Polish inflation and Zloty devaluation by tuj10580

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									                Polish inflation and Zloty devaluation

45%             Devaluation







      92   93         94      95          96   97   98   99   0   1

Direct costs of September 11 Attacks
•   OCTOBER 29, 2001 – BusinessWeek
    Now, Argentina's Default Looks Inevitable
    With the U.S. preoccupied, a bailout is unlikely
    Things in Buenos Aires seem to be going from bad to worse. Any hopes
    that Argentina would eventually emerge from a four-year recession were
    snuffed out by the September 11 terrorist attacks, which dealt a body blow
    to the global economy. Argentine bonds are now trading at less than 60
    cents to the dollar. Meanwhile, local interest rates have soared to a
    punishing 35%, even for blue-chip borrowers. These are signs that the
    markets believe that Argentina cannot go on servicing its $132 billion
    national debt. U.S. rating agencies are assuming as much. On Oct. 9,
    Standard & Poor's Corp. downgraded Argentina's sovereign debt rating to
    CCC+, putting the country on a par with deadbeats such as Ecuador. Rival
    Moody's Investors Service quickly followed suit.

•   Wall Street has already resigned itself to the idea of an Argentine default. A
    recent survey of emerging-market portfolio managers by Morgan Stanley
    Dean Witter & Co. revealed that 85% now believe default is inevitable.
Emerging Economies: Net capital flows
                     A Busang Lesson
•   The root problem that Bre-X faced was the absence of the rule of law in
    Indonesia. This political risk takes on the form of “creeping expropriation,”
    something not easily insured.
•   Rule of law, taken for granted in developed economies, is often missing in
    emerging economies. Why?
     – The ruling class benefits more from discretion than from the rule of law.
          • Discretion or non-transparency gives the ruling class the means to extract rents from
            the society.
          • The cost of the economic inefficiency is borne by the population.
          • Rule of law would limits the power of the ruling class.
     – The absence of the rule of law in most developing countries is not simply a result
       of history. It is what keeps emerging economies always emerging.
•   Portfolio investors would often stay away from some emerging markets
    where creeping expropriation/corruption is suspected to be serious.
•   Direct investors can, in theory, manage this risk. But managing this kind of
    political risk is not easy. Barrick tried to take advantage of the environment,
    but failed miserably.
 Foreign direct investment vs. portfolio investment

• FDI, according to the IMF, is “an investment that
  is made to acquire a lasting interest in an
  enterprise operating in an economy, other than
  that of the investor, the investor’s purpose being
  to have an effective voice in the management of
  the enterprise.”
• Portfolio investment is “passive.”
• FDI allows the use of almost all risk
  management techniques.
• Portfolio investors can only “vote by money” and
  employ financial market based risk hedging.

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