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FINANCIAL MARKETS
CATEGORIES
OF MARKETS
According to Garbbe (see reference at the end of the chapter) international
financial markets consist of international markets for foreign exchange, Euro
currencies and Euro bonds. In view of the development and rapid growth of
swaps and globalisation of equity markets, international financial markets have
been categorised into five markets here: foreign exchange market; lending by
financial institutions; issue and trading of negotiable instruments of debt; issue
and trading of equity securities; and lastly internationally arranged swaps. The
rates of foreign exchange as well as interest rates fluctuate and to hedge against
the risk of loss arising out of changes in them derivative instruments are traded
in the organised exchanges as well as in over-the-counter markets. Most of the
derivatives except the interest rate swaps are short term in nature. Derivatives
involve creation of assets that are based on other financial assets.
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Stock
Components of Net
at year
International Financing
end1985
(Billions of US $)
Outstanding
amount at end
2000
CHANGES
1986 1987 1988
1989
1990
1991
1997
1998
1999
2000
Total International
Claims of reporting
banks
Minuslnter bank
redepositing
719.8
A. Net International
bank credit
410.0 380.0
465.0
115.0
19.8
7.4
16.0
6.9
32.0
532.7 1142.6
17.4
41.1
331.0
86.5
346.1
Total completed
bond and note issues
263.6 239.4
Minus: redemption
and repurchases
89.4 108.4
460.5
497.5
572.5
174.3 131.0
553.5
676.3
D. Total international
financing (A+B+C)
2073.5
591.2 543.0
792.7
133.5
1940.0
227.7
565.0
163.3
875.0
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International Financing
Source: BI8, Annual Reports 1991, 1994, 1998 and 1999 and International Banking and Financial Market Developments,
November 1994, May 1995, March 1998, March 1999 and June 2000.
SEGMENTATION
Feldstein finds that much of the capital that moves internationally is pursuing
temporary gains and shifts quickly as conditions change. The large gross
international flows of funds are often part of offsetting transactions that leave
no net transfer of capital from one country to another. Feldstein argues that the
segmented nature of the world capital market is confirmed by the strong, homecountry bias of institutional portfolios. Only 10 per cent of the value of assets
in the 500 largest institutional portfolios in the world is invested in foreign
securities despite the advice of economists and financial analysts who advocate
global diversification as a way of increasing returns and reducing overall
portfolio risk. No country can count on sustained inflows of foreign capital to
finance domestic investment even when their local investment opportunities are
attractive. Mexicos economic crisis in 1994 broke out because it let its savings
rates slip from 14 to 10 per cent and looked to the rest of the world to finance
its savings gap. Mexicos low saving rate was the problem because of the
limited international flow of capital. The crisis arose out of the fact that too little
capital crosses borders and not too much.
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$ 11,016.4 billion in 2000. Apart from the external assets of banks there was a
large growth in Euro notes and Euro bonds.
Table 1.1 presents the estimated net financing in international financial
markets between 19852000. The Table presents, apart from external claims,
net international bank credit, net money market instruments (including commercial
paper, short-term Euro notes and medium-term notes), bonds and total net
international financing. Outstanding net international bank credit largely consisting
of syndicated loans rose from $ 1,485 billion in 1985 to $ 4,501.6 billion in 2000
(a 203 per cent increase); money market instruments from $ 16 billion to $ 346.1
billion (2,063 per cent); bond financing from $ 572.5 billion to $ 6,168.7 billion
(947.5 per cent); and total net international financing from $ 1,940 billion to
$ 11,016.4 billion (468 per cent).
EURO MARKET
In international lending and trading of securities some operations are called
Euro. It refers to types of financial activity that take place outside the countries
in whose currencies they are denominated. Euro dollar markets are offshore
money and capital markets, in the sense that the currency denomination is not
the official currency of the country where the transaction takes place. The term
Euro was first used for US dollar deposits made in London after the Second
World War when the US dollar replaced pound sterling as the leading international
currency. The term Euro dollar market was later generalised to Euro currency
when offshore centres for other currencies emerged. The reason for the
popularity of Euro dollar or Euro markets was that Euro markets were less
regulated than the U.S. markets. Further, the absence of reserve requirements,
Final Proof-3-02-09\SK