WASHINGTON, 16 September 2004 — Global financial markets are stronger than at any time since the US stock market bubble burst in early 2000, an International Monetary Fund report said yesterday.

“Our assessment on stability of the global financial system is very positive, some might even say it is sanguine,” said Gerd Hausler, director of the Washington-based IMF’s international capital market division that wrote the report, at a press conference.

“Short of a major and devastating geopolitical incident ... it is hard to see where systemic threats could come from in the short term,” the report said.

The semiannual report assesses global financial markets and identifies potential systemic weaknesses that could lead to financial crises.

The financial system is strong enough to withstand an event such as the unexpected collapse of a financial firm, the report concluded.

Valuations of financial assets “are not excessive — one way or the other,” Hausler said. International financial markets have remained calm so far despite the transition to higher interest rates, something the IMF said is due in large part to “the effective communication strategy” of the US Federal Reserve Board.

And, the IMF said, investors are being wise about their investments in emerging markets, instead of rushing in — and then rushing out — of risky investments in emerging markets as they did in 2001 and 2002. “Investors are discriminating between good risks and not-so-good risks,” Hausler said. “There is a fine balance between fear and greed.”

Higher oil prices are not a threat to global financial markets, Hausler said. But the IMF said it would increase efforts to monitor energy trading because many banks and other traditional financial institutions were entering the market.

The IMF repeated its concern about the US current account deficit, noting that if foreign capital flows to the United States decrease it could push up US interest rates and hurt the dollar, which in turn could impact other economies.

“A sharp and disorderly decline of the dollar would, among other things, cause significant losses to many international institutions holding dollar assets or generating dollar income,” the report said.

But it maintained that for now, the US market is not expected to see capital dry up, because there are few alternatives for big investors.

“In the absence of a compelling alternative to liquid dollar assets within a high-growth area, it is not easy to see why investors would trigger a wholesale shift away from dollar assets without undermining the rationale of their investment decisions,” the IMF report said.

The financial system strengthened over the past six months helped by the broadening economic recovery, the report said.

The system benefited “crucially” from a strong capital base going into the recession of 2001 and 2002 and a shift in risk management beforehand, mainly among the major internationally active banks.

The financial sector has a strong cushion of comfort because of increases in gross revenues and a sharp reduction in corporate default rates and in nonperforming loans, both results of the economic recovery, the report added.

The upbeat report said major risks are on the downside. “The most immediate risk is that market participants may develop a sense of complacency, seeing how smoothly financial markets have adjusted to the initial moves to higher policy rates,” the report said. Complacency could lead to a return of “indiscriminate risk behavior” because of a tendency to seek higher yields, the IMF said.

It also voiced concern about the impact of oil prices. “Oil prices, in particular, could spike further, contributing to inflation concerns and potentially hurting financial markets and the economic recovery.”

The IMF again called on countries to address weak spots in their financial systems amid the current low-risk situation, which would help support the financial systems to better cope with the next economic downturn.

“In countries where insufficient profitability has long plagued the banks, a conducive environment should be created to facilitate the consolidation process so as to allow the emergence of a profitable and vibrant banking sector,” the report said.