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
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)
Contrast of Central Bank Policies in the Current Cycle
Quantitative Easing and Low Interest Rates
Slowing Credit Growth and Raising Interest Rates
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 Exchange Rates
Yen (JPY) throughout the Global Crisis: at a 15-year High
Dollar (USD) during the Greek Crisis Against the Euro (EUR)
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)