PM points to loopholes in capital markets

By agencies   |   Tuesday, 09 May 2006, 07:00 Hrs
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NEW DELHI: Prime Minister, Manmohan Singh said that loopholes generated information bubble and flock mentality among inventors.

The 1997 Asian crisis had demonstrated that financial crises could be contagious as a result of imperfections in the capital markets, Singh said at the opening session of the annual meeting of ADB (Asian Development Bank) board of governors.

In panic situation, markets did not adequately discriminate between countries with strong and weak economic fundamentals and seemingly strong economies could be engulfed by a snowballing crisis, he said.

The Asian financial crisis hit countries that had built up an enviable reputation as miracle economies. The crisis arose due to four important factors. The exchange rates were pegged at unsustainable levels, which triggered a crisis.

Another reason was the fragility of financial systems that allowed enterprises to borrow without any regard for mismatches in current composition or maturity profile.

Crisis arose also due to the flawed regulatory infrastructure in financial sector and due to the inadequacy of governmental systems in monitoring the quantum and nature of capital flows.

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