This is a death sentence? I don't get it.
Thursday November 5, 12:50 pm Eastern Time
(Note: this article is ''in progress''; there will likely be an update soon.)
Greenspan says need to curb financial leverage
WASHINGTON, Nov 5 (Reuters) - Federal Reserve Chairman Alan Greenspan said on Thursday that the very high degree of leverage exercised by financial intermediaries had worsened Asia's financial crisis and must be curbed.
''As the financial system becomes ever more sensitive to change, consideration needs to be given to discourage excess leverage by financial intermediaries worldwide,'' he said in a speech prepared for delivery to a meeting in Boca Raton, Fla., of the Securities Industry Association.
Greenspan canceled his trip to Florida because of bad weather but delivered his comments by videoconference. A text was issued in Washington.
Financial markets were intently awaiting the Fed chairman's remarks for any hint about a potential cut in interest rates when the policysetting Federal open Market Committee meets on Nov 17. But Greenspan made no comment about the U.S. or global economic outlook.
He noted that ''investor fright'' had caused a rush toward safe U.S. Treasury securities, but said that may dissipate ''and yield spreads and liquidity premiums will soon fall into more normal ranges.''
Greenspan said a striking difference between the current bout of global turmoil and past such episodes was the increased speed with which capital now shifts between countries.
He said one lesson to be taken was that capital controls, which worked in part to contain international flows in the past, were unlikely to be effective in future and could in fact dry up capital investment flows to economies that apply them.
In a globally linked economy, Greenspan said, ''contagion is clearly enhanced by leverage'' and consideration must be given to discouraging excess leverage that leads to excess debt.
''Nonfinancial corporate leverage in Asia especially urgently needs to be addressed,'' Greenspan said, since it led to huge debt service requirements that helped break down financial systems in East Asia.
''Perhaps the most effective way to reduce leverage in emerging market economies is to remove the debt guarantees, both explicit and implicit, by central banks and governments,'' he suggested.
Greenspan said countries afflicted by crisis also have a responsibility to adopt sound policies. He said ''areas crucial to increased discipline'' included improved bankruptcy procedures and better arrangements for risk sharing between debtors and creditors.
(Note: this article is ''in progress''; there will likely be an update soon.)
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