The International Monetary and Financial Environment

 
Learning Objectives:
9.1  Learn about exchange rates and currencies in international business.
9.2  Explain how exchange rates are determined.
9.3  Understand the emergence of the modern. exchange rate system.
9.4  Describe the monetary and financial systems.
9.5  Identify the key players in the monetary and financial systems.
9.6  Understand the global debt crisis.
 
Focus for this week: The global crisis situation given Covid-19 and The World Economic Outlook. Recent IMF
World Economic Forum Study 2020 and World Economic Outlook Update April 2021 during recent days (!).
 
After you will have finished going through chapter 9 go through the additional IMF text and think about
differences between the Financial Crisis 2008 and the current Corona Crisis. Some of you will have noticed
that the IMF made economic growth data available in April:
 
„Global economy on firmer ground, but with divergent recoveries amid high uncertainty:
Global prospects remain highly uncertain one year into the pandemic. New virus mutations and the accumulating
human toll raise concerns, even as growing vaccine coverage lifts sentiment. Economic recoveries are diverging
across countries and sectors, reflecting variation in pandemic-induced disruptions and the extent of policy support.
The outlook depends not just on the outcome of the battle between the virus and vaccines—it also hinges on how
effectively economic policies deployed under high uncertainty can limit lasting damage from this unprecedented
crisis.
Global growth is projected at 6 percent in 2021, moderating to 4.4 percent in 2022. The projections for 2021 and
2022 are stronger than in the October 2020 WEO. The upward revision reflects additional fiscal support in a few
large economies, the anticipated vaccine-powered recovery in the second half of 2021, and continued adaptation of
economic activity to subdued mobility. High uncertainty surrounds this outlook, related to the path of the pandemic,
the effectiveness of policy support to provide a bridge to vaccine-powered normalization, and the evolution of
financial conditions. ...."
Source: https://www.imf.org/en/Publications/WEO/Issues/2021/03/23/world-economic-outlook-april-2021

The financial crisis in 2008, sparked in the United States, spread worldwide and was the anchor leading to the Great
Recession. Similarly, so did the Covid-19 crisis appear out of nowhere in 2019 and is still an ongoing hot topic in
our everyday life. What these two have in common is the terminology of being considered a ‘crisis’, but in their
essence, they differentiate to a large extent. The financial crisis primarily affected the financial market, which by
some means always has been and will be possible to remediate. Solutions have been sought, money has been
transferred and even though the world was hit by a recession, the countries reemerged. However, the Covid-19 crisis
has a more severe impact and not only on the global economy, but also on the global environment and its people.
This crisis did not only affect the financial sector, but also the social, medical tourism and numerous other sectors.
In its essence it is much deeper and more dangerous in the sense of affecting the functionality of our entire planet
and the severe impact it had to the everyday lives of the world’s population. The crisis influenced how societies on a
global level need to act and respond to the ongoing pandemic. There was a need for further technological
advancements and the use of such, but lack of normal communication and isolation from the outside had lasting
impacts on the psychology of people. On a global economic level, indications have been estimated of a positive
growth in the upcoming future. This again will depend on the evolvement of the crisis and if the forecasted positive
direction it has started to emerge in, shall in fact continue to go in that direction. The financial aspect can, as we
have seen in the past, be remedied. Yet, there are moral and social implications which will be much harder to
remedy and it is a question of how long after the crisis it will take for the wounds to heal.
Therefore, the major difference between the financial and Covid-19 crisis lies in the amount of what an affect they
had on the global level, in which industries and life aspects they have tapped in. The financial aspect is only one part
in the Covid-19 crisis, but there are numerous other aspects which contributed to its wide extent we have all
witnessed.

In attachment 1 you will find the most important information from IMF. Also see the 6% global forecast for
2021 given the attached two pages IMF executive summary.
 
In addition to IMF find below the recent data from „Industriellenvereinigung" for China, USA and EU tyi:
 
China: 8,1% economic growth for 2021
USA 6,7% for 2021
EU: 3,7% for 2021
 
Given end of lock-down for Austria per end of March Austria as of IV would have aimed at 3,9% similar to the EU
economic growth forecast. The latest forecast from end of last week refers to end of lock-down per end of June
leading to 2,9% growth rate for Austria instead off 3,9% planned till March this year.
Please note that the update from "Industriellenvereinigung" from last week for Austria looks at economic growth
rates for this year 2021 with almost 3 percent (2,9%). This forecast is based on end of lock-down for Austria as of
June 30, 2021 and includes investment initiatives („Investitionsprämie") as well as qualfication initiatives for this
year.
 
Make sure to develop understanding on the economic forecast by IMF in addition to chapter 9 as of Cavusgil 2020.
For the readings have a clear focus understanding the avenues for determination of exchange rates, the termination
of the gold standard and Bretton Woods and especially the major participants and relationships in the monetary
system also including the case example of IMF (pp. 282ff.).
 
Development of the Modern Exchange Rate System:
 
- After the Great Depression and World War II, the world economy and trading system were in a sorry state.
- At war's end, seeking stability in the international monetary and financial systems, 44 countries signed the
Bretton Woods agreement.
- Bretton Woods established a fixed exchange rate system in which the U.S. dollar was pegged to a set value for
gold ($35 per ounce), and other major currencies were pegged to the dollar. 
- For nearly 30 years, the system kept exchange rates of major currencies at a fixed level.
 
Key Participants and Relationships in the Global Monetary and Financial Systems:
Source: Cavusgil 2020, p. 288.
 
 
Explain the differences between the international monetary system and the International Monetary Fund.
What are the three major types of crises most frequently addressed by the International Monetary Fund?
 
Answer: 
Firms seek to get paid for the products and services they sell abroad. Portfolio investors seek to invest in stocks and
other liquid assets around the world. The resulting monetary flows take the form of various currencies traded among
nations. Accordingly, the international monetary system consists of the institutional frameworks, rules, and
procedures that govern how national currencies are exchanged for one another. By providing a framework for the
monetary and foreign exchange activities of firms and governments worldwide, the system facilitates international
trade and investment. To function well, national governments and international agencies have focused on creating a
system that inspires confidence and ensures liquidity in monetary and financial holdings.
 
The International Monetary Fund (IMF) provides the framework of and determines the code of behavior for the
international monetary system. The agency promotes international monetary cooperation, exchange rate stability,
and orderly exchange arrangements and encourages countries to adopt sound economic policies. These functions are
critical because economic crises can destroy jobs, slash incomes, and cause human suffering. Governed today by
187 countries, the IMF stands ready to provide financial assistance in the form of loans and grants to support policy
programs intended to correct macroeconomic problems.
 
The IMF plays an important role in addressing financial and monetary crises faced by nations around the world.
Typical crises fall into three major categories.
 
A currency crisis results when the value of a nation's currency depreciates sharply or when its central bank must
expend substantial reserves to defend the value of its currency, thereby pushing up interest rates. Currency crises
occur more commonly in smaller countries and are sometimes the result of a sudden loss of confidence in the
national economy or speculative buying and selling of the nation's currency.
 
A banking crisis results when domestic and foreign investors lose confidence in a nation's banking system, leading
to widespread withdrawals of funds from banks and other financial institutions. This situation arose in the United
States in the 1930s when, during the Great Depression, millions of people panicked about their savings and rushed
to withdraw funds from their bank accounts. The crisis led to the failure of numerous banks. Banking crises tend to
occur in developing economies with inadequate regulatory and institutional frameworks. These crises can lead to
other problems, such as exchange rate fluctuations, inflation, abrupt withdrawal of FDI funds, and general economic
instability.
 
A foreign debt crisis arises when a national government borrows an excessive amount of money, either from banks
or from the sale of government bonds. For example, China's total foreign debt now exceeds $200 billion. However,
the debt is manageable because China has a huge reserve of foreign exchange. By contrast, Argentina's foreign debt
has reached roughly 150 percent of the country's GDP. In an effort to pay its debt, Argentina must use financial
resources that it might have invested instead in important national priorities. Indebted governments draw huge sums
out of their national money supply, reducing the availability of these funds to consumers and to firms attempting to
finance business activities.