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Polish inflation and Zloty devaluation

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OCTOBER 29, 2001 BusinessWeek. Now, Argentina's Default Looks Inevitable ... Any hopes that Argentina would eventually emerge from a four-year recession were ... – PowerPoint PPT presentation

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Title: Polish inflation and Zloty devaluation


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Polish inflation and Zloty devaluation
Devaluation
Inflation
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Direct costs of September 11 Attacks
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  • 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.

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Emerging Economies Net capital flows
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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.

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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 investors 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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