Global Financial Markets - Update
	A guide to the workings of the world's currency, money and capital, commodities and derivatives markets.
	by Ian H. Giddy, Stern School of Business, New York University

Main Contents Page • Part 1 • Part 2 • Part 4 • Part 5 • About the book

This document contains updates to my book, Global Financial Markets (Houghton Mifflin, 1994). It also contains information on developments and research in the international financial markets that might be of interest to students and professionals.

Chapter 9: International Banking and Credit

The Euro-commercial paper and Euronote markets

Chapter 10: Instruments of the International Money Market

New variations on floating-rate notes; The Euro-commercial paper and Euronote markets--an update

Chapter 11: The Global Debt Problem

Emerging Markets; China; Emerging Market Debt Trading; Privatization in Eastern Europe

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The Euro-commercial paper and Euronote markets

See Chapter 10, The Euro-commercial paper and Euronote markets--an update

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New variations on floating-rate notes

See Chapter 17, Structured floating-rate notes

The Euro-commercial paper and Euronote markets--an update

According to a survey conducted by Lehman Brothers, the investment bank, the total combined ECP and Euronote market outstandings reached $112 billion at the end of March, 1994. This was still much smaller than the US commercial paper market, which was $570 billion at the same date. Nevertheless, the Euro market demonstrated its ability to offer issuers quick access to short-term liquidity. Both sovereigns such as Denmark and corporates such as Ford and Guinness have been able to raise in excess of $1 billion in a matter of days.

Many investors in the ECP market use paper with maturities ranging from 1 day to 364 days a repository for temporary funds in between investments in the bond and equity markets. Others, such as French SICAV (mutual) money markets funds, provide ongoing investments. Most, however, insist on quality. The need to have a high rating or reputation to access the market is the main obstacle facing many potential issuers. As a result of this black-and-white attitude to credit quality, issuers with mediocre ratings have difficulty raising significant sums in the ECP market. By contrast, they have good access to the US domestic market.

Source: Financial Times, May 26, 1994, International Capital Markets Survey.

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Problem becomes opportunity--in the next edition of Global Financial Markets, this chapter will have a title something like "Emerging Debt and Equity Markets."

Emerging Markets

Official foreign aid to developing countries has levelled off and even declined. Private flows have more than taken up the slack. The total of official aid, export credits and private-sector flows to developing countries rose to $160 billion in 1993, up from $153 billion the year before. At almost $88 billion, private flows were the biggest component.

One measure of the growing importance of private risk capital in financing economic development is the rising number of domestic companies listed on the stock exchanges of less developed countries. India has by far the biggest number, with 6,800 at the end of 1993. Ten years ago there were less than 4,000. In South Korea, the number of quoted companies rose from under 350 to almost 700 in the same period.

Emerging Stock Markets

Ranked in order of number of companies listed, end-1993 (approximate)

Source: International Finance Corporation

Of course, the ranking changes when market capitalization rather than number of companies is used. The market cap measure put Hong Kong at the top by far, followed by Malaysia, Mexico, South Africa, Taiwan and South Korea. India ranks ninth.

China

With 20% of the world's population and a 9.9% growth rate for the last 15 years, China appears destined to become the next economic superpower, in the view of some. Since its reform program began in 1978, China's growth rate has been four times that of the United States. Based on World Bank projections, China will have the world's largest economy by 2003.

Emerging Market Debt Trading

Trading volume in emerging market debt reached almost $2,000 billion in 1993, more than twice the 1992 volume.

Growth was concentrated in the market for Brady bonds (LDC debt repackaged as bonds). Trading in these bonds increased 4x to $1,000 billion.

Trading in secondary market loans reached $273 billion in 1993, up from $229 billion in 1992.

Trading in LDC debt options grew from $15 billion to $57 billion.

Source: Survey of 70 financial institutions conducted for the Emerging Markets Debt Association by Price Waterhouse.

Privatization in Eastern Europe

"The Micro Frustrations of Privatizing Eastern Europe"

by Gunnar Eliasson

Industriens Utredningsinstitut

Box 5501

11485 Stockholm

08-783-80-00

Abstract

The opening of Eastern Europe to Western competition creates new challenges for the proponents of free markets. Expectations in Eastern Europe are high regarding the capacity of the free market to deliver fast. This paper makes privatization a part of the general deregulation of markets needed to take decisions down to the micro levels where the appropriate competence resides. A general theme is that macro-economic performance depends on the efficient activation and allocation of competence through markets. For that to occur the incentive systems has to be appropriately organized. Among other things this requires that entitlements to future rents of such competence be sufficiently well defined to be tradable. The paper, hence, concludes that privatization in a broad sense is a necessary condition for, and a part of the successful deregulation of Eastern Europe. When ownership of corporate assets is sufficiently well defined, markets will be capable of identifying and directing resources to existing, competent producers, of removing resources from incompetent producers and of facilitating optimal and fast learning of agents to cope with Western competition~ If speedy transition to a market economy is desired, such deregulation cannot await the committee work of Government bureaucrats. Nobody can design the optimal institutional arrangement ahead of its implementation. It has to be achieved through experimentation in markets and self organization to create the appropriate institutions. Privatization, hence, comes first.

The main function of the financial market is its potential to force reorganization and unpleasant change that would otherwise not occur. Since competence to produce profitably under the competitive conditions of international markets appears to be generally very scarce in Eastern countries, the creation of free financial markets is not sufficient to generate growth, only to destroy obsolete structures. To create fast transition and an improving standard of living new competence also has to be rapidly brought into place. The only feasible way to accomplish this within a reasonable time is through various forms of foreign direct investment, deliberately accepting a reduction of national policy authority over the economy. There is, however, no principal difference between this solution and privatization of markets in general. In both cases the goods, services or assets to be traded have to be sufficiently well defined to ensure identification of ownership, allowing (for the benefit of efficiency), central policy authority to be replaced by free decisions of micro agents in markets. The difference is that a viable solution requires that foreign micro agents possessing the needed competence will also be allowed to invest and earn hefty rents in the local markets of Eastern Europe. This, however, is an even more genuine form of privatization than discussed in literature. The situation in Eastern Europe is in large measure the same as that in the underdeveloped world; it does not help to send money or machines. The dominant capital needed is the human embodied competence of individuals and organizations. In order to succeed, markets have to be not only liberated from obstructions that prevent competition, but also organized such that there will be incentives for industrial competence to be brought in and allocated efficiently. Free capital and labor markets are instrumental in the realization of this task. This is the essence of successful privatization.

The necessity to organize the economy such that rapid learning and/or efficient import of competence is achieved is illustrated through comparisons of two East European with a similar Swedish firm.

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