INBU 4200: International Financial Management
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INBU 4200: International Financial Management
Professor Michael PalmerLeeds School of Business
Fall Semester, 2010
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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)
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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
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Economic Response Varied from Country to Country
U.S.: 3Q08 Marks the Beginning of a Recession
China: Only a Slowdown in GDP Growth
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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
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G7 Countries During the Recession
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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
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20
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20
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20
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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
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Emerging Countries Emerging Asia
Latin America Emerging Europe
Middle East Africa
CIS
Emerging countries: GDP Growth (%)
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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)
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Response of Unemployment During the Recession
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Contrast of Central Bank Policies in the Current Cycle
Quantitative Easing and Low Interest Rates
Slowing Credit Growth and Raising Interest Rates
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Differences in Central Bank Rates in the Current Cycle
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Bond Market Responses to Central Bank Policies and Economic Outlook
US: Low Bond Interest Rates
Australia: High Bond Interest Rates
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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%
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Flight to Safety (Risk Aversion): Impact on Government Yields
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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)
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Bond Yields and Spreads Today
Differences in Government Yields Yield Spreads in Europe, July 2010
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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)
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Changing Structure of the Foreign Exchange Market: The Yen (JPY) 1950 – 1970: Bretton Woods Era
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Exchange Rates Today: The Yen 1971 – 2008, After Bretton Woods
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