Notes on Lecture 14 - Globalization: International...

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Globalization: International Financial Relations The Puzzles Why is money invested abroad? Why is international finance controversial? Why are most international financial institutions strong? Outline 1. Background International finance has major economic and political implications: o Greek government currently—government and people are in crisis Cross-border investment improves welfare. o It has potential to improve welfare Investors have mutual interests in the ability to move capital around the world. -But distributional conflict over rates of return and who bears risks. o Where is the money going to go? 1) Investment in host country? 2) Back to the debtor? Mutual vulnerability. o Once one bank is in trouble, it spreads to others and once one country is in trouble, it spreads to other countries. Financial policies subject to outside influence. o EX. German government is putting a lot of pressure on Greeks to have strict rules Example: Latin America Latin America lost access to international capital markets during the Great Depression. Regained access in the 1960s: o From 1973 to 1982, debt rose from $40 billion to $330 billion. o Boom ended with crisis in 1982: Mexico. o Led to “lost decade” throughout Latin America. (1982-1990) High unemployment Argentina’s Debt
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2. How and why invest overseas? Types of Cross-Border Investment o Portfolio investment: investor has no role in managing the investment. Actors: firms, governments, individuals, IOs o We consider portfolio investment to be “sovereign lending”; simply meaning the government is involved, either is it a loan to the government or the government is regulating somehow. 1. Bonds Net value specified at time of sale (set dollar value ) Issued by governments or firms 2. Loans Terms (interest rate ) set at time of sale Issued by various actors 3. Stocks No guarantee —price isn’t set up front it depends on market conditions Value and dividend vary; not set at time of sale Sold by firms to individual and institutional investors Portfolio investment is usually sovereign lending: the loan is to a government or guaranteed by a government.
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This note was uploaded on 03/15/2012 for the course POLI SCI 103 taught by Professor Pevehouse during the Fall '08 term at University of Wisconsin.

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Notes on Lecture 14 - Globalization: International...

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