IMF World Bank And Chinas Role Global Governance Politics Essay

IMF World Bank And Chinas Role Global Governance Politics Essay This study will explain how these international organizations are changing and why there are differences in how the two organizations (IMF World Bank) are developing. Constructivist approach to the study of international organizations as actors, it is argued that an understanding of international organizations as bureaucracies with varying degrees of autonomy will contribute to a deeper understanding of their behavior. There are three central International Organizations (IOs) involved in regulating and coordinating the global economy; the International Monetary Fund (IMF or the Fund), the World Bank, and the World Trade Organization (WTO). But I am only going to discuss the role of IMF, World Bank and Chinas role in Global Governance. Since the end of the Second World War, when most of todays more important IOs were created the environment in which these organizations operate has undergone some significant changes impacting on the roles they are to fulfill and the expectations place d on them. The larger process of globalization has generally meant more work for IOs, more states joining, and expansion into new areas previously considered domestic issues. So, the idea is that in new era organizations like IMF and World Bank have become more important in governing the global economy. So, the IOs can be seen as part of an international system where such organizations act as intervening variables in international affairs but also influence the interests of states, in a mutually constituting environment.  [1]   In creating an IO, states also necessarily grant some level of autonomy in order for the organization to work effectively.  [2]  Naturally some states will have more influence in an organization than others but an IO needs to find a balance between the interests of its members and the organizations interests in promoting its mission and continued existence. The roles of the IMF and the World Bank have changed since their creation and the dismantling of the Bretton Woods system in the 1970s. The increased importance of these organizations has meant different things for the organizations and they have developed their own unique way, yet they are still involved in the larger task of regulating the global economy. In some ways these organizations now also have a greater involvement in the domestic policies of the states. Those for example need to lend money or want to be part of the global trade regime. Importantly their membership numbers have also increased greatly since the end of the Cold War. However, if these organizations are perceive as being in the business of performing tasks that impinge on the sovereignty of states, in some ways fulfilling a governance function at the international level then we arguably need to look closer on how they are accountable to member states (shareholders) and people affected by their policies (Stakeholders). This becomes even more important since it is clear that often the states mostly affected by their policies. Developing countries, are the states with little input in these IOs, to an extent by design, have a degree of autonomy in developing solutions for problems and agenda setting  [3]  . The study of IOs in international relations takes place against a background of theoretical disagreement between rationalists and constructivists. From mainstream international relations perspectives, which are rationalist in character, IOs traditionally have not been seen as relevant actors in the international arena. IOs are primarily seen as tools for states with no independent interests and no relevant autonomy. At best from a neo-liberal perspective you could say that the existence of IOs can have a pacifying impact on state behavior increasing the likelihood of international cooperation. Rationalist theories are focused primarily on states and why states create IOs in the first place. State interest in rationalist theories is largely seen as predetermined while in a constructivist view more emphasis is placed on the importance of changing norms and ideas. Constructivists argue those ideas, principles and an actors perceived identity influence behavior  [4]  . International Organizations as Agents of Change IOs are designed to facilitate state cooperation but often also to uphold a given set of rules, norms and practices. These norms and rules are of course designed by states and are subject to change if states wish it. One state alone however will have a hard time bringing about significant changes. Cooperation and reciprocal treatment is usually necessary to reach some form of consensus on what norms should prevail. IOs can here also be seen as important facilitators of change as they develop new solutions and policies, within general borders of what is acceptable to their principals. In this view state interests can be seen as derived from both the domestic level and the international level where numerous actors more or less important and involved in shaping and reshaping internationally held norms and rules. IOs are sites of interaction where such norms are shaped, but not exclusively by the states as experts and staff are also highly involved. When an organization has become more e stablished it can be seen as an actor in itself, working to promote tasks delegated to it. In the process of doing this the organization needs to solve problems and develop solutions that can be acceptable to member-states and other clients. So, IOs are generally treated as something positive and are seen to promote peace and international cooperation. The fact that IOs often have a liberal orientation, promoting issues like human rights and free trade adds to the positive view of IOs. A view of IOs as bureaucracies however provides insight into how IOs can sometimes fail due to internal dysfunction  [5]  . In addition IOs have traditionally not been famous for their democratic organization and transparency. Treating them as bureaucracies could provide insights into their legitimacy and how they change to improve their legitimacy in the face of increasing criticism. Four characteristics of modern bureaucracies relevant to understanding IOs as actors are organizational hierarchy, continuity, impersonality and expertise  [6]  . The impersonal character of bureaucracies means that there is a focus on rules that contribute to the image of bureaucratic organizations as impartial and depoliticized. Ideally, as pointed out by rationalists, IOs could be seen as impartial organizations administrating and carrying out the will of their members. This is a view that IOs themselves are often happy to promote  [7]  . Bureaucratic culture is a concept that is useful in understanding why organizations choose one solution over another or why they develop in a certain way. Bureaucratic rules are an integral part of this. Rules and guiding principles will be specific to an organization depending on its area of expertise. Rules will reflect underlying norms and principles and define how the organization interprets problems. They can be both explicit, like operating procedures internal to the organization, and implicit rules and norms guiding staff as to how an issue should be approached. Barnett and Finnemore pointed out some effects of bureaucratic rules that can be of interest  [8]  . Internal rules prescribe how an organization interprets problems so that the organization can respond to issues in an effective manner. Rules, often produced by the organization, also define how other actors should behave. Such rules, as part of the bureaucratic culture of an IO, also influence how staff interprets the world around them and how new problems are dealt with. A further argument is that such rules also contributes to a classification of issues in a way that fits the organization that then influences how others understand those issues, thus having a constitutive effect. For example rules on trade are defined at the WTO which then serves as a standard for others. The World Bank develops solutions to problems of poverty and development which prescribe future action by themselves and others. Rules and principles at an organization are also constitutive of the organization s identity in that they define what the values of the organization are. In addition to this, a contribution to bureaucratic culture at IOs, are their different areas of expertise and what kind of people work there. The IEIs are economically oriented organizations working within the areas of international trade, development and poverty alleviation, and financial issues. Traditionally, although this is changing slowly, these organizations have been staffed primarily with individuals educated and experienced within these fields. While this is quite natural it also contributes to what can be called epistemic communities in these organizations. This can have both positive as well as negative effects. It is positive in that it contributes to effectiveness and expertise, but it also limits critical and alternative input. It may lead to dysfunctional behavior because of unwillingness to take in alternative ideas and information  [9]  . The bureaucratic culture thus informs how staff und erstands and interprets problems, as well as what problems they see. This also suggests that IOs may develop their interests over time as long as it is within the general frames of the original mission. Interpretation is necessary from the beginning as IOs are often given broad mission goals like promoting financial stability which the then has to be turned into a manageable set of goals  [10]  . Authority and Autonomy As bureaucracies IOs also have authority  [11]  . The fact that they have been delegated their responsibility by states is central but there are different dimensions to IOs authority as well. Their bureaucratic character as well as other characteristics of IOs contributes to their independent authority and also to autonomy. IOs autonomy is an issue that has been discussed in trying to account for what has been called mission creep in IOs. One way of explaining autonomous IO behavior and such mission creep that fits within the rationalist perspective, is by focusing on the distribution of information between an agent and its principals  [12]  . It can be argued that IOs have access to more information than their principals which they then use to further their own interest. Despite this IOs may have an informational advantage in certain issue areas that they may, but not necessarily will, use. But important point here is that; why would IOs have diverging interests from that of their members? As suggested above, seeing IOs as bureaucracies provide us with insights as to why IOs may develop their interests. IOs often have normative goals that they try to advance. Member-states would however in the rationalist view have a central role in defining the mission and underlying norms. For example the creation of conditionality on loans and the promotion of increased transparency in member-states by the IMF and the World Bank have produced both resistance from some states and support from other states. States of course have mechanisms to keep IOs in check, primarily by having representatives at the organization  [13]  . Evaluation mechanisms at IOs also serve the function of keeping states informed. While states may have an interest in limiting transparency at IOs in some cases, increased transparency could also be seen as a positive development to improve state control of the organization and accountability of the organization towards member-states. In being bureaucracies, IOs have a rational-legal character, they are authorities because they have been delegated this authority but also because of their bureaucratic organization and expertise. The IMF is seen as the guarantor for international financial stability, the World Bank as a central IO working for development. IOs are often perceived as promoting the general welfare of their members, which they have to balance against particular interests of member-states. These sources of authority contribute to IOs being authorities in themselves and also consequently contribute to their autonomy. IOs are not of course autonomous or nor can they likely be entirely autonomous. Analysis of the Discussion There are various perspectives on IOs, and how we should understand them as actors? The arguments reflect that IOs are relevant actors, and although they are set up by states and states as their principals can have a degree of autonomy in them. This does not mean that IOs should be considered independent actors or they are making up their own interests as they go. IOs will likely have different degrees of autonomy depending on the original design by states for their functioning, but autonomy can also come from other sources. Like organizations expertise and informational advantage can contribute to autonomy in some cases. The expansion of the IEIs in the light of globalization has lead some to argue that these organizations constitute an elitist system of governance unaccountable to both member-states and people affected by their policies. This simplified picture is not really helpful in understanding the roles that the IEIs play in the international political economy or the environm ent in which they operate. In many ways the IEIs have been successful in pursuing their missions of trade and financial liberalization  [14]  . They have been able to adapt to a changing environment and find new issues to deal with as others have become less important. They have also persisted through various crises and have been central in solving problems. This reflects a concern over how these organizations are accountable to both shareholders and stakeholders and the character of the developing system of global economic governance. Legitimacy of this system should base on output oriented logic. In this way its effectiveness will matter the most. Furthermore, the inclusion of stakeholders in decision-making could play a prominent role. The International Monetary Fund The IMF as an organization has developed significantly from its creation reflecting the changing needs of member-states and developments in the world economy. The IMF has expanded over the years and has become increasingly engaged in prescribing economic policy for states in a way that was not originally intended  [15]  . The IMF since the 1980s increasingly deals with the domestic economies of states that want to draw from the Funds resources and prescribe economic policy through conditionality requirements on loans to developing countries. The IMF is an expert bureaucratic organization and an authority on international financial issues. To be perceived as an impartial and expert organization is important for the IMF to retain its legitimacy and importance. From the beginning the IMF has had a liberal ideological orientation to promote free movement of capital and contribute to economic growth. That the organization has been primarily staffed with economists in turn also affect how problems are interpreted and what kind of solutions are developed  [16]  . The staff of IMF need to interpret the mission given, identifies problems, and develops solutions that are likely to be successful while being sensitive to the interests of member states. The World Bank The World Bank of today has changed significantly from its origin both in its organization and in the policies it promotes. The Bank, like the IMF, has conditions attached to most of its loans and has moved further into previously domestic issues in order to pursue its mission of poverty alleviation and development. Originally the World Bank consisted of only one institution, the International Bank for Reconstruction and Development (IBRD). With time a number of auxiliary organizations were created; the International Financial Corporation (IFC) in 1956; the International Development Association (IDA) in 1960; the International Centre for the Settlement of Investment Disputes (ICSID) in 1966; and the Multilateral Investment Guarantee Agency (MIGA) in 1988. These together form the World Bank Group, while the IBRD and IDA are usually referred to as just the World Bank or simply the Bank. Unlike the IMF the Bank (IBRD) provides project specific long-term loans, but also development polic y loans to support institutional and policy change in borrowing countries. Although now strongly influenced by similar economic ideals as the IMF, the Bank has previously promoted and supported various development models  [17]  . In the 1980-90s the Bank became more engaged in issues of institutional and policy change in borrowing countries  [18]  . The organization has continuously been a target for criticism by NGOs and various other critics. But the World Bank has however changed more quickly and in slightly different ways than the IMF in response to legitimacy critique. How to Share Responsibility Before going further in the discussion of global governance, we need to understand the concept of power first. Following could be the important factors to determine a states power: geographical extension, population and military capacity etc. Considering this, and in order to achieve a democratic sharing of responsibilities on the principle of one person one vote. Now is the time when US and EU should really recognize the shift of economic power, energy power and of GDP power to Asia and other emerging economies. After the rise of China, US and EU should think about the other powers in developing countries. The world is progressing day by day and world powers should realize this change. As world is shifting very quickly and many countries are approaching them for forcing them to play their neutral role for the betterment of the world. The US and EU need to think of making IMF and World Bank more open and give representation to the developing countries of the world. If they are not going to act wisely, then there is possibility that other growing countries get frustrated soon and try to create their own multilateral institutions like IMF and World Bank. They could change the situation by giving up from their longstanding monopolies for appointing heads for the IMF and World Bank. (Traditionally Europe names IMF Director General and the US the h ead of the WB). EU and US should adopt the global changing economic reality and give up the leadership of World Bank and IMF for their own good  [19]  . Chinas Role in Global Governance China is rapidly integrating into the international system, but still a new player in global governance while the EU and its member states have rich experience in global governance. General literature on Chinas growing international importance is abundant; but there is still only a limited understanding of the motivations, targets and limitations driving Chinas participation in global governance. According to the literature there are four global governance arenas as key research areas, namely climate change, energy, trade, and development because they are global issues of particular concern for both Europe and China. It is most important to consider that mutual understanding and dialogue are indispensable tools for constructing global governance structures for the world. Since the onset of the financial crisis there have been suggestions to form a Group of Two (G-2) consisting of the United States and China. This proposal is based on the facts that China is the largest creditor of the US, the US is Chinas biggest export destination, and the strong interdependence of their two economies provides a foundation for joint action that can shape the global economy. This thinking is tempting when the Group of Eight is seen as reflecting an outdated balance of power and the Group of 20 is considered too diluted to respond to global challenges. Yet a G-2 would give a false assumption about stronger global governance and China would probably not deliver in such a format. We can say it like this [The] steady and fast growth of Chinas economy is in itself an important contribution to global financial stability. Or look at the closing statement of the National Peoples Congress: We have prepared enough backup firepower to deal with potential greater difficulties, a nd new stimulus packages, if necessary, will be launched.  [20]   Some Chinese are flattered by the suggestion of a G-2. It suggests China is a global power. But on the other hand Chinese realize that they are not yet ready for this. It could have another dimension and that it could be a potential trap for China that could expose it on the world stage. China is active in international reform with focus on internal growth and active foreign policy in financial and monetary matters. China is on the center court of international decision-making to protect a system of economic globalization that has provided China with many benefits. That is reflected in diplomatic efforts undertaken with regard to financial reform and the International Monetary Fund, as well as floating suggestions regarding a new reserve currency. Chinas foreign policy is still deeply rooted in non-interference and at its best conflict-avoidance. The US-China relationship is one of the most important bilateral relationships. There is need for tight coordination between the US and Chi na. Yet, to turn that into a G-2 will create an illusion of global governance that will not deliver on its promise. Is China Prepared for Global Leadership? Few years ago, some in the West warned of Chinas coming collapse but now, almost all hopes for global economic recovery are pinned on China, the only major economy still enjoying growth during the current global financial crisis. China has long sought to make others believe that it is one of the greatest countries on the planet. But China is not yet ready to take the leaders role, as it is a revisionist rather than revolutionary state. Chinas effective response enhances its image as the savior of a struggling global economy. Therefore, its proposals for the international economic order have attracted attention. President Hu Jintao became the star of the London Summit. Zhou Xiaochuan, governor of Chinas central bank, also won world wide fame for his suggested new international reserve currency, managed by the International Monetary Fund (IMF), to replace the US dollar. Chinas new offer of a loan to the IMF was also considered a step toward raising its voice in the international financ ial institutions (IFIs)  [21]  . Although China undoubtedly wields significant economic and political influence, its society contains the fundamental weaknesses of an underdeveloped country. It still has far to go to be a global leader in quantity and quality. With its domestic focus, Chinas government does not think it is time to take primary responsibility for global prosperity and stability. But China can still be more active in global governance and the G20 is an appropriate forum for China to exert its influence on global issues. Chinas rising power enhances the effectiveness of the G20 because a stronger China will improve the power balance in the group, as well as its legitimacy. Here there is no need to deny the differences between the advanced and emerging economies. The developed world is always willing to forget how countries became developed. For instance, developed countries claim that developing countries are stealing their intellectual property and that all countr ies need the strictest regulations to protect their intellectual property, overlooking the fact that they have control of most of it and that they were also imitating and copying during their development process. These differences, as well as Chinas power, help to ensure that the G20 will be a democratic and balanced forum for countries in various stages of development to revise the existing global economic system. Critical Analysis of Chinas Position for Global Governance China has brought forward ideas on the reform of the international institutions. But it is not trying to overturn the existing system and does not yet have its own blueprint for future global governance. It is trying only to reform some deficiencies that conflict with its own interests and values, as China is not yet in a position to take on the responsibility to lead. Moreover, China has enjoyed unprecedented growth under the current system. With regard to global economic governance, it will take into account the interests and requests of developing countries and reduce the control of industrialized countries. China also shares many common interests with the developed world. Cooperation rather than confrontation will help China achieve its goal of revising the international economic order. Because China has benefited much from its WTO membership, and the economic downturn has demonstrated that the Chinese economy still depends heavily on foreign demand, China needs to take a more ag gressive and accommodating stance in the coming negotiations, for instance, by offering more radical market-opening commitments in services and agriculture. On sustainable development, however, China is more defensive. The United States and the European Union have proposed a carbon tariff, which China strongly opposes. For China, this proposal ignores the differences between developed and developing countries for the historical responsibility of climate change, as well as regarding their present levels of development. Here, China again has a strong sense of identity as a developing country. Although it is excited by its acceptance as a major world power, China is not yet prepared to take a leading role in assuming responsibility for global prosperity. In terms of its economic and political development, it is still a developing country. China has therefore neither the capability nor the willingness to establish a new international system to replace the existing one. China, rather, us es the current system, while trying to change parts of it to sustain its own interests. This rising China is revisionist rather than revolutionary, and will help the recovery of the global economy and the reform of international economic order. Globally, I think China should actively participate in global governance constructive. From a longer-term perspective, China should participate in many global issues such as climate change and food security, and offer suggestions with vision. The world power shift has been happening in a peaceful way, without wars. But in reshaping international economic and financial territories, trade wars and protectionism are threats China and other countries must face. China is rapidly integrating into the international system, but still a new player in global governance while the EU and its member states have rich experience in global governance. While general literature on Chinas growing international importance is abundant, there is still only a limit ed understanding of the motivations, targets and limitations driving Chinas participation in global governance. The rise of China will undoubtedly be one of the great dramas of the twenty-first century. Chinas extraordinary economic growth and active diplomacy are already transforming East Asia, and future decades will see even greater increases in Chinese power and influence. But exactly how this drama will play out is an open question. Will China overthrow the existing order or become a part of it? And what, if anything, can the United States do to maintain its position as China rises? Conclusion The size and rapid growth of China, together with its increasing assertiveness, represent a challenge to the established global order. The dynamics and the future impacts of these power shifts for global governance and Chinas rise will create tensions varies according to the ways in which the basic interests of China and Western countries clash. Correspondingly, China has been playing a responsible, cooperative and constructive role in many areas. We can find contributions from China at nearly every big global or regional occasion. But meanwhile, Chinas domestic economic measures have helped create opportunities for other countries. In this way, the stimulus package has been designed and implemented in a balanced way. China is against trade protectionism and actively participating in redesigning international financial institutions. And the efforts are gradually delivering results. We can say China, as a growing power, is playing its role well. It is a suggestion that China should wo rk more aggressively to establish partnerships with international organizations such as the International Monetary Fund and World Bank. On the other hand some states will have more influence in an organization than others but an IO needs to find a balance between the interests of its members and the organizations interests in promoting its mission and continued existence. The US and EU need to think of making IMF and World Bank more open and give representation to the developing countries of the world. Chinas new activism should be encouraged as part of its transformation into a responsible stakeholder. A strengthened partnership and contribution from China can, in turn, boost its role and performance globally. At the same time, Chinas partnership with the United States is very important. The bilateral partnership is the key to the success of Chinas role on the global stage. The Western countries are losing power, and we have to admit the US has been severely affected by the financi al crisis. However, the US is still a robust society. Its high-tech industry is still leading its economy. Furthermore, economic cooperation between the US and China is much needed but world governance is still about more than economics.

College Essay (Soccer)

As a senior, my team and I take our first step onto the turf field; we go on as a family that is striving to bring home the cup. This is my first, yet last chance to do this. The heat from the turf moves through my cleats and onto my feet. The intensity of the sun is shining straight down on me and the sweat is just beginning to start. Then my mind rewinds back to those few words that crushed me terribly last year coming from the varsity soccer coach, â€Å"I think it’d be best if you played on junior varsity this season. I spent countless nights being angry that I did not make varsity and I felt somewhat like a loser because I was a junior playing on the JV team. After a few weeks, I figured it was pointless to feel pity for myself and decided that I was going to show everyone how great I could be. Soccer has been my addiction since I was five and nothing could ever replace the desire for it. My father taught me the rules and coached me; I was set on making sure I knew every aspect of the game, attempting to perfect every skill. I was in complete disbelief when I was not put on the varsity squad, I thought I was good.I knew I had to get better because there is always room for progress. My first step was to improve my physical condition by running and lifting. Running was something that I dreaded to do every day, but knew it was so vital to do. I absolutely despised running, every time I wanted to stop I would just think, â€Å"A starter wouldn’t stop running until they’ve reached the end†. Lifting weights was an activity that I found enjoyable and did not mind doing. Besides exercising, I spent numerous hours working on my ball skills; juggling, controlling, and passing everything a starting player should be precise at.Finally, after many long months, my hard work had paid off. During tryouts I showed everyone that I was a zealous and determined player, taking practice serious and hustling for every drill. The varsity coach awarded me with a starting position for the team my senior year. My determined work ethic, initiative and discipline helped me to get where I am now. To this day I continue to work hard at every practice, even though I am starter. Slacking off is not an option for me. I have applied this lesson to many areas in my life including school work, sports and volunteer work. I am not a quitter and am never satisfied until I achieve my goals.

ESL Lesson Plan Intensive Reading Exercise

The following lesson focuses on reading intensively, in other words, understanding every word. Generally, teachers tend to ask students to read quickly for a general understanding. This method of reading is called extensive reading and is very helpful in getting students to deal with large chunks of information. However, at times students do need to understand details and this is when intensive reading is appropriate. Aim Developing intensive reading skills, vocabulary improvements concerning fine differences between related vocabulary terms Activity Intensive reading exercise in which each sentence must be read very carefully to discover mistakes and inconsistencies of syntax Level Upper-intermediate Outline Discuss different types of reading skills with students: Extensive reading: reading for pleasure with emphasis on general understandingIntensive reading: reading carefully for an exact understanding of text. Necessary for contracts, legal documentation, application forms, etc.Skimming: quickly looking through text to get an idea of what the text concerns. Used when reading magazines, newspaper articles etc.Scanning: locating specific information in a text. Usually used in timetables, charts, etc. Ask students to give examples of when they employ the various reading skills. This part of the discussion can serve to raise awareness concerning the fact that it is not always necessary to understand every word. Pass out handout and have students get into groups of 3-4. Ask students to read one sentence of the stories at a time and decide what is wrong with the sentences in terms of vocabulary (contradictions). Follow-up with a class discussion about the various problems with the text. Have students get back into their groups and try to substitute appropriate vocabulary for the incongruencies. As homework, ask students to write their own Whats Wrong? story which will then be exchanged with other students as a follow-up activity to the lesson in the next class period. What's Wrong? This exercise focuses on intensive reading. Read one sentence at a time and find the inappropriate vocabulary mistake or contradiction. All errors are in the choice of vocabulary NOT in grammar. Jack Forest is a baker who always provides his customers with tough meat. Last Tuesday, Mrs Brown came into the shop and asked for three fillets of brown bread. Unfortunately, Jack only had two fillets remaining. He excused Mrs Brown and promised her that he would have too much bread the next time she came. Mrs Brown, being a reliable customer, assured Jack that she would return. Later that day, Jack was sealing the shop when he the phone sang. It was Mrs Brown requiring if Jack had baked another slice of brown bread. Jack said, As a matter of truth, I burnt some extra loaves a few hours ago. Would you like me to bring one buy?. Mrs Brown said she would and so Jack got into his bike and road to Mrs Browns to deliver the third pound of brown toast.My favorite reptile is the Cheetah. It is truly an amazing creature which can trot at a top speed of 60 m.p.h.! Ive always wanted to go to the cool planes of Africa to see the Cheetah in action. I imagine it would be a disappointing experien ce looking at those Cheetah run. A few weeks ago, I was watching a National Geographic special on the radio and my wife said, Why dont we go to Africa next summer?. I hopped for joy! Thats a lousy idea!, I stated. Well, next week our plain leaves for Africa and I can hardly imagine that we are going to Africa at first.Frank Sinatra was an infamous singer, known throughout the world. He was a novice at singing in the crooning style. During the 50s and 60s grunge music was very popular throughout clubs in the US. Las Vegaswas one of Frank Sinatras favorite squares to sing. He often traveled into Las Vegas from his hut in the woods to perform in the evening. Audiences inevitably booed as he sang encore after encore to the delight of international fans from around the county.

Liquidity Risk Sovereign Risk And Sub Prime Crisis Finance Essay - Free Essay Example

Sample details Pages: 5 Words: 1486 Downloads: 8 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? It is said that when the U.S. sneezes everyone catches a cold. This motto has never been truer than nowadays when the world economy is struggling with one of the biggest financial crises ever. Such a crisis happened after risky loans granted in the U.S. reached alarming proportions. The US financial sector entered a grave credit crisis after a strong speculation in the real estate industry. The situation worsened with the bankruptcy of world financial giants such as Lehman Brothers and AIG in 2008. At the center of the subprime crisis there is an excessive liquidity risk, the risk that the market would be unable to turn investments into money cheaply, quickly, and at a fairly predictable price. It is opportune to highlight that the rise of liquidity risk had its roots in two linked phenomenons. Firstly, commercial banks lost their typical function of collecting and converting savings into productive investments which would generate funding liquidity for investo rs. Secondly, the noteworthy development of the so-called Shadow Banking System, a innovative financial engineering used by financial institutions which rivaled a fragile banking system and, created easier credit conditions by avoiding public-sector backstops and regulation (Federal Reserve Bank of New York, 2010) Ever since the US government decreased the cost of money to foster its economy after the September 11, financial intermediaries have played a role that all investors took advantage of: to create new financial instruments to manage and hedge risk for instance counter-party and default risk in the case of CDS (Credit Default Swap), by using a traditional market such as credit. Banks converted long-term assets such as mortgages and loans into marketable securities exchanged and sold to capital market investors (securitization) (Langley, 2010, 78). This financial practice made investors double their money and became very popular. In fact, over the last decade innovative assets such as subprime mortgages-backed securities (MBS) increased from $52 billion in 2000 to over $507 billion in 2005 (Eerden, 2009, 130). However, when the US housing market experienced a fall due to rising loan-defaults of low-credit-rating borrowers (classified as subprime), the value of the underlying assets of MBS and other structured asset-backed securities such as CDO (Collateralized Debt Obligation) dropped dramatically over a short period causing heavy losses. CDS were the last straw. Given that they were new financial instruments which lacked of government regulations and schemes to determine their value, price movements and the speed at which investors could dispose of their assets changed rapidly. Thus liquidity risk rose since assets prices and loss-values were unpredictable. Uncertainty on loss exposure made these assets go for sale quickly and drained liquidity from the market by causing volatility and insolvency. Investors were clearly not interested in these assets anymore and this led to one of the main sources of liquidity crises (Nikolaou, 2009, 4): market incompleteness, a situation where there are no markets on which financial assets can be easily traded because of the lack of buyers and therefore the ability to hedge liquidity risk is very low. On the other hand, what contributed to boost liquidity risk was also the asymmetric information between CDO issuers and potential buyers. Due to a structured finance, CDO issuers were the only players who were able to analyze the value and risk level of the assets underlying CDOs (Beltran and Thomas, 2010, 21). Not only did buyers not have enough information and tools to explore the value of these innovative and structured securities, but they were also exposed to a mispricing risk, due to altered ratings from qualified agencies such as Moodys, Standard and Poors and Fitch which increased their profits by overrating the value and quality of CDOs. Although liquidity risk occurs in the banking sector of a country, it is intimately related to the governments risk such as sovereign risk. Unlike corporations, governments can discretionally issue laws and policies that allow them to break, within their jurisdictions, debt contracts. This happens by declaring default or restructuring unilaterally the contract terms (extending deadlines or modifying yields) on determined securities of the public debt. When the market experiences massive liquidity falls, governments represent the first line of defense through central banks which are required to intervene by ensuring large amounts of capital to lending institutions in order to meet their investors needs. During episodes such as the subprime crisis featured by illiquidity amongst financial institutions, governments make great efforts by using public spending and might run into debt with increasing fiscal liabilities and budget deficit (Arghyrou and Kontonikas, 2010, 6). Lenders may start fearing the possibility that a sove reign government, in which they invested, may default because of its incapacity to fund its debt and ask for massive international bail-outs as happened for bankrupted Greece. Increasing fears that the government would not be able to refinance the banking system raise what is called sovereign risk. Therefore liquidity risk is one of the main components that influence sovereign risk. Since investors bear higher risk due to potential defaults, they demanded higher yield premiums on sovereign bonds and this makes the debt even more expensive and the probabilities of default risk rise. This justifies the high 10-year bond yields that some peripheral EU countries at stake such as Ireland with 7.14 percent and Portugal with 6.11 percent are now facing (Financial Times, 2/11/2010) Furthermore, fluctuating exchange rates experienced over the last few years (e.g. UK currency), increased sovereign risk since the risk of collapse of financial markets caused by illiquidity hit a large market such as bond markets. In fact as Arghyrou and Kontonikas (2010, 3) state, the EMU debt crisis can be seen as a currency crisis in disguise Within the eurozone, one of the countries that has been little damaged by the liquidity crisis is Italy. Italy has traditionally been featured by a prudent credit system and an above-average saving propension. Therefore banks finance themselves by having recourse to clientele deposits as funding source. Furthermore, unlike the US, loans can only be granted to those with high credit ratings who prove to be able to meet their obligations. Moreover borrowers can obtain loans only if they meet the income requirement. Therefore it is right to speak of prime loans and not subprime loans. As soon as the liquidity shortfall became an insolvency crisis, the Italian Government, in agreement with the Central Bank, swiftly intervened by paying special attention at the undeserving institutions with the highest insolvency. In order to ensure liquidity in the financial system, the Government has introduced the so-called Tremonti Bonds, which are bonds issued by Italian banks and underwritten by the Italian Treasury with the aim of enhancing banks core equity capital and supporting the supply of credit towards families and businesses. In addition, as other EU central banks, the Italian Central bank has followed the new policies established by Basel and the European Union. According to Nout Wellink, chairman of the Basel Committee on banking supervision, global regulators will not finish their package of capital surcharges and other safety measures for banks deemed too big to fail until mid 2010-11 (Financial Times, 20/10/2010). Throughout the crisis the world regulators such as Central Banks, the European Central Bank (ECB), and Federal Reserve (FR) have been strongly committed to provide unlimited liquidity in the banking sector and guarantee non- insolvency crises. Furthermore, the ECB, in order to prevent the Euro-zone fro m potential defaults and give more peace of mind to investors, created a ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬750 billion fund for EMU countries that might be at stake within the next three years (Arghyrou and Kontonikas, 2010, 10). In order to support credit towards businesses and households, according to the 2009 ECB report, the monetary policy has been eased with unprecedented measures: unlimited liquidity provision at the key interest rate of 1 percent, extended the average deadline for refinancing operations, broadened the range of assets accepted as collateral which implies that banks will have access to central banks liquidity more easily. Moreover, the ECB and other central banks provided liquidity in other currencies such as US dollars. Overseas, the FR has responded with an aggressive monetary policy ever since August 2007 by reducing the federal fund rate from 5,25 percent to effectively zero (Federal Reserve, 5/2/2010). The illiquidity has been tackled with the implementat ion of two special liquidity schemes such as The Term Auction Facility and The Term Security Lending Facility. The first, designated for depositary institutions, consists of auctioning funds, such as collateralized short-term loans, to safe institutions. The second allows investors to exchange collateral with less risky assets such as Treasury securities. Over the last decade, developed countries lived well beyond their possibilities whilst until the end of the last century it was common to spend in accordance to income. However, in most recent years overspending became popular by recurring to loans in order not to make any renunciation. The economy based on real data, labor, and productivity has been replaced by a creative finance. The new financial engineering gave life to authentic monsters, such as financial intermediate practices mostly aimed at selling worthless and unmarketable tools whose usage has been too irresponsible. Don’t waste time! Our writers will create an original "Liquidity Risk Sovereign Risk And Sub Prime Crisis Finance Essay" essay for you Create order