INTERNATIONAL BUSINESS ENVIRONMENT (Political Economy … · INTERNATIONAL BUSINESS ENVIRONMENT...
18/06/2010 1 INTERNATIONAL BUSINESS ENVIRONMENT (Political Economy of International Business) Session 5 International Business and the International Monetary System Today's questions 1. What is the International Monetary System (IMS)? 2. What has been the evolution of the IMS since the early XX th Century? What is the structure of the IMS today? 3. What are the economic and business implications of flexible exchange rates? Of a monetary union like the Eurozone? 18/06/2010 2 JG DITTER
INTERNATIONAL BUSINESS ENVIRONMENT (Political Economy … · INTERNATIONAL BUSINESS ENVIRONMENT (Political Economy of International Business) Session 5 International Business and
Government in need of capital tend to refuse conditional IMF loans, crowding-out the institution's resources
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"The IMF is hurting the poor ..."
Turkey and Latvia were in the news last week, having joined the roster of governments whose IMF disbursements are being withheld because they find it politically impossible to impose the required punishments on their citizens. The IMF sees these measures as necessary and pre-determined – in most cases by the borrowing countries' having run-
up unsustainable external or budget imbalances. But in fact the IMF has a long track record – dating back decades – of imposing unnecessary and often harmful conditions
on borrowing countries.
Latvia missed a 200 million euro disbursement from the IMF in March for not cutting its budget enough. According to press reports, the government wants to run a budget
deficit of 7% of GDP for this year, and the IMF wants 5%. Latvia is already cutting its budget by 40%, and is planning to close some public hospitals and schools in order to
make the IMF's targets, prompting street protests.
In almost all of its standby arrangements negotiated over the last year, the IMF has included conditions that will reduce output and employment in situations where
Banking crises refer to a situation in which a loss of confidence in the banking system leads to a "run on the banks", as individuals and companies withdraw their deposits
Currency crises occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency, or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates in order to defend prevailing exchange rates
Foreign debt crises are situations in which a country cannot service its foreign debt obligations, whether private sector or government debt
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Since 1973, a series of crises (ctd)
Latin American debt crisis (1980s)
Black Monday (October 19, 1987): global stock market crash
Japanese real estate bubble collapse (1990s)
EMS currency crises (1992-93)
Mexican currency crisis (1994)
Southeast Asian financial crisis (1997)
Russian debt crisis (1998), leading to the collapse of LTCM
Turkish financial crisis (2001)
Dotcom bubble burst (2001)
Argentine currency crisis (2002)
"Subprime" crisis ... leading to global recession (2007-2009)
Chinese authorities have kept that currency persistently weak. They’ve done this mainly by trading renminbi [or yuans] for dollars, which they have accumulated
in vast quantities. And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies. This has given Chinese exporters a growing competitive advantage over their rivals,
especially producers in other developing countries.
What makes China’s currency policy especially problematic is the depressed state of the world economy. Cheap money and fiscal stimulus seem to have averted a
second Great Depression. But policy makers haven’t been able to generate enough spending, public or private, to make progress against mass
unemployment. And China’s weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the
pockets of artificially competitive Chinese exporters.
New York Times, November 15, 2009
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Current issues 
*…+ last week the dollar neared $1.50 against the euro, compared with $1.25 in March. The weakness of the dollar, if sustained, could force American consumers to get used
to paying more for many imported goods as well as trips to their favorite vacation spots. But there is also an upside: a weak dollar could prove beneficial to the
American economy by aiding long-suffering manufacturers, rebuilding a stronger industrial base and lifting exports even if it makes life harder for trading partners
around the world, especially in Europe. *…+
If the dollar does keep falling and the euro keeps rising, it could increase trade tensions with Europe, especially big exporters like Germany, which have already been
hard hit by the global economic slump. “The strength of the euro is coming at absolutely the wrong time,” said Jens Nagel, head of the international department of the German Exporters Association in Berlin. *…+ “It has two sides, like it always does,”
said Carl Martin Welcker, owner of a machine tools maker, Schütte, in Cologne, Germany. “On the one hand, it makes our machines significantly more expensive,”
said Mr. Welcker, whose equipment churns out 80 percent of the world’s spark plugs. “On the other hand, we’re seeing international companies move production back to
the U.S., which helps our sales there.”
New York Times, October 18, 2009
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Current issues 
*…+ with Germany and France poised to record strong growth in the third quarter and Italy looking well placed to return to growth, the question of whether Britain should join [the euro] is being raised once again. The argument in favour is that Britain has paid a high price for staying out. Initially, the pound was too strong,
making British exports dearer and adding to the imbalances in the economy between an over-mighty City and a struggling manufacturing sector. Now sterling
is weak against the euro amid concerns about the vulnerability of British banks and the size of the black hole in the government's finances. [Moreover, A raft of large UK companies could follow Cadbury onto the takeover block as overseas predators cash in on the weakness of the pound and the UK's liberal markets.]
Inside the eurozone, there is collective security against a systemic crisis in the banking system; outside the eurozone Britain is simply a middle-ranking economic
power with a bloated financial sector and a huge debt.
Guardian, Monday 26 October 2009
Observer, Sunday 24 January 2010
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Current issues 
After simmering for months, the Greek sovereign-debt crisis has boiled over. The promise of a rescue by the IMF and the country’s euro-zone partners, worth €45 billion ($60 billion) or more, is no longer enough to persuade many private investors to hold Greek public bonds. Opposition to the bail-out in Germany meant that
market confidence had all but vanished by April 27th, when Standard and Poor’s (S&P) slashed its rating of Greek government
bonds to BB+, just below investment grade. The rating agency also lowered its rating on Portugal, to A-; a day later it downgraded
Spain from AA+ to AA. *…+
Do the rumblings in Greece signal a wider retreat by investors from sovereign debt? Defensive Eurocrats point out that the public
finances of the euro area as a whole are no worse than America’s. *…+ But the zone is not a single fiscal entity and investors are wary
of countries whose finances or growth prospects are worse than average. America [also] has the great advantage of issuing the
world’s reserve currency.
The Economist, 29 April 2010
An intrinsically unbalanced system?
While there were many causes of the [current global economic and financial] crisis, its intensity and scope reflected unprecedented disequilibria. Large and unsustainable current account imbalances across major economic areas were
integral to the buildup of vulnerabilities in many asset markets. In recent years, the international monetary system failed to promote timely and orderly
This failure has ample precedents. Over the past century, different international monetary regimes have struggled to adjust to structural changes, including the integration of emerging economies into the global economy. In all
cases, systemic countries failed to adapt domestic policies in a manner consistent with the monetary system of the day. As a result, adjustment was
delayed, vulnerabilities grew, and the reckoning, when it came, was disruptive for all.
The Group of 20, or G-20, is an international body that meets to discuss economic issues. It is a forum for cooperation and consultation on matters pertaining to the international financial system
It gathers finance ministers and central bank governors from 19 of the world's largest national economies, plus the European Union
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Its members -- 19 countries with some of the world's biggest industrial and emerging economies, plus the European Union --represent about 90 percent of the world's gross national product, 80 percent of world trade (including trade within the European Union) and two-thirds of the global population