Global Business Perspectives
Durga93
GBE4ClasslectureWeek9.pdf
The Global Business Environment
LECTURE 8
Challenges and responsibilities
Global finance HOW GLOBAL FINANCIAL MARKETS IMPACT ON THE BUSINESS ENVIRONMENT
Agenda
PROGRAM: GLOBAL BUSINESS MANAGEMENT
COURSE: GLOBAL BUSINESS PERSPECTIVES
COURSE CODE: MGMT8110
SEMESTER: 3RD
SECTION: 11
TOPIC: GLOBAL FINANCE
WEEK: 09
DATE: WEDNESDAY, MARCH 11, 2020
Summary of contents
o Evolution of the international monetary system
o International capital flows
Global financial risks and their consequences
When financial crisis strikes nations
o The global financial crisis of 2008
o Global markets for corporate control
o Challenges and responsibilities
o Conclusions
Source:https://www.google.com/search?q=the%20gold%20standard&tbm=isch&h l=en&hl=en&tbs=rimg%3ACbEplnyt62CLImCS9ihDCgUIT6kTUojPJyQAO_1YykCOSex
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The international monetary system
o The gold standard system – 1870s to 1914 o Currencies were ‘pegged’ to gold – there was a
conversion rate for each currency
o System depended on central banks adhering to external convertibility
o Marked the emergence of a global financial order
o No restrictions on international gold flows
o System broke down at the outset of the First World War, when governments restricted movements in gold markets
Source:https://www.google.com/search?q=The+Gold+standard&tbm=isch&v ed=2ahUKEwi6r7qEuY_oAhVDIq0KHZX2DCgQ2-
cCegQIABAA&oq=The+Gold+standard&gs_l=img.3..35i39j0l9.418
Source:https://www.google.com/search?q=the+gold+standard+tHE+gOLD+sT ANDARD+began+sometime+in+1880s&tbm=isch&ved=2ahUKEwj-
tuuVvI_oAhUMhawKHRJVAesQ2-cCegQIABAA
What is the Gold Standard?
Source: https://www.youtube.com/watch?v=5FHtcCpAMQ0
Source:https://www.google.com/search?q=the+gold+standard&sxsrf=ALeKk0 3xzyTUCrdr48dAcfycyyxbcbVJw:1583802598923&source=lnms&tbm=isch&sa=X
&ved=2ahUKEwi2hLa63I7oAhWL
Source: https://www.google.com/search?q=This+side+weighs+more+heavily- gold+standard+&tbm=isch&ved=2ahUKEwi39MLttI_oAhUC3KwKHckMAjMQ2- cCegQIABAA&oq=This+side+weigh
The Bretton Woods system
o Dates from the aftermath of the Second World War It lasted from 1944 to 1971
o Currencies pegged to the US dollar
But some flexibility for countries in setting the value of their currencies
o National capital controls allowed
o The IMF and World Bank are Bretton Woods institutions
o Bretton Woods system collapsed, largely due to a growing US trade deficit and steep rises in the price of oil
Exchange rate system
o Overseen by IMF
o Provides guidelines to governments on managing their currency
o Currencies can range from fixed rate to free- floating
o Pegged exchange rate – currency pegged to another, e.g. US$
The peg is adopted to provide stability, and is favoured by developing and transition economies
Governments can come under pressure to devalue
o The IMF warns against the accumulation of vast currency reserves, but many countries in fact hold large reserves, e.g. China
The IMF and World Bank
o Both are involved in economic development policies for member countries (numbering over 180)
o Both are influential institutions, e.g. attaching conditions to loans, based on principles of the ‘Washington consensus’
o The World Bank focuses on development programmes, especially in Africa, Asia and post- communist transition economies
o The IMF focuses on broader development issues and financial stability
The IMF is a co-ordinating organization of the G20
Source:https://www.google.com/search?q=the%20gold%20standard&tbm=isch &hl=en&hl=en&tbs=rimg%3ACbEplnyt62CLImCS9ihDCgUIT6kTUojPJyQAO_1YykC
OSexHP9Te2SRANwYOS-e46ec
Source:https://www.google.com/search?q=the%20gold%20standard&tbm=is ch&hl=en&hl=en&tbs=rimg%3ACbEplnyt62CLImCS9ihDCgUIT6kTUojPJyQAO_1
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The Dollar Standard and Its
Collapse
Source: https://es.coursera.org/lecture/principles-of-macroeconomics/the- dollar-standard-and-its-collapse-RIRFv
Source:https://www.google.com/search?q=Why+did+the+Breeton+Wood+Syste m+Fail%3F+In+1960+US+ran&tbm=isch&ved=2ahUKEwiT_KmKwI_oAhUP2KwKHV6
kA7kQ2-cCegQIABAA&oq=
Post-Bretton Woods
o Issues of global financial stability
o IMF seeks to maintain exchange rate flexibility
o Currency pegs can be more flexible, moving in bands
o If the currency is undervalued, benefits flow to the country’s exporters
o Free-floating currencies are ‘reserve’ currencies – the US $, Japanese yen, UK £ and the euro
o Growing influence of China
China’s currency, the yuan, is no longer pegged, and has become a reserve currency
The-Foreign-Exchange-Market
Source: https://courses.lumenlearning.com/wm-microeconomics/chapter/the- foreign-exchange-market/
International capital markets
o MNEs raise capital by offering shares to investors (equity funding), and by borrowing (debt financing)
o Capital markets – flows of capital, including equity and debt markets
o The financial environment has become highly globalized, due largely to improvements in computing and communications; characterized by:
Growing opportunities for cross-border financing and investment in business
Growth of global financial institutions
Growing role played by governments, e.g. sovereign wealth funds
Equity markets
o Shares in listed companies are traded on stock exchanges, beginning with the IPO (initial public offering)
o China has overtaken New York in new listings of companies
o Global companies now often seek listings outside their home countries :
In countries which are growing markets or where new investors are emerging
In countries where costs and regulation are more advantageous
o Institutional investors, such as pension funds and investment funds, have become major players in capital markets
Debt financing
o A bond is a loan instrument which promises to pay a fixed sum on a fixed date, and to pay interest to the lender
o Many organizations issue bonds, from companies to governments Sovereign debt, or government debt, has grown to huge
proportions
o Derivatives – financial instruments which have facilitated the securitization of debt
o Hedge funds – investment funds active in bond markets Their speculative behaviour can cause volatility in capital
markets
o Private equity funds – Investment funds which focus on buy-out activities, often financed by debt
Global financial risk
o Globalization has increased risks
o Derivatives markets are largely unregulated
o Use of ‘asset-backed securities’ or ‘mortgage-backed securities’ - of uncertain value
o Hedge funds are active in derivatives markets and in sovereign debt instruments
Some, known as ‘vulture funds’ purchase government bonds in secondary markets, known as ‘junk’ bonds, and pursue legal actions for full payment
o Finance is now seen as an activity in its own right, not merely a function
National financial crises
o National financial systems can become vulnerable through a banking crisis, especially when banks are exposed to derivatives markets
o Some causes of national financial crises:
Openness to global financial flows
Accumulation of too much debt – by governments, businesses and households
Falling currency and dollar-denominated debt
o Argentina – sovereign debt default, but the government eventually paid off vulture funds
o Russia – currency crisis in 1998, following rapid liberalization under IMF-recommended reforms
The Asian financial crisis
o Started in Thailand in 1997, and contagion spread to 3 other Asian countries – South Korea, Indonesia and Malaysia
o Investment boom and huge inflows of capital preceded the crisis
o Risks of the pegged currency: the government struggles to maintain the peg, risking running out of reserves
o The currency crisis caused investors to flee
o IMF rescue packages ensued, but one-size-fits-all market solutions were criticized
Global financial crisis 2008
o Financial growth in the preceding decade was based on low interest rates and extensive borrowing
Growth in derivatives trading and the re-packaging of debt as securities, especially mortgage-backed securities
o Banks became active in derivatives, using debt to fund further lending – a risky strategy
o The crash in the US housing market led to uncertainty in financial markets and an abrupt halt to lending
o Failure of Lehman Brothers bank in the US – a watershed event
o Repercussions around the globe, affecting globalized banks which were exposed in derivatives markets
Source:https://www.google.com/search?q=depression%20of%202008&tbm=isch &hl=en&hl=en&tbs=rimg%3ACXyxQ1tRYI0OImBQOAU176qEgXMEb7JALC0J793H
WL5W_17oU7qQlVDIhCngtuV
Source: https://www.youtube.com/watch?v=yM0uonkloXY
Here's What Caused the Great Recession | History
Source: https://www.google.com/search?q=About+the+crisis+Sub- prime+crisis+presented+by+Astha&tbm=isch&ved=2ahUKEwjLhOW2xY_oAhUP2
KwKHV6kA7kQ2-cCegQIABAA&oq=About+
Source: https://www.google.com/search?q=About+the+crisis+Sub- prime+crisis+presented+by+Astha&tbm=isch&ved=2ahUKEwjLhOW2xY_oAhUP2K
wKHV6kA7kQ2-cCegQIABAA&oq=About+
Source: https://www.google.com/search?q=About+the+crisis+Sub- prime+crisis+presented+by+Astha&tbm=isch&ved=2ahUKEwjLhOW2xY_oAhUP2
KwKHV6kA7kQ2-cCegQIABAA&oq=About+
Source:https://www.google.com/search?q=The+Great+Recession+in+Numbers -The+Street&tbm=isch&ved=2ahUKEwjiupXVuI_oAhWJRawKHT_yA5QQ2-
cCegQIABAA&oq=The+Great+Recession
The 2008 Financial Crisis: Crash Course Economics #12
Source: https://www.youtube.com/watch?v=GPOv72Awo68
Aftermath of the financial crisis
o UK government rescued two banks (RBS and HBOS) – RBS had become overextended through global acquisitions
o Scandals involving rigging of the interbank lending rate (LIBOR)
o Banks have also faced fines for mis-selling
financial products
o Quantitative easing (QE) – in the US and UK – intended to inject money into the financial system
Regulatory issues
o It had been widely assumed that financial markets would be self-regulating
o The near-collapse of banks and other companies, which had to be bailed out by governments, led to a rethinking of stricter regulation
o How can future crises be prevented? Compel banks to become more conservative in strategy
and national in focus Raise capital adequacy requirements for banks Bring derivatives trading within regulatory framework
o How far will governments co-operate internationally to regulate banking?
Global markets for corporate control
o A merger is the coming together of two or more companies to form a new company
o An acquisition or takeover involves one company buying out another:
Often paid for by borrowing, in the leveraged buy-out (LBO)
If the board of the target company does not approve the takeover, it becomes ‘hostile’, and is submitted for shareholder approval
o Emerging markets are now the source of much merger & acquisition (M&A) activity
Challenges and responsibilities
o Assumption has been that the ‘free’ market comprised of self-interested organizations is essentially stable
o ‘Self-regulation’ does not imply that all players will behave responsibly
o How to combine an enterprise culture and a sense of responsibility
o The global crisis revealed a banking culture in which illegal and unethical practices occurred – the ‘casino’ mentality
Conclusions
o Financial systems are vital to individuals, businesses and governments
o Stability is the key feature required in financial markets, but the rise of global finance has brought greater instability
o Global markets have seen innovation in finance, but also greater risks
o What of regulation at international level?
o IMF rescue measures help individual countries to some extent, but they do not constitute a global framework
