There appears to be a good deal of uncertainty concerning the conditions surrounding the availability of official finance. It could be that investors are demanding higher interest rates to compensate for that uncertainty. There is also uncertainty among market participants about what would happen in the event of a debt restructuring and the expected repayments that would ensue. One role for the official community is to try and mitigate these uncertainties through greater clarity about the criteria for official lending and its crisis resolution policies – a theme I return to below. If successful, one outcome of these reforms would be lower borrowing costs for emerging markets. Investors are also starting to differentiate among borrowing countries more clearly than before. This has led to a greater dispersion of spreads on emerging market debt. Before the Russian crisis these spreads were tightly compressed with the central 50% of the distribution of emerging market spreads covered by a range of only around 100 basis points. At present, the range covered by the central 50% of the distribution is over 500 basis points. Correspondingly, there has been a sharp fall in the correlation between changes in emerging market spreads. The rolling 26 week correlation between changes in emerging market spreads reached a peak of around 0.8 at the time of the Russian crisis. Since then it has steadily declined, reaching a level of only 0.2 before the recent rise to around 0.35 following adverse developments in Turkey and Argentina. This differentiation in spreads is a welcome development.
While individual jurisdictions may be confronted with specific challenges of implementation that may arise from differences in economic and market structures, there is also much in common, particularly among emerging economies, that can be shared among jurisdictions. The period of observation on some of the components of the reform package provided by the Basel Committee is welcomed. It will allow jurisdictions to consider appropriate actions needed to support the effective implementation of the reforms. At the same time, there is an expectation that there will be a willingness by the international standard setting community to adjust or otherwise supplement current prescriptions, frameworks or implementation strategies as more experience is gained under changing market conditions. The effective implementation would also require support for the implementation of the reforms, particularly in the area of capacity building, particularly in the emerging and developing world. Inclusive communication channels with the market and an inclusive process of global consultations will allow us to benefit from the experience of others and, more importantly, facilitate more coordinated policy responses and thus support the orderly adjustments to the new standards. While the evolution of financial stability policies over the recent two years has seen clearer mandates being established for the regulatory authorities, the framework for financial stability both at the national and international levels continue to be a subject of intense discussion.