International financial system

International financial system

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  International Financial System
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  International Financial System •It refers to financial institutions and financial markets/facilitators of international trade, financial instruments (to minimise risk exposure), rules regulations, principles and procedures of international trade.
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  International Monetary System •It is defined as a set of procedures, mechanisms, processes, institutions to establish that rate at which exchange rate is determined in respect to other currency. • The whole story of monetary and financial system revolves around 'Exchange Rate' i.e. the rate at which currency is exchanged among different countries for settlement of payments arising from trading of goods and services.
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  Monetary System BeforeFirst World War: (1880-1914 Era of Gold Standard) • The oldest system of exchange rate was known as "Gold Species Standard“ • The other version called "Gold Bullion Standard", where the basis of money remained fixed gold but the authorities were ready to convert, at a fixed rate, the paper currency issued by them into paper currency of another country which is operating in Gold.
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  • The exchangerate between pair of two currencies was determined by respective exchange rates against 'Gold' which was called 'Mint Parity'. Monetary System Before First World War: (1880-1914 Era of Gold Standard)
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  Three rules ofMint Parity • The authorities must fix some once-for-all conversion rate of paper money issued by them into gold. • There must be free flow of Gold between countries on Gold Standard. • The money supply should be tied with the amount of Gold reserves kept by authorities. The gold standard was very rigid and during 'great depression' (1929-32) it vanished completely.
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  The Gold ExchangeStandard (1925-1931) • In 1925, US and England could hold gold reserve and other nations could hold both gold and dollars/sterling as reserves. • The countries started devaluing their currencies in order to increase exports and de- motivate imports. • This was termed as "beggar-thy-neighbour " policy.
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  Bretton Woods System •Allied nations held a conference in New Hampshire, the outcome of which gave birth to two new institutions namely the International Monetary Fund (IMF) and the World Bank, (WB) and the system was known as Bretton Woods System which prevailed during (1946-1971). • Bretton Woods, the place in New Hampshire, where more than 40 nations met to hold a conference.
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  The Bretton WoodsEra (1946 to 1971) • In Bretton Woods modified form of Gold Exchange Standard was set up with the following characteristics – One US dollar conversion rate was fixed by the USA as one dollar = 35 ounce of Gold – Other members agreed to fix the parities of their currencies vis-à-vis dollar with respect to permissible central parity with one per cent (± 1%) fluctuation on either side.
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  Post Bretton WoodsPeriod (1971-1991) • Two major events took place in 1973-74 when oil prices were quadrupled by the Organisational of Petroleum Exporting Countries (OPEC). • From 1977 to 1985, US dollar observed fluctuations in the oil prices which imposed on the countries to adopt a much flexible regime i.e. a hybrid between fixed and floating regimes.
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  Current Scenario ofExchange Regimes • Exchange arrangement with no separate legal tender • The members of a currency union share a common currency. • Currency Board Agreement • There is a legislative commitment to exchange domestic currency against a specified currency at a fixed rate. • Conventional fixed peg arrangement • Country pegs its currency to another, or to a basket of currencies not exceeding +/- 1 • Up to 1999, thirty countries had pegged their currencies to a single currency
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  Current Scenario ofExchange Regimes • Pegged Exchange Rates Within Horizontal Bands • It is a middle way between a fixed peg and floating peg. • Crawl ing Peg • A currency is pegged to another currency or a basket of currencies but the peg is adjusted periodically which may be pre-announced or discretion based or well specified criterion. • Crawling bands •The currency is maintained within a certain margins around a central parity which 'crawls' in response to certain indicators.
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  Current Scenario ofExchange Regimes • Managed float • In this regime, central bank interferes in the foreign exchange market by buying and selling foreign currencies against home currencies without any commitment or pronouncement. • Independently floating • Here exchange rate is determined by market forces and central bank only act as a catalyst to prevent excessive supply of foreign exchange and not to drive it to a particular level.
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  The Era ofEuro and European Monetary Union • As a failure of the Smithsonian agreement in 1973, some countries of Europe met together to form a union which was basically an attempt to keep the member countries exchange rate. • This was known as 'Snake in the Tunnel' and in 1979 the 'snake' became the European Monetary System (EMS) with all EEC countries joining the club except Britain.
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  • The ECUwas the sponsor of 'EURO' commonly shared by eleven member countries. • This was mainly an attempt to create a single economic zone in Europe with complete freedom of resource mobility within the zone. • In November, 1999, central banks of EEC finalised the draft statute for a future European Central Bank. The Era of Euro and European Monetary Union
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  • The conceptof European economic and monetary union received shake when in 1992 referendum, Denmark people (Danish) rejected the "Maastricht Theory" and Italy and Britain faced political anger against it. • Debates were going on to resolve the conflicts and ultimately in Dec. 1996 "Growth & Stability Pact" was agreed upon in Dublin. • As a consequence of this agreement, 'EURO' came into existence on January 1, 1999 and trading began on January 4, 1999. The Era of Euro and European Monetary Union