INBU 4200: International Financial Management

Professor Michael PalmerLeeds School of Business

Fall Semester, 2010

The Environment of International Finance

• Background: When did the global financial crisis begin?• Important regional and country by country variations to the current

crisis:– Response of economies to the global credit crisis, the resulting

recession, and the current cycle:– Economic growth rates (GDP)– Response of unemployment to recession– Response of Central Banks

– Performance of financial markets to the global credit crisis and current cycle:– Bond Markets (yields and spreads)– Cross country differences in corporate debt costs– Flight to Safety (Risk Aversion) during the crisis

– Policies and Attitudes of Governments– Fiscal policy debate today (stimulus versus debt reduction)– Attitudes of governments towards regulation of financial markets

• Changing nature of the foreign exchange market (1960s versus today)

Background: Global Credit Crisis (Peak in Oct 2008)

TED Spread: 3 month Euro-dollar rate minus 3 month US T-bill rate (i.e., interbank spread over default free rate)

Fed Funds Rate: Interbank Lending Rate in United States

Economic Response Varied from Country to Country

U.S.: 3Q08 Marks the Beginning of a Recession

China: Only a Slowdown in GDP Growth

Variation in Economic Growth Rates

3.82.5

6.9

-1.6

-3.31.7

3.6

2

6.3

-4 -2 0 2 4 6 8

2003-2007average

2009

2010f

World Growth Industrialized Countries Emerging Countries

3.82.5

6.9

-1.6

-3.31.7

3.6

2

6.3

-4 -2 0 2 4 6 8

2003-2007average

2009

2010f

World Growth Industrialized Countries Emerging Countries

G7 Countries During the Recession

Note, CIS refers to the former Soviet Republic (includes: Russia, Ukraine, Belarus, Georgia)

Variation in Growth Rates Among Emerging Countries

-8

-6-4

-2

0

24

6

810

12

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

f

Emerging Countries Emerging Asia

Latin America Emerging Europe

Middle East Africa

CIS

Emerging countries: GDP Growth (%)

-8

-6-4

-2

0

24

6

810

12

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

f

Emerging Countries Emerging Asia

Latin America Emerging Europe

Middle East Africa

CIS

Emerging countries: GDP Growth (%)

Variation in Current GDP Growth Rates (% Change in GDP from previous

quarter at annual rate)• North America:– United States: +2.4% (2q)– Canada: +6.1% (2q)– Mexico: -1.4% (1q)

• Asia:– Japan: +0.4% (2q)– South Korea: +6.0% (2q)– China: +10.3 (2q)

• Europe:– Germany: +9.0% (2q)– Greece: -5.8% (2q)– Britain: +4.5% (2q)

Response of Unemployment During the Recession

Contrast of Central Bank Policies in the Current Cycle

Quantitative Easing and Low Interest Rates

Slowing Credit Growth and Raising Interest Rates

Differences in Central Bank Rates in the Current Cycle

Bond Market Responses to Central Bank Policies and Economic Outlook

US: Low Bond Interest Rates

Australia: High Bond Interest Rates

Cross Country Differences in Corporate Debt Costs

2000 (August 16)• United States: 7.42%• Australia: 7.59%• Canada: 7.00%• Euro Area: 6.21%• Japan: 2.37%• Switzerland: 4.65%• United Kingdom: 6.48%

2010 (August 19)• United States: 4.63%• Australia: 6.32%• Canada: 5.80%• Euro Area: 3.16%• Japan: 1.06%• Switzerland: 1.35%• United Kingdom: 5.55%

Flight to Safety (Risk Aversion): Impact on Government Yields

Flight to Safety (Risk Aversion): Impact on Exchange Rates

Yen (JPY) throughout the Global Crisis: at a 15-year High

Dollar (USD) during the Greek Crisis Against the Euro (EUR)

Bond Yields and Spreads Today

Differences in Government Yields Yield Spreads in Europe, July 2010

Fiscal Policy and Regulation Issues

• Fiscal policy reactions:– United States versus Western Europe– Continued stimulus versus Debt reductions.• U.K. Deficit: 10.3% of GDP (3.6% in 2008); U.S.: 8.8% of

GDP (2.4% in 2008)

• Attitudes of governments towards regulation of financial markets:– United States/United Kingdom versus Continental

Europe (Germany and France)

Changing Structure of the Foreign Exchange Market: The Yen (JPY) 1950 – 1970: Bretton Woods Era

Exchange Rates Today: The Yen 1971 – 2008, After Bretton Woods

Text Book: Madura

9th Edition 10th Edition