GLOBAL FINANCIAL SYTSTEM

TEXT 1.GLOBAL FINANCIAL SYSTEM: STRUCTURE AND INSTITUTIONS.

The international monetary and finance structure is a complex web of political and economic agree­ments, understandings, institutions, and relationships that help determine two things in particular. One is a set of institutions that establish values for different national currencies in terms of other cur­rencies. The second is a set of rules as to how much, how often, and under what terms money moves into and out of national economies.

The main players are the global institutions, such as International Monetary Fund and Bank for International Settlements, national agencies and government departments, e.g., central banks and finance ministries, and private institutions acting on the global scale, e.g., banks and hedge funds. The International Monetary Fund (IMF) keeps account of international balance of payments accounts of member states. The IMF acts as a lender of last resort for members in financial distress, e.g. currency crisis, problems meeting balance of payment when in deficit and debt default. The World Bank aims to provide funding, take up credit risk or offer favorable terms to development projects mostly in developing countries that couldn't be obtained by the private sector. Governments act in various ways as actors in the global financial system: they pass the laws and regulations for financial markets and set the tax burden for private players, e.g. banks, funds and exchanges. They also participate actively through discretionary spending. They are closely tied (though in most countries independent of) to central banks that issue government debt, set interest rates and deposit requirements, and intervene in the foreign exchange market.

Because currency exchange rates and cross-border flows of money significantly affect national wealth and power through international trade, investment, and access for credit, states pride themselves on being able to control money and finance. Excessive money supply in the national economy generates inflation, causing the national currency to decrease in value such that less can be purchased with it. However, if there is not enough money (liquidity), businesses cannot expand and economic growth and trade is sti­fled. Another problem that many states share today in the global economy is that there are tremen­dous amounts of "hot" (uncontrolled by any state) money in the international system, with which states tend to have a love-hate relationship. Initially this money is attractive to states, because in­vestments bring with them new jobs and other benefits. However, many investments can just as quickly leave a state with little or no notice, putting thousands of people out of work.

It would be easy to assume that the world's in­ternational monetary and finance system operates on the basis of laissez-faire principles and polices. Although elements of this picture are certainly true, for the most part it is oversimplified, and it is useful to explore some of the other motives and ideological outlooks that influence the monetary and finance system’s actors, institutions, and processes.

The thesis of this chapter is that both states and markets greatly influence the development of institutions, rules, and processes that constitute the international monetary and finance structure.

READING: Read the text and find answers to the following questions:

1. What is the international financial system made up of?

2. What do these rules determine?

3. What are the three main groups of players in the international financial system?

4. What are the functions of the IMF as a part of the global financial system?

5. What are the functions of the World Bank as a part of the global financial system?

6. What are the functions of governments as parts of the global financial system?

7. What are the functions of private institutions as parts of the global financial system?

8. Why is it important for states to control money and finance?

9. What are the risks of excessive money supply in the national economy?

10. What are the risks of insufficient money supply in the national economy?

11. What is ‘hot’ money?

12. Why is it easy to assume that the world's in­ternational monetary and finance system operates on the basis of laissez-faire principles?

DISCUSSION: Can you find arguments to prove the thesis that ‘both states and markets greatly influence the development of institutions, rules, and processes that constitute the international monetary and finance structure.’

TERMS AND VOCABULARY:

C. Explain the meaning:

Establish values for different national currencies in terms of other cur­rencies; national agencies; a lender of last resort; debt default; tax burden; discretionary spending; credit; liquidity.

B. Find the English equivalents of the following in the text:

В частности, на условиях, участники (2 вар.), частные учреждения, финансовые затруднения, установить налоговое бремя, доступ к кредитным ресурсам, чрезмерный, расти (о предприятиях), по большей части, изучить (мотивы), идеологические взгляды, быть составными элементами.

C. Give the Russian equivalents to the following words and expressions from the text:

National agencies, acting on the global scale, offer favorable terms, pass the laws and regulations, generate inflation, growth and trade is sti­fled, love-hate relationship, with little or no notice.

D. Provide definitions of the following terms (See Appendix 1, Globalization):

Currency value; hedge fund; international balance of payment; money supply; laissez-faire principles.

E. Translate into Russian in writing: Paragraphs 1, 3.

E. Make up questions about the global financial system using the given words and expressions:

To be closely tied to: to take up risk; pass rules and regulations; to share (a problem) in the global economy; oversimplified picture.

F. Complete the sentences, place the in the context of the international financial system:

It is easy to assume that inflation ….

It is easy to assume that the new financial regulations…

It is easy to assume that the IMF ….

The IMF tends to …

Central banks tend to …

The World Bank tends to …

Economic growth may be stifled if …

International trade may be stifled by…

Economic cooperation between countries can be stifled by…

Inflation is generated by…

G. Find sets of synonymous words and expressions used in the text. Add to them if you can. Comment on the differences.

Actor, …

To cause, …

Government agencies, …

To establish (currency value),…

To explore…

F. Translate into English:

A

1. В мировой экономике особое место отведено системе, связующей экономические отношения разного рода и обеспечивающей базу для других форм международного сотрудничества.

2. Это — международная валютно-финансовая система.

3. Здесь исследователь выходит за рамки описания валютного курса и валютных рынков.

4. Мы рассматриваем эволюцию этой системы, изучаем процесс поиска новых форм денежно-кредитных отношений.

5. Показатели этой системы включают торговые и платежные балансы на глобальном уровне и в масштабе конкретных стран.

6. Считается, что они дают полноценную и необходимую информацию.

7. По ним мы можем судить как о состоянии внешнеэкономических связей стран, так и об эффективности их участия в международных экономических отношениях.

8. Международная валютная система отражает общие тенденции развития мирового рынка и отдельных стран.

9. С другой стороны, она ежедневно воздействует на экономику составляющих ее государств.

10. Следовательно, она должна рассматриваться в тесной взаимосвязи с внутринациональными экономическими процессами.

B.

1. Международная валютно-финансовая система - форма организации валютно-финансовых отношений, функционирующих самостоятельно или обслуживающих международное движение товаров и факторов производства.

2. Валютно-финансовая система позволяeт развиваться международной торговле товарами и финансовыми инструментами, а также обеспечивает движение факторов производства.

3. Валютно-финансовая система состоит из двух групп элементов: валютных и финансовых.

4. Валютными элементами международной валютно-финансовой системы являются национальные валюты, условия их обмена и обращения, валютный курс и национальные и международные механизмы их регулирования.

5. Финансовыми элементами международной валютно-финансовой системы являются международные финансовые рынки и механизмы торговли конкретными финансовыми инструментами - валютой, ценными бумагами, кредитами.

6. Международная валютно-финансовая система включает в себя следующие элементы: международную валютную систему, международный валютный рынок и международный финансовый рынок.

7. Международный валютный рынок - сфера экономических отношений, где осуществляются операции по покупке и продаже золота, иностранной валюты и платёжных документов в иностранной валюте, а также срочные финансовые сделки

TEXT 2. The Complex Politics of Global Finance

By Louis Pauly, Professor and Chair of Political Science in the Munk School of Global Affairs at the University of Toronto.

(from John Ravenhill (ed.), Global Political Economy: OUP, 2005)

1. Since the early 1970s, the world economy has been embarked on an experiment involving, on the one hand, the opening and deepening of financial markets, and, on the other, the dispersion of political authority required to regulate global markets. The resulting governance dilemmas are nowhere clearer than in the circumstances surrounding financial crises capable of spilling across national borders.

2. It is the real economy that really matters. The distinction economists and business journalists make between such an economy and the ‘financial’ economy reflects an important insight. The prices of stocks and bonds fluctuate continuously, so do the prices of financial assets and liabilities. Every such price movement is meaningful to someone, somewhere. But financial gyrations only visibly matter to the lives of most people when they directly affect the fundamental mechanisms through which jobs are created or destroyed and goods and services are produced (the ‘real’ economy). In the democratic systems currently lying at the heart of an integrating global economy, financial market ups and downs can be constructive. When they facilitate innovation, production and exchange, adjustments in the prices of financial assets are helpful to the real economy and serve to stabilize the underlying political order. Their specific political effects can be important, but they tend to be invisible to most. Economic benefits and costs are surely distributed and redistributed, but the process occurs in such a way that no particular group or groups with overwhelming political power become aggrieved enough to seek fundamental systemic change.

3. Turbulence in financial markets can also be destructive, however, and then its political effects tend to be very obvious and very negative. When panic feeds on itself and spreads the psychology of fear, the confidence of savers, investors, producers, and consumers is undercut. Crisis conditions can engender spiraling declines in real incomes and life prospects when they impose costs deemed unbearable by the politically strong and mobilized, they can retard economic progress and destabilize political order.

4. The globalizing political economy gradually and intentionally built up in the wake of systemic turbulence in the mid-twentieth century rested on the assumption that it would eventually drive a widening circle of shared prosperity. Recurrent financial crises cast doubt on such an assumption. They raise a host of political challenges for national policy makers trying to secure the economic and social benefits promised by economic openness while minimizing social and political costs.

5. Stable, well-functioning financial markets require stable, well-functioning regulatory authority underneath them. Market actors need clear operating rules. Property rights have to be established and adjudicated when conflicts arise. Predictable procedures have to be in place to handle inevitable bankruptcies. Some agency has to be entrusted with the responsibility, and endowed with the capability, to act as lender-of-last-resort. Finally, this last-resort lending function has be linked with binding instruments for the prudential supervision of the financial intermediaries.

6. But when national markets become increasingly open and ever more integrated internationally, how can adequate cross-national regulatory authority be maintained? All of the functions listed above have to be fully met in a world potentially characterized by deeply integrated financial markets. What is missing, of course, is the international polity capable of creating policy instruments analogous to those that have been established at the national level. Therein lies the essential political dilemma posed by the contemporary move toward the financial openness. Moments of crisis focus an analytical spotlight on that very dilemma.

TASKS:

1. Find the most suitable synonym for the words used in the text without using a dictionary, then check a dictionary to clarify their meanings.

		A	B	C
1	embark (1)	board	send	dispatch
2	gyration (2)	activity	circulation	cycle
3	aggrieved (2)	agitated	adjusted	upset
4	engender (3)	energize	generate	jeopardize
5	deem (3)	judge	decree	justify
6	host (4)	sort	group	multitude
7	adjudicate (5)	reward	redeem	recognize
8	prudential (5)	protective	probational	primary
9	polity (6)	political government	political entity	political theory

2. Paraphrase:

the dispersion of political authority (1), governance dilemmas (1), an important insight (2), confidence … is undercut (3), retard economic progress (3), in the wake of systemic turbulence (4), drive a widening circle of shared prosperity (4), endow (sb) with the capability to act as lender-of-last-resort (5), binding instruments for prudential supervision (5), focus an analytical spotlight (on dilemma) (6).

3. Give examples illustrating the following phenomena:

the opening and deepening of financial markets (1); the dispersion of political authority required to regulate global markets (1); the real economy (2); distribution and redistributon of economic benefits and costs (2); declines of incomes and prospects engendered by crisis conditions (3); clear operating rules for financial markets (5); lender-of-last-resort (5).

4. Agree or disagree with the following statements from the text, use appropriate constructions such as below. Agree or disagree with views expressed by your colleagues.

I agree	I disagree	I partially agree
There is no doubt about it that... I completely / absolutely agree with you. I agree with you entirely. I totally agree with you.  I simply must agree with that.  I am of the same opinion.  I am of the same opinion.  That’s exactly what I think.	I’m sorry, but I disagree.  I'm afraid, I can't agree with this.  The problem is that...  I (very much) doubt whether...  This is in complete contradiction to...  With all due respect,… I am of a different opinion because .. I cannot share this view.  I cannot agree with this idea.  What I object to is...  I have my own thoughts about that.	It is only partly true that...  That’s true, but… I can agree with that only with reservations.  That seems obvious, but...  That is not necessarily so.  It is not as simple as it seems.  I agree in principle, but…  I agree in part, but…  Well, this could be right.

• Governance dilemmas resulting from more open financial markets and greater dispersion of authority are nowhere clearer than in the circumstances surrounding financial crises capable of spilling across national borders (1).

• It is the real economy that really matters (2).

• Financial market ups and downs can be constructive (2).

• Crisis conditions can destabilize political order (3).

• Recurrent political crises cast doubt on prospects that global economy will drive shared prosperity (4).

• Last-resort lending function has be linked with binding instruments for the prudential supervision of the financial intermediaries (5).

• All of the functions listed above have to be fully met in a world potentially characterized by deeply integrated financial markets (6).

5. Summarize each paragraph of the text in one or two sentences.

Write one or two sentences expressing the main idea of the text.

Write a summary of the text suitable for being inserted into a literature review of a student thesis work. Use appropriate words to introduce the author’s ideas (e. g.: According to XXX; XXX suggests/states/claims/ asserts; in XXX’s view/perspective/opinion).

6. Discussion: the following is an excerpt from the script of a talk on Global Financial Sector Reform: An Unfinished Agenda by Christine Lagarde, IMF Managing Director, given in Toronto on October 25, 2012. Read and discus the proposed agenda and its viability and feasibility. Comment on its relevance for Russia.

• To start, we need concrete progress with the too-important-to-fail conundrum. We need a global level discussion of the pros and cons of direct restrictions on business models. For example, the Volcker Rule in the U.S., the Vickers Commission proposals in the U.K., and the Liikanen Report on the EU banking system will have important effects beyond their jurisdictions. Here a global perspective is sorely needed.

• We also need further progress on recovery and resolution planning for large institutions, especially cross-border resolution. Much work is underway to develop the tools to intervene in distressed institutions, but we need to move to compliance and assessment on an international scale.

• “Shadow banking” remains a concern. This is activity by nonbank financial institutions operating outside the regulatory perimeter. The FSB is looking into this and we look forward to collaborating closely with them on follow up.

• For the remainder, the key word at this stage is implementation: implementation of derivatives markets reform, so these can become truly “over the counter” and not “under the table”; implementation of the FSB’s principles for compensation; and most importantly, implementation of the Basle Committee’s principles for effective banking supervision. Even the best rules are of no value if not implemented and well supervised.

RENDERING:

(For guidelines, see Appendix 2, Globalization)

Identify the subject and thesis.

Suggest a title.

Formulate the main thought contained in each of the paragraphs. Write it in the space left before each of the paragraphs.

Formulate a concluding statement. Write it in the space after the text.

Prepare a set of key English terms and expressions.

Retell the text in the English language reducing it to about one half of its size.

Title: …………......................................................................................................

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Международные финансовые отношения являются составной частью и одной из наиболее сложных сфер рыночного хозяйства. В них сосредоточены проблемы национальной и мировой экономики, развитие которых исторически идет параллельно и тесно переплетаясь. По мере интернационализации хозяйственных связей увеличиваются международные потоки товаров, услуг и особенно капиталов и кредитов. Межхозяйственные связи немыслимы без налаженной системы финансовых отношений. В специфической форме они реализуют и развивают законы денежного обращения, действующего внутри страны.

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Мировая финансовая система – это экономические отношения, связанные с функционированием мировых денег и обслуживающие различные виды хозяйственных связей между странами (внешняя торговля, вывоз капитала, инвестирование прибылей, предоставление займов и субсидий, научно-технический обмен, туризм, государственные и частные переводы и др.).

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Развитие и стабильное функционирование международной финансовой системы обусловлено ростом производительных сил, созданием мирового рынка, углублением международного разделения труда, формированием мировой системы хозяйства, интернационализацией хозяйственных связей. Она не может существовать без развитых и стабильных международных финансовых институтов, потому что принципы формирования финансовой системы в мировом масштабе это - форма организации и регулирования денежных отношений, закрепленная национальным законодательством или межгосударственными соглашениями.

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Важной составной частью мировой финансовой системы является рынок иностранных валют, который образуется из взаимодействия национальных денежных систем. Особенностью рынка иностранных валют является также и то, что он объединяет валюты с различным режимом национального регулирования. Объект этого рынка - свободно конвертируемая валюта. Валюты с ограниченной конвертируемостью играют незначительную роль, что в свою очередь не маловажно для формирования системы финансовых отношений на международном уровне.