POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Chapter 8 : International Financial Markets A Written Report Presented to the Faculty of the Polytechnic University of the Philippines Sta. Mesa, Manila In Partial Fulfillment of the Requirement for the Subject Fundamentals of Financial Markets ABEJUELA, Marlou H. CRUZ, Andrea Rae O. CUBIO, Genesis C. Reporters BSMA 2-8 October 2019 Mrs. Luzviminda S. Payongayong Adviser
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES INTERNATIONAL FINANCIAL MARKETS Every day, we find ourselves in constant contact with internationally traded goods. This lead to less visible in daily life is the international trade in financial assets, but its dollar volume is much greater. International trade in financial assets is easy and reliable, due to low transactions costs in liquid markets –that is why, international financial markets are characterized by high capital mobility. Financial Capital was highly mobile in the 19thcentury. Early 20thcentury brought two world wars and the Great Depression. Many government implemented controls on international capital flows –fragmented the international financial markets and reduced capital mobility. Post-war efforts to increase the stability and integration of markets for goods and services –the creation of General Agreement on Tariffs and Trade(GATT); the precursor to the World Trade Organization(WTO). Low capital mobility is reflected in the economic models of the 1950s and 1960s –conducting international analyses under the assumption of capital immobility. Financial Innovations such as the Eurocurrency Markets; undermined the effectiveness of capital controls. Technological innovations; lowered the costs of international transactions. These factors, combined with the
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES liberalizations of capital controls in the 1970s and 1980s, led to the development of highly integrated world financial markets, also known to be the “globalization” and now usually adopt perfect capital mobility as a reasonable approximation of conditions in the international financial markets. International capital flows surged after the oil shock of 1973 to 1974, which spurred financial intermediation on a global scale. Surpluses in the oil-exporting countries and corresponding deficits amoing oil importers led to a recycling of “petrodollars” in the growing Euromarkets. Many developing countries gained new access to international capital markets, where they financed mounting external imbalances. Most of this intermediation occurred in the form of bank lending and large banks in the industrial countries accepted huge exposures to developing country debt. Debt crisis of the 1980s led to significant slowdown in capital flows to emerging markets in the 1990s. Private Capital responded to the efforts of many Latin American countries to liberize, privatize, open markets, and enhance macroeconomic stability. Central and Eastern Europe began a transition toward market economies and rapid growth in a group of economies in East Asia had caught the attention of investors worldwide.