International finances also known as international macroeconomics are economic and monetary interrelations betweet two or more countries. All financial transactions that take place, crossing national borders are an element of international finances. For this reason, we all participate directly or indirectly in international finance. Phenomena such as financial crises or the arrangements of large financial organizations also affect entrepreneurs and ordinary people, so it is worth having basic knowledge on this subject.
In this article you will find:
THE MOST IMPORTANT INTERNATIONAL FINANCIAL INSTITUTIONS
There are intergovernmental, private and mixed financial institutions. They have specific competences, range of influence; they deal with the broadly understood principles of the functioning of international finances. Many of them have similar competences, sometimes the competencies of one organization are the same as competencies of another organization.
International financial institutions can be divided into:
“GLOBAL” INSTITUTIONS – are characterized by universal membership, a wide range of competences, impact on the overall international financial system. Most important of them:
• International Monetary Fund IMF (the widest cooperation -189 member states);
• World Bank Group (IBRD, International Development Association IDA , International Finance Corporation IFC, Multilateral Investment Guarantee Agency MIGA, International Centre for Settlement Investment of Investment Disputes ICSID);
• Bank for International Settlements (BIS – this is the oldest one
international financial institution (established in 1934), head office in Basel, Switzerland, the task is cooperation of central banks)
•Financial Stability Board (FSB – established in 1997-98, its task is to cooperate between international financial institutions and their member states, became active after the 2007 crisis thanks to the G20 group, no treaty basis)
• Organization for Economic Cooperation and Development (OECD)
MULTILATERAL DEVELOPMENT BANKS – created by groups of countries in order to provide financing and professional advising for the purpose of development. Most important of them are:
• International Bank for Reconstruction and Development
• International Finance Corporation
• Inter-American Development Bank
• Asian Development Bank
• African Development Bank
• Nordic Investment Bank
• Caribbean Development Bank
• European Bank for Reconstruction and Development
• European Investment Fund
• Inter-American Investment Corporation
• Islamic Development Bank
WHAT MONETARY SYSTEM IS NOW?
Over the centuries, we can distinguish several dominant financial systems.
The gold system – it was never introduced by the treaty and was not based on any international agreement. The informal leader of this system was Great Britain. Course of each currency was related to gold resources – this resulted in fixed exchange rates. That system was very transparent and predictable, inflation was limited.
The Bretton Woods system – at the conference (1944) the views were mainly clashing British (John Keynes – one currency for all or neutral world currency; establishing an international organization for the elimination of customs duties; establishment of a central bank cooperation organization; vocation international organization for developing countries) and American (Harry
White – US dollar as a world currency). The effect was establishment of fixed exchange rates of national currencies to the dollar and dollar to gold (dollar as reserve currency). In the 60s / 70s. the system collapsed.
Insufficient gold supply blocked the development of the system. Lack of confidence in the dollar (USA
unilaterally changed the dollar to gold rate and temporarily stopped the exchange of dollars for gold).
Contemporary financial system – since 1972/73 no international rules
financial. Supplementing the gaps created by creating new rules –
nevertheless, the system is not cohesive, vulnerable to crises. Characteristics :
• The key role of liquid (market) exchange rates
• Fiduciary money, the money supply has no connection with gold resources
• Fast increase in capital flows – an increase in the number of financial transactions that are
the goal itself – trading in securities (breaking of dependence
between a material and immaterial zone)
WHAT MAKES CURRENCY GLOBAL?
An international or global currency is an exchangeable national currency, which commonly in the international relations in the long term functions as money, and thus a measure of value, means of payment and means of thesaurisation. These functions should be fulfilled by global currency both in the private sphere and in the official sphere. Obtaining the status of an international currency requires, in addition to full convertibility, the fulfillment (by the country that issues) of certain conditions, which include:
high turnover of foreign trade (large export and high import) Large export of attractive goods at competitive prices means for the holders of the international currency access to various goods.
It means securing the currency in the form of valuable goods, which we can exchange for it (buy);
high share of the issuer of the international currency in international capital and monetary turnover, which is a derivative of the state’s and private entities’ ability to issue foreign loans, purchase foreign securities and make foreign direct investments;
existence of net currency supply for foreign countries, which requires maintaining a structural deficit of balance of payments, which is a long-term source of international currency creation for foreign entities;
stabilized currency value, i.e. stabilized exchange rate, level and long-term relatively constant purchasing power in the internal market, which is a premise of foreign investors’ confidence in a given currency and maintaining the real value of reserves held in it;
existence of adequate financial institutions to facilitate performance by the domestic currency of the function of the international currency. It’s about here existence of a developed banking system with a network of foreign branches and well-shaped capital and money market constituting a condition of access to capital and the basis of transfers capital for foreign entities
The dollar and the United States, as the country issuing this currency, meet all of the above
conditions. That is why it is currently the most important international currency in the world.
The US dollar enjoys the status of a global reserve currency for decades. In 1944 the Bretton Woods arrangements led to the global domination of the dollar. From now on, currency interventions by central banks from dozens of countries around the world were implemented in relation to the dollar. The increased supply of the dollar against the supply of gold was a matter of time. And despite the fact that the Bretton Woods system collapsed in 1971, the US dollar still remained the global reserve currency. Unlike other currencies, the value of the US dollar has never devalued itself.
5 MOST IMPORTANT RULES OF FINANCES
1. Money flow counts. Turnover is the key.
2. Money has a time value. I.e. 1 $ today is more than 1 $ tomorrow. Apart
from inflation, the point is that if I have a dollar and I will invest it, I can earn from it.
3. Risk only if you can gain something. No investor will take any risks
without seeing the opportunity to return profits from your investment. Profit must
be large enough to justify the “dedication” of investor.
Investori is freezing funds – he puts the money down for a year, two or five, so he could not
use them for consumption or other investitions. Investor also looses deposit effect – freeze money in
bank for a year, because there is a profit, i.e. 1.5%.
4. The market price is right – the market sets a price
5. Prosperity requires stability – the financial sector will not be profitable in a crisis
TYPES OF FINANCIAL CRISES
1. Currency crisis / balance of payments crisis – sudden, significant drop in exchange rates
and a significant increase in short-term interest rates;
The crisis main reason is the uncontrolled by the central bank, massive sale of a currency by
market participants who lost confidence in that curency. The result is devaluation.
Factors contributing to the currency crisis may be outgoing
foreign investment, protectionist raising of interest rates or too low state of central bank’s foreign exchange reserves.
2. Banking crisis (or Banking panic) takes place when a large number of people want to
withdraw the deposited funds. Because banks only hold a small percentage of customers’ money in the physical form, banking panic can lead to bank’s bankruptcy. A panic situation is considered a crisis situation when banking panic applies to many banks. Instruments to counteract
banking crises include, among others, the obligation of banks to store
larger sums in cash and the use of central bank reserves as
lender of last resort. In the case of banking panic, it is also possible to suspend
payments to guarantee the bank’s financial liquidity.
3. Crisis of foreign debt – crisis resulting from the need to repay
high foreign debts. Limits the use of budget for internal needs.
4. A speculative bubble – A very sharp, dynamic increase in the price of a good
(bubble inflating) followed by a sudden drop in prices (bursting). For example, a lot of shares were bought back by investors and thus price pumping. After
the short period with a small drop in value is followed by mass
selling out the purchased shares, and a sharp drop in their value.
A concept broader than the financial crisis; it concerns a low level of consumption,
investment as well as production slump. During the economic crisis
competitiveness of the economy and GDP is decreasing, inflation and unemployment are rising.
USEFUL INFORMATION ABOUT INTERNATIONAL FINANCES
The main directions of reforms of the global financial system are:
a. gradual liberalization
Key concepts within international finances are:
a. the Mundell–Fleming model
b. the optimum currency area theory
c. purchasing power parity
d. interest rate parity
e. the international Fisher effect
The role of the G10 Committee and other market regulators in the global financial system:
The role of market regulators is to oversee the stability of the global system
as well as the introduction of solutions leading to an increase
of this stability in the global dimension. Such areas of activities are mutual exchange of information, risk management and creation of minimum supervisory standards.
Main features of the modern ad hoc monetary system:
a. There is no treaty that would establish it
b. There are no indications which institutions manage it
c. Based on temporary solutions
d. It was created “quickly” after the collapse of the Bretton Woods system (and took over after that system several institutions). So far many new institutions have been created in new system.
Elements of the international finances system:
a. Standardized financial mechanisms
b. International currency
c. International regulatory agencies
Types of property funds
a. SWF- Sovereign Wealth Fund – special investment fund that trades
b. Typology based on origin:
– Commodities – export of raw materials
– Non-commodities – export of everything that is not a raw material
c. Typology for the purpose:
– Stabilization – in the event of a crisis
– Savings – more stable instruments – earning on interest
– Pension – funds for eventual shortages in the system retirement
– Reserve – investing surplus for a larger project
– Development (SDSWF- Strategic Development Sovereign Wealth Fund) –
Risky investments for development, financed from surplus
We can distinguish two models in international finances:
1. Anglo-saxon model it is market centered / oriented. The separation of banks’ activities into two types: deposit and credit and investment. There is supervision, not as strong as
in the continental system. This system is also more liberalized than the continental system
2. Continental-european model is bank oriented / centered, banking services are broadly defined and currently described in the second EU directive. The continental system is characterized by strong financial supervision, especially strong banking supervision.
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