Recent Developments in International Finance

08/09/2022 0 By indiafreenotes

Global financial markets witnessed turbulent conditions during 2007-08 as the crisis in the US sub-prime mortgage market deepened and spilled over to markets for other assets. Concerns about slowdown in the real economy propelled a broad-based re-pricing of growth risk by the end of the year.

Money Markets:

The policies initiated by central banks and the guarantees offered by governments assuaged to an extent the funding pressures that were evident in the international financial markets during September and October 2008. The spreads between Libor and overnight index swaps (OIS) have been gradually narrowing.

In the UK, however, bank funding markets came under renewed pressure. The Sterling Libor-OIS spreads slightly widened and the inter-bank term lending remained subdued during late January and February 2009.

Recent financial market developments have also blurred the distinction between different segments of the financial markets. Creditors and investors now compete with each other for good financial transactions. In addition, borrowers can now structure the best deals available in the entire market rather than focusing on specific market segments. By borrowing in the most accessible financial market segment and then swapping aspects of the debt to other markets, successful borrowers tailor the currency, cost, maturity, and form of their financial transactions to their financial needs.

These developments in international financial markets do entail some adverse consequences for developing country borrowers. Lenders and investors can be more selective in choosing their financial transactions, using swaps and other hedging techniques to pass on unacceptable risks. Given the present shortage of available financing, securitization provides flexibility and more accessible financing to creditworthy borrowers, limiting the options available to less creditworthy borrowers, such as developing countries. Borrowers can mitigate this impact by structuring financing proposals that address the risk concerns of specific groups of financial actors. It is easier for investors to assess specific project-related risks than the numerous categories of risk that can affect general purpose financing. Borrowers should also structure their funding proposals to link the timing, amount, and currency of their repayment obligations more directly to cash flow.

If developing countries are to gain access to international financing, they will need to ascertain how investors perceive the risks associated with their debt issue in relation to the risks associated with other debt issues. Investor perception can be influenced by commercial and political risk assessments of the borrower and the anticipated marketability of the debt instruments. All developing countries who borrow, regardless of their dealings with international financial markets, should make an effort to understand some of the new financing techniques. By doing so, borrowers with access to international financial markets can maximize the benefits they derive from funds raised in these markets, while borrowers with no present access to these markets can apply these techniques to renegotiate existing commercial bank debt. Debt managers and their lawyers who understand the new financing techniques may also be able to use this information in developing overall international borrowing strategies.