Global finance is becoming a growing part of the financial world and the world of the investor. Global options for investing abound but require knowledge on the part of the investor and expertise on the part of the fund manager. Global finance allows emerging growth countries and economies to participate and access new markets and demand for new investments. However, the investor must weigh the cost and possible instability of global markets when investing. Portfolio diversification and strategy may suggest that a component of a well-rounded portfolio be global funds. But investors have no way of predicting the cultural and political shifts that may influence the stability of global funds. Other more secure investments may be needed to offset possible losses in global funds.
Keywords Finance; Financial Regulation; Global; Globalization; International Finance; International Monetary Fund (IMF); Securities and Exchange Commission; World Bank
Finance: Global Finance
Global finance concerns the international financial system, financial institutions and instruments. Several international institutions regulate global financial markets. These include the World Bank, the International Money Fund and the World Trade Organization. The prospect of investing in global instruments is attractive to some but worrisome to others. Tyson (2003) advised investors to be careful and often stay away from global investing. Tyson noted that the word "international" means the fund invests globally except in the United States. A fund with worldwide or global in its name includes the United States. Tyson gave two reasons for avoiding global fund investing — information and cost. He felt it was difficult for a fund manager to follow the action if it were occurring across the globe and much more difficult than following U.S. funds. Secondly, he felt that the costs associated with the operation and management of global funds would offset the yield and return an investor could anticipate.
Thinking globally means changing the view of what is important in global finance and who the primary players are. There was a time when the only markets that were deemed important were the United States and parts of Europe. The view then began to trend toward only the major industrialized nations. However, with improvements in technology and the desire of emerging growth countries to participate in global markets, the global finance landscape has changed. Poor and emerging economy countries are recognizing that they have valuable items to trade such as natural resources and labor that were previously untapped. Harnessing those resources and participating in the global economy can change the status of an emerging country and its people.
Risks of Global Finance
Some issues related to global finance are the conditions in various underdeveloped and emerging countries. There can be instability due to currency instability and political instability. There can also be war and military issues, poverty, environmental and human rights issues. Some global funds can become undesirable based on the discovery of internal turmoil in the local economy. Funds can also face a backlash when information about such instability is uncovered.
Global finance is growing with the growth and expansion of multinational corporations. Many established corporations in the United States and Europe are looking for ways to expand their customer base and increase the demand for their products and services. Some are facing saturation in developed countries and are looking for opportunities in new areas. Mergers and acquisitions are also making companies bigger with multinational interests. Many fear that the 'McDonaldslization' or 'Starbucktizing' of the world is not a good thing. This is due to the fact that when multinational firms are investing in new economies, they will likely have influence over the activity, growth and change that occurs.
The County Monitor (2006, p. 5) noted the success of banks worldwide in reducing risk. The techniques used to do this included "statistical portfolio management, securitization, the sale of problem loans and derivatives hedging." These methods have helped banks to reduce risk and spread it around. Moody's rating service revised the way it rates banks. It contrived a five rating system from A to E to make the international ratings consistent across economies. The rating system is supposed to give investors a better idea of how credit worthy a bank is and what the true risk is in a certain economy. However, many experts believe that the rating system can only go so far, and in fact Moody's (as well as the other ratings agencies) came under sharp criticism after the 2008 global financial crisis when it was discovered that billions of dollars in bad debt, bundled into collateralized debt obligations, was given the highest rating — AAA (Fiderer, 2013).
Banks have experienced an influx of cash in the early 21st century, contributing to merger and acquisition activity. This new level of consolidation meant that mergers also began occurring across global borders. Citigroup led the way by making inroads into China, Taiwan and Turkey (Country Monitor, 2006). Other changes in global banking have occurred in the asset makeup of banks. The economies of Russia and China with "less developed financial systems" tend to have a higher ratio of corporate loans than consumer loans whereas U.S. Banks have a 50:50 ratio. In 2013 China's banks were lending at a rate of 132 percent of GDP, and of that about 85 percent was to corporations (Dobbs, Leung & Lund, 2013). The risk is lower when there are more consumer loans in the mix — spreading the risk around. With corporate loans, especially if those loans are largely to only a few institutions, the risk is greater (Country Monitor, 2006).
Role of Governments in Globalization
Dorn (2003) believed bad government policies are at fault for many global financial crises. Dorn (2003) provided examples of the Argentine government defaulting on debt in 2001 and the Brazilian crisis in 2002 as examples of how government can help devalue confidence in an economy. Dorn (2003) used these examples to indicate how important it is to find ways to deal with the crises of debt across the world combined with banking crises and currency crises. The International Monetary Fund (IMF) has stepped in to help countries in crisis but cannot remove the stigma that may remain on the credibility of investing in these regions with problems. Governments must cooperate with market forces in order to keep the flow of capital investment coming. In Europe, in the early days of the global financial crisis, Iceland partially nationalized its banks to prevent collapse, but it protected the deposits of Icelanders only; the large number of foreign depositers in the U.K. and Netherlands were bailed out by their own governments, who expected reimbursement from Iceland but were instead rebuffed. Touryalai (2011) predicted long-term repurcussions for Iceland from the global investment community. Refusing to impose austerity on its people in order to meet its credit obligations, Iceland's government instead provided mortgage relief and other measures. In contrast, Ireland, Portugal, Spain, Greece, and Italy struggled under huge debt burdens that ravaged their economies, and bailouts by the European Central Bank were conditioned on austerity measures that sparked massive protests. A fragile calm eventually ensued (though unemployment remained extremely high) and by 2013, these nations were again issuing bonds (Fontevecchia, 2013). At the same time, Iceland's economy was recovered modestly, with growth in GDP and a steep drop in unemployment; the necessity of not remaining a pariah in the foreign investment market was obvious, and the government was working toward satisfying foreign creditors and investors (Bremner & Valdimarsson, 2013). Worries remained, however, that in preserving institutions that had colossally failed, public debt had swollen to dangerous and unsustainable levels (Bilkic, Carreras Painter, & Gries, 2013).
Regard for Risk
A 1999 Federal Reserve Bank conference on "Bank Structure and Competition" (Brewer & Evanoff, 1999, para.1) suggested ways to prevent global financial crises and to resolve them when they occur. Conference discussions pursued the causes of global financial crises finding that the integration of global markets increased the dependence countries have on each other; spreading the pain around. Excessive debt, herd mentality by investors and over speculation with a "boom-bust" mentality created a gambling like atmosphere among investors. Many investors rushed into new markets without regard for risk.
Disregarding risk is a classic mistake in an unknown investment environment. Crises occurred because the governments at the center of these financial investments did not back up the liabilities incurred by financial institutions. The reason investors engage in risky investments is high yield and protection from potential losses. Other conference participants blamed the IMF for bailing out failing financial institutions as a signal to financial institutions in other countries that they would also be helped if they wanted to find relief from financial liabilities. This "moral hazard" also fueled the savings and loan crisis in the U.S. since bailout was seen as a viable option (Brewer & Evanoff, 1999, para. 8). Not only are unnecessary risks taken when bailout is assured but market prices are distorted as well. Regulation is seen as a primary vehicle to prevent excessive risk taking due to assurances of liability relief. The complexity of global finance can make it difficult for rating agencies and others to react to potential crises.
Some recommendations to avert future financial crises included restricting the IMF to bailout only if the affected country has a sound financial banking system. Sound systems would mean that private lenders would accept liability if the bank fails and foreign banks should be encouraged and allowed to fairly compete in their local markets to diversity the risk. Finally, investors would have to be compensated with a higher rate of return if failure occurs. These recommendations were felt to possibly curb the tendency for excessively risky behavior (Brewer & Evanoff, 1999). Conquering risk means regaining control and requires decision making and careful calculation (Beck, 2002).
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