Asian-Pacific markets have been enjoying an extremely favorable economic climate generated by high global liquidity over the past three years. In 2006, for example, the excess of liquidity and the overall positive economic performance of these countries led to the lowest sovereign spreads in history falling below 200 basis points, as shown in Exhibit 1.
Among the mechanisms contributing to this process are: 1) the low interest rates in mature markets (the U.S., the U.K., Europe, and Japan), until recently declining due to the burst of the dotcom bubble in 2000; 2) the steep yield curve, providing incentives for carrying leveraged positions; and 3) the low long- term interest rates in the U.S. relative to the country’s economic growth rate.
The overall liquidity, together with the reduction on risk perception that it creates, have encouraged global institutional investors to take strategic positions in Asian-Pacific markets, thus narrowing the spreads even more. Furthermore, the average credit classification provided by international rating agencies for the countries composing the EMBI+ has gone up to the highest level ever (Ba1/BB+ as of September 2006), expanding the base of investors even more. This scenario has allowed Asian-Pacific economies to finance their debt via local currency issues in the domestic and foreign markets, thus allowing them to improve the composition of their public debt by extending its maturity profile, reducing the proportion denominated in foreign currency and accumulating reserves.
Nevertheless, the crucial issue for Asian-Pacific markets is whether the current level of sovereign spreads is sustainable in the face a potential reversal of cyclical factors, such as those involving liquidity, ch...
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... the dependent variable (interest rate), a common approach for determining sovereign spreads that significantly raises the coefficient of fit (R2 ). Third, the model uses macroeconomic fundamentals and gover- nance indicators specific to each country as explanatory variables, instead of proxies for repayment capacity. These proxies, generally ratings or other holistic constructs, are usually subject to criticism regarding the methodology for scale conversion or their ability to predict currency crises in Asian-Pacific economies.5
Furthermore, the proposed model analyzes the country-specific vulnerability (sensitivity) to a global risk shock. Such elasticities are further decomposed into eco- nomic fundamentals and governance indicators, with the objective of assessing whether, and to what extent, country vulnerability can be mitigated by improving such variables.
It made benchmark interest rate remains low. Then the excess liquidity made the asset bubble. Finally, the burst of asset bubble thumped the financial system. (Pierpaolo,B and Woodford,M, 2003)
Rhee, C., & Song, E. Y. (2013). Trade Finance and Trade Collapse during the Global Financial
Westpac Institutional Bank May 2010, ‘Westpac Market Insights Australia, New Zealand, G3 & China’. Retrieved June 6th, 2010 from - http://www.westpac.com.au/about-westpac/media/reports/australian-economic-reports/
After a generation of portfolio managers and investors profiting from decades of favorable returns on stocks, they believed the modern economy was impervious to major calamities (“Rethinking” 20). As inflation rates fell from record highs in the late 1970s and early 1980s to the record lows that they are today, interest rates followed, enabling Americans to borrow more money from lenders which, in turn, increased housing prices to all-time highs (“Rethinking” 21).
Public debt, which comes from securities and bonds issued by the United States Treasury, is responsible for over 60 percent of the debt (“Debt Position and Activity Report” 1). These debts are being held by the public inside and outside the US. Over 25 percent of the debts are held by foreign governments, in which China and Japan accounts for almost half of the sum (“Treasury Bulletin: September 2009” 60).
From the 1970s, there has been a wave of liberalization in China, which was introduced by Deng Xiaoping. This is one of the key reasons to the rise of China to be one of the economic giants in the world. In the last 25 years of the century, the Chinese economy has had massive economic growth, which has been 9.5 percent on a yearly basis. This has been of great significance of the country since it quadrupled the gross domestic product (GDP) of the country thus leading to saving of 400 million of their citizens from the threats of poverty. In the late 1970s, China was ranked twentieth in terms of trade volumes in the whole world as well as being predicted to be the world’s top nation concerning trading activities (Kaplan, 53). This further predicted the country to record the highest GDP growth in the whole world.
Takagi, S. (2010) ‘Applying the Lessons of Asia: The IMF’s Crisis Management Strategy in 2008’, ADBI Working Paper 206. Tokyo: Asian Development Bank Institute. Available from: http://www.adbi.org/workingpaper/2010/03/16/3638.imf.crisis.management.strategy.2008/ [Accessed 10 November 2013]
Many of the “Elite” financial figures could not give a definite answer about why this crisis occurred as well as stated by many of the people interviewed, “We don’t know how it happened.” Many young brokers working for JP Morgan back in the middle of the 90’s believed they could come up with a way to cut risk, credit derivatives. Credit Derivatives are just a way of using other methods to separate and transfer risk to someone else other than the vender and free up capital. They tested their experiment with Exxon Mobile who were facing millions of dollars in damage for the Valdez Oil Spill back in 1989 by extending their line of credit. This also gave birth to credit default swaps (CDS) which a company wants to borrow money from someone who will buy their bond and pay the buyer back with interest over time. Once the JP Morgan and Exxon Mobile credit default swap happened, others followed in their path and the CDS began booming throughout the 90’s. The issue was that many banks in...
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
During the year 2012, Australian Dollar (AUD) is the 5th most traded currency in the world, accounting for 7.6% of the world’s daily share. The Australian dollar is popular with currency traders because of the comparatively high interest rates in Australia, the relative freedom of the foreign exchange market from government intervention, the general stability of Australia's economy and political system, and the prevailing view that the Austra...
LeJeune, A. T. (2010). Risks facing financial institutions: Liquidity, foreign exchange and sovereign risks. International Journal of the Academic Business World, 4(2), 31-37. Retrieved from http://jwpress.com/
Debt crisis is becoming common and faced by most citizens in Malaysia. Between June 1997 and January 1998 a financial crisis swept like a brush fire through the "tiger economies" of SE Asian. Over the previous decade the SE Asian states of Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea, had registered some of the most impressive economic growth rates in the world. Their economies had expanded by 6% to 9% per annum compounded, as measured by Gross Domestic Product. This Asian miracle, however, appeared to come to an sudden end in late 1997 when in one country after another, local stock markets and currency markets imploded. When the dust started to settle in January 1998 the stock markets in many of these states had lost over 70% of their value, their currencies had depreciated against the US dollar by a similar amount, and the once proud leaders of these nations had been forced to go cap in hand to the International Monetary Fund (IMF) to beg for a massive financial assistance. (W.L.Hill, n.d.)
Several financial statements have been prepared to describe the causes of this current financial failure. There are a variety of factors that has resulted in the explosion of this financial crisis. Downfall of the US housing market; highly benefited financial dealings and a low interest-rate promoting borrowings, have all contributed to the recession monetary market. Let us now consider these various reasons in a little detail.
In the late 2000s, the World suffered from a big global economic crisis which caused “the largest and sharpest drop in global economic activity of the modern era”, in which “most major developed economies find themselves in a deep recession”, according to McKibbin and Stoeckel (1). Because its consequences have a very big impact to the whole world, many economists and scientist have tried to find the causes of the crisis; and some major causes have been emphasized are greed, the defection of the free market system, and the lack of prudent regulation and supervision. This essay will focus on the global imbalances, one of the most important causes of the current economic crisis.
There is one thing that differentiates the international business with the domestic business where it uses more than one currency in the commercial transaction. For example, if a company from British purchases some goods from a company from US, the international transaction will require for exchanging pounds and U.S. dollars which involve the foreign exchange market. In the foreign exchange market, any country that wish to do business with foreign country, the country need to convert their domestic currency into the foreign currency that they are wish to cooperate with through foreign exchange.