Well func­tion­ing cap­i­tal mar­kets vi­tal to growth

Financial Mirror (Cyprus) - - FRONT PAGE -

Moody’s In­vestors Ser­vice says that well-func­tion­ing cap­i­tal mar­kets can help fos­ter macroe­co­nomic sta­bil­ity, ac­cess to fi­nan­cial ser­vices and the over­all de­vel­op­ment of economies.

“De­vel­oped cap­i­tal mar­kets are good at mo­bil­is­ing, di­rect­ing and al­lo­cat­ing lo­cal and in­ter­na­tional sav­ings. To be ef­fec­tive, they must of­fer a menu of risk/re­turn op­tions that is both suit­able and use­ful to var­i­ous types of in­vestors and in­vest­ments,” said Ray­mond McDaniel, Moody’s Pres­i­dent and CEO.

McDaniel was speak­ing to del­e­gates at the in­au­gu­ral Moody’s and Shang­hai Ad­vanced In­sti­tute of Fi­nance (SAIF) 2014 Credit Mar­ket Re­search Con­fer­ence in Shang­hai on May 17.

On the topic of the cap­i­tal mar­kets, while they pro­vide a great num­ber of ben­e­fits when they func­tion well, McDaniel states that “the cap­i­tal mar­ket is a sys­tem. How well - or poorly - each part op­er­ates in­evitably de­pends on how the rest of the sys­tem is work­ing.”

“And one of the cru­cial in­gre­di­ents for the over­all ef­fec­tive­ness of mar­kets is credit — which in its sim­plest form is the trust that en­ables one party to tem­po­rar­ily pro­vide re­sources to an­other mar­ket,” said McDaniel.

The ben­e­fits that bet­ter-de­vel­oped mar­kets can bring in­clude cre­at­ing an im­por­tant safety valve in the sys­tem for in­stances where banks are con­strained to lend; a more dis­ci­plined process for cap­i­tal al­lo­ca­tion; and strong mar­ket­based sig­nals that en­able in­vestors to mon­i­tor the use of and re­turns on their fi­nanc­ings.

McDaniel notes that pub­lic pol­icy has an im­por­tant role to play in es­tab­lish­ing the rule sets that make mar­kets deliver these ben­e­fits. “The global re­cov­ery is still frag­ile. In this con­text, get­ting fi­nan­cial mar­kets to work well be­comes in­creas­ingly im­por­tant,” said McDaniel, adding, “a strong over­all mar­ket de­sign, with ap­pro­pri­ate macro-pru­den­tial over­sight, a sound le­gal frame­work, and broad avail­abil­ity of in­for­ma­tion, can at­tract and en­cour­age par­tic­i­pa­tion by both do­mes­tic and for­eign in­vestors.”

In this con­text, the in­ter­na­tional credit rat­ing agencies can also play a role in deep­en­ing liq­uid­ity.

Credit rat­ings are use­ful tools in pro­mot­ing sec­ondary mar­ket liq­uid­ity be­cause rat­ings are a read­ily avail­able and glob­ally com­pa­ra­ble point of ref­er­ence that can en­cour­age a deeper un­der­stand­ing of credit risk.

“The cre­ation and oper­a­tion of well-func­tion­ing cap­i­tal mar­kets is a shared re­spon­si­bil­ity of both the pub­lic and pri­vate sec­tors,” said McDaniel. The ocon­fer­ence, spon­sored by Moody’s and SAIF, cov­ered a broad range of is­sues that are shap­ing the mod­ern global cap­i­tal mar­kets, in­clud­ing bank risk in the Euro Zone, cor­po­rate credit risk in China, and the role played by in­no­va­tive struc­tured fi­nanc­ings in the con­text of over­all mar­ket-based fi­nance.

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