Despite the weak economic environment, the upward trend in the level of international capital market financing showed signs of continuing in the second quarter, although activity was lower than in the record first quarter. A range of contrasting influences led to differences in the performance of market segments.
Several factors kept activity high. International bond issues were boosted by the large funding requirements of sovereign borrowers-to finance deepening fiscal deficits or to replenish foreign exchange reserves-and of companies needing to refinance maturing debt. And the easing of long-term interest rates stimulated financing or refinancing activity in longer-term instruments, although at the expense of issues of short-term paper. Borrowers from Latin America and the buoyant Asian economies also contributed to the high level of activity. The reduction in exchange market tensions in Europe stimulated issues in a variety of currency sectors, and led to a sharp fall in issues in the deutschmark, which had dominated European issues in the second half of last year.
The long-term growth of activity in securities markets at the expense of banking markets has reflected the increase in institutional portfolio management and continuing deregulation, both of which have boosted cross-border investment and asset diversification. At the same time, banks' business has been influenced by their cautious and selective approach towards new lending. These factors continued to have a major effect during the second quarter. Large loss provisions and the implementation of the new capital adequacy guidelines have caused Japanese banks to remain cautious about increasing their international exposures, other than to Asian borrowers. And although US banks' earnings have recovered, they are only gradually taking a more positive attitude towards lending Opportunities. A significant part of the rise in syndicated credit activity in the second quarter reflects the refinancing of existing debt by US companies, typically arranged by US banks, rather than a net increase in their exposures.