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 international 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 up this congress once again this year. i couldn ’ t remember what i ’ d done to wind you all up last year! but i am happy to join you anyway at what has become – in five short years – an unmissable event in the 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 upsets – beginning in asia, then russia and most recently brazil – which had everyone scrambling for liquidity and desperate to reduce risk, it proved, on ifr ’ s figures, to be a record year for international bond issues, with total issuance rising by some 17 % to over a trillion dollars equivalent. that can ’ t have been bad for fees! and altogether it suggests you had a pretty good year – apart from those of you who chose to go on holiday in august leaving someone else to look after your long positions in russian bonds. inevitably issuance by emerging market economies fell away, but issuance by supranational and 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 strengthen their balance sheets, accounting for 45 % of total issuance. this was despite a general widening of credit spreads – which though they have come back some way from the peak levels of the autumn are – and are likely to remain – substantially wider than before the emerging markets crisis, reflecting a more sober assessment of relative credit risk. against that, the bond markets generally benefited substantially from continuing low inflation and a further decline in inflationary expectations, so that yields have declined in virtually all the main currency sectors. in terms of government bonds they have come down by 100 basis points in the us, by 150 basis points in bunds, by close to 200 basis points in the sterling gilt market, and even by over 100 basis points in japan before yields there began to back up late last year. borrowers have been attracted by lower nominal borrowing costs ; and investors in the market have been attracted by the prospect of rising values as

woods. but the darkest financial storm clouds have lifted a little since the fund meetings. the us congress finally approved more resources for the imf, the threat of a credit crunch extending to the industrial economies in the wake of ltcm receded, helped also by an easing of monetary policy in europe as well as in the united states. in asia, japan took more determined policy action to address the fragility of the banking system and to stimulate domestic demand ; the yen strengthened ; china and hong kong both remained admirably resolute ; and there have even been some encouraging signs of renewed capital inflows to some of the asian countries. the floating of the exchange rate in brazil last month inevitably increased concerns about emerging market instability, but it is encouraging that adverse effects on other markets have so far been limited. – 3 – there may be further particular setbacks, as far as the overall financial situation is concerned, but i think i can confidently say that if it doesn ’ t get any worse it is likely to get better. risk aversion is all 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 financial disturbances. the inevitable counterpart of recession in much of the rest of the world is a sharp slowdown of net external demand – particularly for manufactures – in the industrial world. that has been reflected in growing weakness and falling business confidence in large parts of the manufacturing sector in both the united states and europe. the prospective growth in world economic activity has already roughly halved – from its trend rate of about 4 %. unless this fall in net external demand is offset by sustained domestic demand growth in the industrial countries – unless, in other words, the industrial economies collectively accommodate the necessary improvement in the external current account position of the emerging countries, through a deterioration in their own 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 world and, faced with weakening external demand, we can afford to see higher offsetting domestic demand growth without jeopardising price stability. indeed we need to see higher domestic demand growth than we otherwise would if overall demand is not to fall short of underlying supply capacity, and we need it, too, to offset the effects of weak world prices and of lower exchange rates in many emerging market producers on our own domestic price level. these considerations largely explain the easing of