Chapter_9_An_Introduction_to_Internation

What are the consequences of default country risk

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What are the consequences of default? Country risk refers to the additional interest (relative to interest paid on a safe benchmark) the country must pay to compensate investors for the risk of default. Once a country defaults, its country risk will increase substantially for some time. It will face higher interest rates when it borrows. It may even be unable to borrow for a while. Defaults may trigger fiscal pain, crises, recessions.
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Darlings and Deadbeats: Defaults and Other Risks Countries that default, or are in danger of default, suffer from high country risk and poor credit ratings.
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Objectives 3. Government: Policies and Performance Analyze how financial openness and transactions have changed in advanced countries, emerging markets, and developing countries over time. Discuss the choice of exchange regime and the prevalence of fixed versus floating exchange rate regimes.
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Integration and Capital Controls: The Regulation of International Finance Financial openness and financial transactions w Increased steadily since 1970 w Most dramatic increase since the 1990s
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Integration and Capital Controls: The Regulation of International Finance Patterns in integration and financial openness Advanced countries High income per person Well-integrated into the global economy Examples: U.S., European Union, Japan, OECD Emerging markets Middle-income countries with high growth rates Increasingly integrated into the global economy Examples: Mexico, Brazil, Argentina, Korea, Taiwan, Thailand, Turkey Developing countries Low-income countries Not yet well-integrated into the global economy. Includes most African countries, many parts of Asia and Latin America.
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Independence and Monetary Policy: The Choice of Exchange Rate Regime Most countries have their own currency as sovereign nations. But what is their exchange rate regime choice? Fixed or floating? Both are important:
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Independence and Monetary Policy: The Choice of Exchange Rate Regime Another option? w Some groups of countries that eliminates their individual currencies in favor of a common currency . § In 2009 the Eurozone comprised 16 countries. § Several other countries are in line to join soon. § The policies governing the value of the common currency are jointly decided by governments in the participating countries.
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Independence and Monetary Policy: The Choice of Exchange Rate Regime Yet another option? w Other countries may decide against an individual currency and use the currency of another country, without the ability to have a say in policy. (This note is no longer in use) w This is known as dollarization . § Examples: Ecuador (US$), El Salvador (US$), Panama (US$), Liechtenstein (SFr), Montenegro (€), Pitcairn Island (NZ$)
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