessary improvement external current account position of the emerging countries, through a deterioration in current account positions - the prospects for world economic activity would be dismal.
Happily, we start from a position of relatively low inflation throughout the industrial faced with weakening external demand, we can afford to see higher offsetting domestic d growth without jeopardising price stability. Indeed we need to see higher domestic demand than we otherwise would if overall demand is not to fall short of underlying supply capaci need it, too, to offset the effects of weak world prices and of lower exchange rates in man market producers on our own domestic price level.
These considerations largely explain the easing of monetary policy in the US and in Euro last autumn. The fact that we reduced interest rates by different amounts, and that the different levels, is explained by differing assessments of the prospective impact on the overall demand, taking account of our own particular starting points. But the general na response was driven by essentially similar considerations.
Managing this global imbalance will be a considerable challenge for policymakers over the years; and helping to finance it - including helping to finance re-emerging markets considerable challenge for international bond markets. The fact that you are all here evidently good form - after the past remarkable year suggests that you have strong nerves. well need them again in the period ahead. But think of it this way. By the time we meet aga great Congress next year, Y2K will be behind you - and if you have survived that, you can anything! I wish you all possible success.