International Financial Markets – Questions and Issues
(It is assumed that the first part of the stuff was covered by the midterm exam. Therefore, the following list of questions and issues refers to the remaining part only)
1.The evolution of the international monetary system since 1944.
2. International role of the US dollar, present challenges to its global position and possible alternatives (if any).
Noting that the dollar’s share of foreign exchange reserves has already fallen from 80 percent in the mid-1970s to around 65 percent today, the Economist pointed out that questions about the dollar’s role were raised in the early 1990s, but its pre-eminence survived. However at that time there was no alternative. Today one exists in the form of the euro. Over the longer term the dollar’s biggest failure has been as a store of value. Since 1960 it has fallen by around two thirds against the euro (using the German currency as a proxy for the years prior to 1999 when the euro was established) and the Japanese yen. While the marked fall in the US dollar in the late 1980s had few ill effects on the economy, there is more cause for concern in the present situation. This is because the US current account deficit, running at close to 6 percent of GDP is almost twice as big as at its peak in the late 1980s and will keep widening. Furthermore, at that time the US was still a net creditor nation. Today it is the world’s biggest debtor, with borrowing sucking in around 75 percent of the world’s balance of payments surpluses and with foreign liabilities expected to reach $3.3 trillion, or 28 percent of GDP, by the end of this year.
“The requirements of a reserve currency are a large economy, open and deep financial markets, low inflation and confidence in the value of the currency. At current exchange rates the euro area’s economy is not that much smaller than America’s; the euro area is also the world’s biggest exporter; and since the creation of the single currency, European financial markets have become deeper and more liquid. It is true that the euro area has had slower real GDP (gross domestic product) growth than America. But in dollar terms the euro area’s economic weight has actually grown relative to America’s over the past five years.”
US dollar as a safe haven for investors
Henry Kissinger once noted, "Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world."
How the Dollar System works After 1945, the US emerged from war with the world's gold reserves, the largest industrial base, and a surplus of dollars backed by gold. In the 1950's into the 1960's Cold War, the US could afford to be generous to key allies such as Germany and Japan, to allow the economies of Asia and Western Europe to flourish as a counter to communism. By opening the US to imports from Japan and West Germany, a stability was reached. More importantly, from pure US self-interest, a tight trade area was built which worked also to the advantage of the US.
That held until the late 1960's, when the costly Vietnam war led to a drain of US gold reserves. By 1968 the drain had reached crisis levels, as foreign central banks holding dollars feared the US deficits would make their dollars worthless, and preferred real gold instead.
In August 1971, Nixon finally broke the Bretton Woods agreement, and refused to redeem dollars for gold. He had not enough gold to give. That turn opened a most remarkable phase of world economic history. After 1971 the dollar was fixed not to an ounce of gold, something measurable. It was fixed only to the printing press of the Treasury and Federal Reserve.
The dollar became a political currency�do you have "confidence" in the US as the defender of the Free World? At first Washington did not appreciate what a weapon it had created after it broke from gold. It acted out of necessity, as its gold reserves had got dangerously low. It used its role as the pillar of NATO and free world security to demand allies continue to accept its dollars as before.
Currencies floated up and down against the dollar. Financial markets were slowly deregulated. Controls were lifted. Offshore banking was allowed, with unregulated hedge funds and financial derivatives. All these changes originated from Washington, in coordination with New York banks.
3. Emergence of the single European currency (the euro), its actual and potential role in the international monetary system.
The euro (currency sign: €; currency code: EUR) is the official currency of 16 out of 27 member states of the European Union (EU). The states are known collectively as the Eurozone.
The currency is also used in five further countries and territories with formal agreements and six other countries without such agreements. Hence it is the single currency for over 327 million Europeans.[2] Including areas using currencies pegged to the euro, the euro directly affects close to 500 million people worldwide.[3] As of November 2008[update], with more than €751 billion in circulation[4] (equivalent to about USD 953 billion[5]), the euro is the currency with the highest combined value of cash in circulation in the world, having surpassed the U.S. dollar (USD).[6] Based on IMF estimates of 2008 GDP and purchasing power parity among the various currencies, the Eurozone is the second largest economy in the world.[7][8][9] [10]
The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. Physical coins and banknotes entered circulation on 1 January 2002.
In economics, an optimum currency area (or region) (OCA, or OCR) is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. There are two models, both proposed by Robert A. Mundell: the stationary expectations model and the international risk sharing model. Mundell himself advocates the international risk sharing model and thus concludes in favour of the euro.
The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. The absence of distinct currencies also removes exchange rate risks. Financial markets on the continent are expected to be far more liquid and flexible than they were in the past. The reduction in cross-border transaction costs will allow larger banking firms to provide a wider array of banking services that can compete across and beyond the Eurozone. Another effect of the common European currency is that differences in prices—in particular in price levels—should decrease because of the 'law of one price'. Differences in prices can trigger arbitrage, i.e. speculative trade in a commodity across borders purely to exploit the price differential. Therefore, prices on commonly traded goods are likely to converge, causing inflation in some regions and deflation in others during the transition. Some evidence of this has been observed in specific markets.
The euro is a major global reserve currency, sharing that status with the U.S. dollar (USD), which continues to be the primary reserve of most commercial and central banks.Since its introduction, the euro has been the second most widely-held international reserve currency after the U.S. dollar. Additionally, there has been suggestion that recent weakness of the US dollar might encourage parties to increase their reserves in euro at the expense of the dollar.
4. The role of the International Monetary Fund in the global financial system.
The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. It also offers financial and technical assistance to its members, making it an international lender of last resort. The International Monetary Fund was created in 1944 [1], with a goal to stabilize exchange rates and assist the reconstruction of the world's international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances.
In the past a number of criticisms have been directed towards the role of the IMF. A major criticism against the IMF has been the fact that it should not only seek exchange rate stability around the world, but it should also identify what should be regulated and what is necessary to be regulated.
Secondly, the role of the IMF has been maligned by lawyers and economists alike. Lawyers have been the victims of legal technicality and economists have been the main designers when it came to the structure of the Fund.
Another major concern has been the fact that the IMF has not always been effective in the implementation of its policies, in addition to the fact that the IMF has not managed to persuade States to achieve consensus in a number of certain legal matters of international economic significance.
The IMF’s failure to adapt its original governance arrangements to its changed operations has resulted in the following problems:
IMF-Supplier State Relations: The supplier states, because of their wealth and power are both independent from the IMF and have the votes and Board representation to control its decision making. This means that they can make decisions for the IMF that will never affect their citizens. This situation of decision-makers having power without accountability to those most affected by their decisions is ripe with potential for abuse.
IMF-Consumer State Relations: Although, there is great variation in conditions among the consumer states, the underlying causes of their macroeconomic challenges lie in the governance of their societies. The IMF has attempted to deal with this reality by increasing the range of non-macroeconomic issues its addresses in its operations in these countries, thereby becoming an important actor in their policy making processes. Although this narrows their policy space, consumer member states cannot effectively challenge the IMF because they are dependent on its financing or its approval for access to financing and cannot easily influence its decision making.
IMF-Non-State Actor Relations: The creators of the IMF believed that it was not necessary for the IMF to have any direct interaction with non-state actors, such as labor unions, human rights organizations or community associations. Given its important role in domestic policy making, this position is no longer valid. There is no obvious reason why the IMF, when it “descends” into the national policy-making process, should be less accessible or accountable to those people directly affected by its decisions than other actors in this process.
IMF-International Organizations Relations: The IMF, because of the broadening scope of its operations, encroaches on the “jurisdiction” of other UN specialized agencies. In general, because of disparities in their financial and political resources, these other agencies have been unable to either challenge the IMF or to effectively coordinate their activities with the IMF. The resulting de facto expansion of IMF “jurisdiction” both disempowers the other agencies and increases the cost of the IMF giving bad policy advice.
IMF’s Lack of Internal Accountability: The IMF still operates on the erroneous assumption that its existing channels of accountability--the IMF’s Board of Executive Directors, and the Board of Governors--are sufficient. Most consumer member states are only indirectly represented on the Board of Executive Directors, on which IMF supplier states hold the overwhelming majority of the votes, and the IMF’s operations have become too complex for these directors to effectively exercise firm oversight over the management and staff. The Board of Governors, comprised of central bank chiefs and finance ministers, meets infrequently and is not designed to deal with particular operational cases.
Międzynarodowy Fundusz Walutowy, jako organizacja o charakterze światowym stale znajduje się pod ostrzałem krytyki. Żeby dobrze to zrozumieć trzeba się dokładnie przyjrzeć kilku faktom. Podstawą do przyznania kredytu jest spełnienie szeregu wymogów wystosowanych przez zarząd Funduszu. Reformy te dotyczą m.in. prywatyzacji, liberalizacji handlu i bezpośrednich inwestycji (FDI), zastosowania rynkowych zasad w stosunku do kursów walut, zmiany wydatków publicznych w celu zwiększenia ich produktywności czy zmian w sposobie opodatkowania. Te cele są niewątpliwie bardzo trudne do osiągnięcia i przez to podatne na krytykę. Jednym z podstawowych zarzutów to – czy jeden model reform pasuje do wszystkich państw?. Druga rzecz wzbudzająca kontrowersje to restrykcyjna polityka MFW mająca na celu likwidację inflacji i deficyty budżetowego. To ,,dokręcanie śruby’’ spowalnia wzrost gospodarczy, jednak pozwala na wyjście z kryzysu i rozwój w dłuższej perspektywie czasu. W krajach, gdzie stawia się na krótkotrwałe skoki gospodarcze, ta polityka jest bardzo niepopularna ( było to widoczne m.in. podczas ostatniego kryzysu w Argentynie ). Bardzo krytykowana jest również zbyt duża rola państw założycielskich MFW w podejmowaniu strategicznych decyzji. Podważają to zwłaszcza kraje o bogatych złożach naturalnych (zrzeszone w tzw. grupie BRIC).
Postępujący kryzys finansowy i początkowe nikłe reakcje MFW spowodowały, że dyskusja na temat reformy tej instytucji weszła w fazę kluczową. Zgłaszana jest potrzeba dostosowania MFW do nowych realiów, w jakich znalazły się światowe gospodarki. MFW musi zostać przebudowany tak, by służył celom współczesnego świata – powiedział ostatnio brytyjski premier Gordon Brown.
Jest kilka kwestii, z którymi zgadza się większość państw członkowskich. Po pierwsze zarządzanie funduszu musi być rozszerzone o większą ilość podmiotów. Specjaliści oceniają, że większą rolę decyzyjną powinny otrzymać wschodzące gospodarki, Chiny i Indie. Ograniczoną rolę miałyby dostać państwa, które ostatnio mniej znaczą na arenie międzynarodowej, na przykład Anglia i Francja. Ponadto jest planowana formuła mająca na nowo określić system kwot wpłacanych do Funduszu, co jednak nie spowoduje to wzrostu znaczenia państw rozwijających się. Oprócz PKB danego kraju, będzie się zwracać uwagę na PKB w stosunku do parytetu siły nabywczej.
Kolejnym planem jest stworzenie systemu wczesnego ostrzegania przed kryzysami. Pojawiają się opinię, że Fundusz wykonałby w tej kwestii lepszą pracę niż analitycy z sektora prywatnego (wliczając w to agencje ratingowe), gdzie często występuje konflikt interesów. Dyskusja dotyczy też mobilności kapitału i co się z tym wiąże, przejrzystości sytemu kredytów. Zgłaszana jest potrzeba poskromienia mało przejrzystego i rozdmuchanego systemu derywatyw, czyli instrumentów pochodnych w bankach i innych instytucjach finansowych. Ważne jest niedopuszczenie w przyszłości do nagłych załamań cen towarów, kursów walut i innych podstawowych komponentów gospodarki.
Z inicjatywą wychodzi też sam Fundusz. Ostatnio dyrektor naczelny Dominique Strauss-Kahn przedstawił pięciostopniowy plan reformy MFW. Pierwszym problemem, który musi być rozwiązany jest coraz większy problem finansowy wewnątrz tej instytucji. Przez ostatnie kilka lat Fundusz nie był obecny na arenie międzynarodowej, mniej państw występowało o pożyczki więc drastycznie zmniejszył się dochód generowany z procentów od przyznawanych kredytów. Istnieje plan sprzedaży około 400 ton złota i ustanowienia możliwości wpłat darowizn na niektóre działania MFW. Drugi punkt dotyczy usprawnienia nadzoru państw członkowskich. Coroczne sprawozdania są bardzo uciążliwe dla personelu, który musi przygotowywać kompleksowy raport na temat stanu gospodarczego i politycznego krajów członkowskich. Dlatego tam gdzie będzie to możliwe dotychczasowe sprawozdania mają być organizowane co dwa lata.. Dzięki temu Fundusz będzie mógł skupić na sprawach najważniejszych. Trzecią reformą ma być ustanowienie nowej formy multilateralnego nadzoru w celu skonfrontowania potencjalnych zagrożeń dla stabilności systemu monetarnego. Na podstawie międzynarodowych spotkań pracownicy Funduszu mają tworzyć sprawozdania, które później będą przedyskutowywane przez zarząd. Pierwsza taka runda miała miejsce z udziałem Chin, państw strefy Euro, Japonii, Arabii Saudyjskiej i Stanów Zjednoczonych. Zakończyło się to jednak niepowodzeniem z powodu nieprzejednanych stanowisk Chin i USA. Wyciągnięto z tego taki wniosek, że dopóki MFW nie będzie mógł przedłożyć własnej opinii na forum międzynarodowym, wielostronny nadzór nie przyniesie spodziewanych efektów.
Kolejny punkt pana Strauss-Kahn’a to ustanowienie nowego obiektu w strukturach Funduszu, który zapewniałby zabezpieczenie krajom, które prowadzą odpowiedzialną politykę makroekonomiczną i posiadają zrównoważony budżet, jednak pomimo tego są narażone na kryzys z powodu słabego bilansu oraz nieodporności systemu. Państwa zakwalifikowane do tych funduszy będą mogły brać bardzo duże pożyczki. Piąta reforma ma dotyczyć podziału kwot i systemu głosów w MFW.
Nie są to wszystkie planowane zmiany. Istnieje jeszcze wiele propozycji, między innymi wystosowana przez grono ekspertów pod przewodnictwem Pedro Malana z brazylijskiego Unibanco, chcących ucięcia długoterminowych pożyczek dla biednych krajów. Natomiast wniosek Tommaso Padoa-Schioppa, ministera finansów w rządzie włoskim, dotyczy skonsolidowania państw strefy Euro w Funduszu.
Przed nadchodzącym spotkaniem w Waszyngtonie odbyła się dwudniowa sesja ministrów finansów i dyrektorów banków centralnych państw członkowskich G-20. Na sesji osiągnięto porozumienie co do potrzeby reformy m.in. Międzynarodowego Funduszu Walutowego, jednak konkretne decyzje zostaną podjęte na zaczynającym się dzisiaj szczycie w stolicy Stanów Zjednoczonych.
5. The nature and functions of the Special Drawing Rights.
Special Drawing Rights (SDRs) are potential claims on the freely usable currencies of International Monetary Fund members. SDRs have the ISO 4217 currency code XDR. SDRs are defined in terms of a basket of major currencies used in international trade and finance. At present, the currencies in the basket are the euro, the pound sterling, the Japanese yen and the United States dollar. Before the introduction of the euro in 1999, the Deutsche mark and the French franc were included in the basket. The amounts of each currency making up one SDR are chosen in accordance with the relative importance of the currency in international trade and finance. The determination of the currencies in the SDR basket and their amounts is made by the IMF Executive Board every five years.
SDRs are used as a unit of account by the IMF and several other international organizations. A few countries peg their currencies against SDRs, and it is also used to denominate some private international financial instruments. For example, the Warsaw convention, which regulates liability for international carriage of persons, luggage or goods by air uses SDRs to value the maximum liability of the carrier.
In Europe, the euro is displacing the SDR as a basis to set values of various currencies, including Latvian lats. This is a result of the ERM II ...
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