Integración Financiera Internacional y Crisis Financieras Internacionales

1. Integración Financiera Internacional y Crisis Financieras Internacionales Emilio Ontiveros 3 de noviembre de 2009

2. Contents 1. The New International Financial Landscape 2. Measures and Drivers of the IFI 3. Effects: opportunities and risks • New Risks 5. Looking to the future. Requirements

3. Financial Deepening + b) International mobility of financial assets and liabilities = INTERNATIONAL FINANCIAL INTEGRATION (IFI): Financial Globalization 1. The New International Financial Landscape

6. 1. The Changing Financial Landscape. Financial Deepening

7. 1. The Changing Financial Landscape. Financial Deepening

8. 1. The Changing Financial Landscape. International Capital Mobility Source: Obstfeld and Taylor ( 2002)

9. 2. Measures of IFI • De jure measures: restrictions on capital account • a) IMF • b) Mody and Murshid (2002). • De facto measures: • Stock of Assets and Liabilities: Lane and Milesi-Ferretti (2001). Edison and Warnock ( 2001) , Chanda (2000 ), O’ Donnell ( 2001) • Saving-investment correlations and various interest parity conditions (Frankel, 1992) • c) Discount rate: Robert P. Flood and Andrew K. Rose • ( 2004)

10. 2. Measures of IFI. The Net External Position • 5 categories of external liabilities: • Foreign Direct Investment • Portfolio equity investment • Portfolio debt investment • Other investment: bank loans, trade credits, and currency deposits,… • Financial Derivatives • 6 categories of assets: • the same 5 as liabilities + official reserves

11. 1. The Changing Financial Landscape. IFI Trends 1970–2003 (Percent of GDP)

12. 1. The Changing Financial Landscape. IFI Trends 1970–2003 (Percent of GDP)

13. 1. The Changing Financial Landscape. IFI Trends. Real Interest Rate Convergence Long-Term Real Interest Differentials : ˜rt = rt − rUS

14. Liberalization and deregulation: Opening the capital account Removing “financial repression” policies Removing restriction to foreign ownership Financial Privatization Privatization of Institutions Instruments: private debt + equity Financial Innovation Technological Innovation Real Globalization More Markets, Less Intermediation 2. Drivers of IFI

15. 2. Drivers of IFI : Liberalization/Deregulation

16. 2. Drivers of IFI: Financial Liberalization by Income Group, 1973-96 Source: ABIAD AND MODY( 2005)

17. 2. Drivers of IFI : Financial Innovation InformationalEfficiency New Instruments New Agents New Technologies Rise of modern risk management

18. 2. Drivers of IFI : Financial Innovation. Instruments

19. 2. Drivers of IFI : Financial Innovation. Instruments

20. 2. Drivers of IFI : Financial Innovation. Agents US Equity Mutual Funds: Net New Cash Flows (In billions of U.S. dollars)

21. 2. Drivers of IFI : IT 1 cost of a three-minute phone call from NY to London

22. Opportunities: “ AN ENGINE OF GROWTH” Incentives to diversification: decline of the home bias. Risks: ” A SOURCE OF INSTABILITY” Financial crises 3. Effects

23. Financial integration potentially allows: 1) Risk sharing. To ease the capital scarcity constraint a developing economy might face. To bring foreign direct investments (FDI) into the country. “The good cholesterol” : To boost productivity 4) The main potential benefit of financial globalization for developing countries is the development of their financial system: more complete, deeper and more stable financial markets. Literature on benefits of financial integration for LDCs: McKinnon (1973), Shaw (1973), King and Levine (1993), Levine (1997), Fry (1997), Beck, Levine, and Loayza (2000), Epaulard and Aude Pommeret, 2005. 3. Effects on developing economies. The Theory

24. There is mixed empirical evidence on whether capital account liberalization and financial integration have resulted in increased long-run economic growth in developing economies. Survey: Edison, Klein, Ricci, and Sløk, (2002a ) Over the last quarter of a century financial instability has reduced the incomes of developing countries by roughly 25 per cent. Survey: Dobson and Hufbauer’s (2001) 3. Effects on developing economies. The evidence

25. “too many, too often,…” 1982: Debt Latin America 1987: Stock market crashes 1989 : Failures of US S+Ls 1990: Junk bond And US municipal bond meltdowns 1992: EMS crises 1994: Mexico. (“Tequilazo”) 1997: East Asia ( “ Asian flu”) 1998: Russian debt default ( “ The Russian worm”) 1998 : LTCM ands its imitators 1999: Ecuador default 2001- 02 : Argentina devaluation + default 3. Financial crises

26. a) All (near) in LDCs countries b) Causes c) Contagion: countries, markets and institutions. d) Heavy Costs 3. Financial Crises. What in common?

27. a) Unsustainable macroeconomic policies Krugman (1979), Obstfeld and Taylor (1998 ): The Trilemma b) Fragile financial systems Goldstein and Turner (2003) c) Institutional weaknesses. IMF, GFSR., Williamson and Mahar (1998); Demirgüç-Kunt and Detragiache (1998) d) Flaws in the structure of international financial markets Eichengreen and Hausmann (1999), Devenow and Welch (1996) , Bhagwati (1998), Eichengreen, Hausmann, and Panizza (2002): “The original sin” 3. Financial Crises. What in common? Causes of financial instability

28. Contagion

29. Channels : Investor behavior: * Herding and fads: Bikhchandani, Hirshleifer, and Welch (1992), Banerjee (1992), Banerjee (1992) * Global diversification of financial portfolios in the presence of information asymmetries: Calvo and Mendoza (1998), b) Economic linkages Trade: Eichengreen, Rose, and Wyplosz (1996) , Glick and Rose (1999), Kaminsky and Reinhart (2000) Finance: Kaminsky and Reinhart (2000), Mody and Taylor (2002), Frankel and Schmukler (1998) , Caramazza, Ricci, and Salgado (1999) 3. Financial Crises. What in common? Contagion

32. Emerging Market Bond Yield Spreads, 1992-2002

33. 3. Financial crises. Costs

34. 3. Financial crises. Costs Korean Social Indicators Following the Crisis

35. 3. Post-Crises. Capital Flows to Emerging Markets

36. Net Private Capital Flows Source: Graciela L. Kaminsky, Carmen M. Reinhart and Carlos A. Végh ( 2003)

37. 3. Solutions to the instability in Emerging countries • Re-regulate domestic financial markets • Goldstein and Turner (2003) • Bhagwati (1998), Stiglitz (2002). • 2. Reimpose capital controls • Dobson and Hufbauer (2001), Brouwer (2001). • 3. Adopt a common currency • Mundell ( 2000) • 4. Pursue an international solution to the currency-mismatch problem • Eichengreen and Hausmann (2003)

38. 4. New Risks Macro: • Global Imbalances Micro: • Concentration in Derivatives Markets. Credit Derivatives • Growing role of Hedge Funds in Derivative Markets and the Financial System • Conglomeration and cross-sector competition

40. 4. New Risks: Global Imbalances(In billions of U.S. dollars)

43. 4. New Risks: Global Imbalances. (% world GDP)

45. 4. New Risks: Global Imbalances. Current account balance, US, m.m$US

48. 4. New Risks: Global Imbalances. Foreign holdings of US Treasuries

49. 4. New Risks: Global Imbalances Net lending and borrowing in the US economy

50. 4. New Risks: Global Imbalances. US household debt-to-disposable income ratio