The global financial and monetary order

1. The Global Financial and
Monetary Order
Group Member
•Sadia khan
•Rabeea bibi
•Bista faraz
•Zeenat bibi
•Anza zafar

2. Introduction
Presented by
Sadia khan

3. The International Monetary System
– The international monetary system refers to the institutional
arrangements that countries adopt to govern exchange rates
– (i) the set of conventions,
– rules and policy instruments as well as
– (ii) the economic, institutional and political
– environment which determine the delivery
– of two fundamental global public goods: an
– international currency
– (or currencies) and
– external stability

4. Desirable objectives of the
international monetary
– The desirable objectives of the international monetary
system are.
– 1) exchange rate stability.
– 2) being able to run an independent monetary (and more
broadly economic) national policy, for example a fiscal
deficit when needed to boost economic growth.
– 3) enjoy freedom of capital flows, in order to have a
more efficient financial system, international investment
etc. As we shall see this third point is now being
challenged.

5. Desirable objectives of the
international monetary
Desirable objectives of IMS:
– 1) exchange rate stability;
– 2) independent monetary policy;
– 3) free capital flows.
– The three objectives however are incompatible,
only two are achievable at the same time.
– Under Bretton Woods there was 1 and 2, but not
3.
– Currently most countries, have 2 and 3, but not 1.
– The Euro means that each EU member state enjoys
1 and 3, but not 2.

6. Floating exchange rate system
–A floating exchange rate system exists when a
country allows the foreign exchange market to
determine the relative value of a currency
– the U.S. dollar, the EU euro, the Japanese yen, and
the British pound all float freely against each other
– their values are determined by market forces and
fluctuate day to day

7. Fixed exchange rate system
–A fixed exchange rate system exists when
countries fix their currencies against each other
at some mutually agreed on exchange rate
– European Monetary System (EMS) prior to 1999

8. Which Is Better – Fixed
Rates Or Floating exchange Rates?
– fixed exchange rate system
1. Provides monetary discipline
– ensures that governments do not expand their money
supplies at inflationary rates
1. Minimizes speculation
– causes uncertainty
1. Reduces uncertainty
– promotes growth of international trade and investment

9. Which Is Better – Fixed
Rates Or Floating exchange Rates?
– Floating exchange rates provide
1. Monetary policy autonomy
– removing the obligation to maintain exchange rate parity
restores monetary control to a government
1. Automatic trade balance adjustments
– under Bretton Woods, if a country developed a permanent
deficit in its balance of trade that could not be corrected by
domestic policy, the IMF would have to agree to a currency
devaluation

10. CREATION OF THE BREETON WOODS SYSTEM
• The United Nations Monetary and Financial Conference was held in July 1944 at the
Mount Washington Hotel in Bretton Woods, New Hampshire,
• It was an unprecedented cooperative effort for nations that had been setting up
barriers between their economies for more than a decade.
• Those at Bretton Woods envisioned an international monetary system that would
ensure exchange rate stability, prevent competitive devaluations, and promote
economic growth.
The 730 delegates at Bretton Woods agreed to establish two new institutions.
The International Monetary Fund (IMF)
The World Bank

11. – In 1944, representatives from 44 countries met at
Bretton Woods, New Hampshire, to design a new
international monetary system that would facilitate
postwar economic growth
– Under the new agreement
– a fixed exchange rate system was established
– all currencies were fixed to gold, but only the U.S. dollar was
directly convertible to gold
– devaluations could not to be used for competitive purposes
– a country could not devalue its currency by more than 10%
without IMF approval
CREATION OF THE BREETON WOODS
SYSTEM

12. THE RISE AND
DECLINE OF
THE BREETON
WOODS
SYSTEM
Rabeea Bibi

13. The Breeton Woods system was based on four key
elements:
– The member states adopted fixed but adjustable exchange rates, with the US
dollar serving as an anchor currency. The dollar itself was linked to gold, and
other currencies were allowed to fluctuate within 1 per cent of their fixed rate to
the dollar.
– Although the removal of restrictions on capital movement was the ultimate goal,
the Bretton Woods system allowed countries to retain capital controls initially to
help them stabilise the system and adjust their domestic economy to it.
A ‘scarce-currency’ clause was established that allowed restrictions of imports
from countries that ran persistent payment surpluses and whose currencies
became scarce within the Fund.
– The International Monetary Fund (IMF) and the World Bank were created as the
main institutions supporting the new international monetary order.

14. What Institutions Were
Established At Bretton Woods?
– The Bretton Woods agreement also
established two multinational institutions
1. The International Monetary Fund (IMF) to
maintain order in the international monetary
system through a combination of discipline
and flexibility
2. The World Bank to promote general economic
development
– also called the International Bank for
Reconstruction and Development (IBRD)

15. What Institutions Were
Established At Bretton Woods?
1. The International Monetary Fund (IMF)
– fixed exchange rates stopped competitive devaluations and brought
stability to the world trade environment
– fixed exchange rates imposed monetary discipline on countries,
limiting price inflation
– in cases of fundamental disequilibrium, devaluations were permitted
– the IMF lent foreign currencies to members during short periods of
balance-of-payments deficit, when a rapid tightening of monetary or
fiscal policy would hurt domestic employment

16. What Institutions Were
Established At Bretton Woods?
2. The World Bank
– Countries can borrow from the World Bank in two ways
1. Under the IBRD scheme, money is raised through bond sales
in the international capital market
– borrowers pay a market rate of interest - the bank's cost of funds
plus a margin for expenses.
1. Through the International Development Agency, an arm of
the bank created in 1960
– IDA loans go only to the poorest countries

17. Why Did The Fixed Exchange Rate
System Collapse?
– Bretton Woods worked well until the late 1960s
– It collapsed when huge increases in welfare programs and the
Vietnam War were financed by increasing the money supply and
causing significant inflation
– other countries increased the value of their currencies relative to the U.S. dollar in
response to speculation the dollar would be devalued
– However, because the system relied on an economically well
managed U.S., when the U.S. began to print money, run high trade
deficits, and experience high inflation, the system was strained to
the breaking point
– the U.S. dollar came under speculative attack

18. THE RISE AND DECLINE OF THE
BREETON WOODS SYSTEM
– The last two centuries have seen a succession of different international monetary
systems.
– The era of the Gold Standard, which lasted from the 1870s to 1914, is widely
credited with providing stability and confidence in the major currencies that
formed part of the system.
–
– The Gold Standard was suspended during the the First World War, but following
the end of the war there was a futile attempt to restore the Gold Standard at pre-
war exchange rates.
– From the 1930s onwards, the economic dislocations of the war forced one
country after another to abandon attempts to fix their currency to the Gold
Standard.

19. RISE AND DECLINE
– The economic crisis of the inter-war years, which was one of the
factors contributing to the outbreak of the Second World War.
At the Bretton Woods conference in 1944, the United States and
Britain played a pivotal role in designing a new framework for
international monetary relations.
Bretton Woods was to provide international stability while avoiding
the shortcomings of previous monetary systems.
The leading economic powers restored a system of fixed exchange
rates and international cooperation linked with the promise of
domestic autonomy in economic policy-making, which John Ruggie
called the ‘compromise of embedded liberalism’.

20. Global monetary
order after
Bretton Woods
Presented by:
Bista Faraz

21. Jamaica Agreement
– A new exchange rate system was established in 1976 at
a meeting in Jamaica
– The rules that were agreed on then are still in place
today
– Under the Jamaican agreement
– floating rates were declared acceptable
– gold was abandoned as a reserve asset

22. The post-Bretton Wood international monetary
system
– Fixed exchange rates broke down in 1971. What followed
were fluctuating exchange rates with no general rule on
exchange rate adjustments.
The dollar remains the key reserve currency, although the
system is based on some cooperation.
– The IMF act as regulator of the world international
monetary system.
– National economies would be more independent of each
other

23. Critics over floating exchange rate
– Threaten trade and undermine the long-term planning of
companies operating internationally.
– Governments might be tempted to use aggressive
devaluations(reduction in the official value of a currency in relation
to other currencies.) of their currency to boost export industries
– Flexible rates made currencies more volatile(uneasy),
– The fluctuations between the major currencies did not lead to
economic turmoil(disorder).
– USA continued leverage as the predominant economic power

24. – Frustrated by a lack of international cooperation, the
European countries sought their own solution
– creating a separate monetary order for Europe
– Europe’s leading economies were more open to
international trade than the USA and
– stability and predictability.
– These efforts supported by European Economic
Community

25. ‘European Snake’ in 1971
– limited the fluctuations of European currencies against each other
to 4.5%.
– oil price rises and inflationary(prses rise) pressures, the Snake failed
to live up to expectations.
– 1979 European Monetary System (EMS)
– policy oversight that was missing in the Snake
– interim step towards a full monetary union and single currency
– withdrawal in 1992 of Britain and Italy from the EMS underlined the
weakness of its monetary disciplines.

26. 1999 as European Monetary Union
(EMU)
– EMS crisis gave the final inspiration to the creation of a
full monetary union
– 1999 EMU established
– Euro replacing national currencies as the new single
currency.
– EMU provided the ultimate solution to the inherent
conflict between fixed rates and domestic autonomy.

27. 1999 as European Monetary Union
(EMU)
– It is an expansion of the EU single market,
– with common product regulations and
– free movement of goods, capital, labour and services.
– A common currency, the euro, has been introduced in
the eurozone, which currently comprises 19 EU Member
States

28. – single currency advantages:
– it lowers the costs of financial transactions,
– makes travel easier,
– strengthens the role of Europe at international
level

29. Euro crises
– 2008 global financial crisis
– rapidly rising budget deficits
– Eurozone member states (Greece, Portugal, Ireland, Spain and
Cyprus) were unable to repay or refinance their government debt
– 2010, the EU needed to set up a mechanism for supporting members
of the Eurozone
– that experience difficulties in refinancing their public debt
– Euro crisis has thus brought into sharp focus the difficulty of
sustaining a common currency system.

30. The IMF and
international
debt crises
Presented by :
Zeenat Mughal

31. What Has Happened To Exchange Rates
Since 1973?
– Since 1973, exchange rates have been more volatile
and less predictable than they were between 1945 and
1973 because of
– the 1971 and 1979 oil crises
– the loss of confidence in the dollar after U.S. inflation in 1977-
78
– the rise in the dollar between 1980 and 1985
– the partial collapse of the EMS in 1992
– the 1997 Asian currency crisis
– the decline in the dollar from 2001 to 2009

32. The IMF and international debt crises
The IMF’s original role was to provide short-term lending to
countries with balance-of-payments problems but with the end of
the Bretton Woods system this role was no longer central to the
IMF’s mission.
With global financial liberalisation and greater capital flows to
emerging economies in the developing world during the 1970s,
the IMF shifted its focus to dealing with problems of indebtedness
and long-term structural economic problems.
One of the key events of the 1980s that was to underline the
importance of the IMF was the debt crisis that afflicted a number
of developing countries.

33. – Today, the IMF focuses on lending money to countries
in financial crisis
– There are three main types of financial crises:
1. Currency crisis
2. Banking crisis
3. Foreign debt crisis

34. Between the early 1970s and the mid-1980s, total debt by
governments rose from around $100 billion to nearly $900 billion.
In the case of the developing countries that took on an ever growing
debt burden in the 1980s, indebtedness became a key factor holding back
their developmental efforts.
In Latin America – with some of the most heavily indebted countries
of all, such as Mexico, Argentina and Brazil – the 1980s became known
as the ‘lost decade’.
The debt crisis started in 1982, when the Mexican government
nearly defaulted on its loan obligations. With a debt burden of $86
billion, Mexico’s debt crisis soon assumed international dimensions.

35. Heavily exposed creditor nations such as the United States could not
afford to let indebted countries default, as this would threaten the
stability of their own financial system.
The USA and European governments, private banks and the IMF
responded by setting in motion a process of debt rescheduling that aimed
at averting a global crisis while allowing for structural reforms to take
place.
 In this context, the IMF assumed the central role of negotiating
rescheduling terms with debtor nations, leading the way for agreements
between debtors and private banks.

36. The creditors thus acted like a cartel, and were able largely
to impose their preferences on the affected developing
countries.
The threat of international contagion effects should large
debtor nations default, served to rein in the power of
creditors and forced them to continue to supply capital to
pull the international financial system back from collapse.

37. Managing
Financial
Crises
Presented by
Anza Zafar

38. – Financial crisis
– Financial crises seem to be endemic in the global
financial system.
– Speculative bubbles, macroeconomic policy failures
and volatile market reactions are a recurrent feature of
the international economy.
– International financial system is prone to look like
irrational market behavior and international contagion.

39. Asian crisis of 1997
– The Asian financial crisis, also called the "Asian Contagion," was a series
of currency devaluations and other events that spread through many Asian
markets beginning in the summer of 1997.
– Asian crisis of 1997 exhibits some of the central features of financial crises,
private capital was pouring into the region to the tune of $40 billion and $32
billion in 1995 and 1996 respectively.
– Much of this capital inflow, was short-term and could be reversed quickly if
the economic climate worsened. This is indeed what happened from 1997
onwards, with net capital outflows from East Asia reaching $40 billion in 1998.

40. – The crisis was triggered by Thailand’s decision to end the
currency peg of its national currency with the US dollar in
response to speculative pressure from currency traders.
– The financial crisis quickly developed into a broader economic
crisis in East Asia, with many countries seeing both an outflow of
capital and a decline in economic prosperity, with often
disastrous social consequences.

41. International Response to
1997Crisis
– The international response to the crisis was initially slow and
insufficient.
– The IMF’s aid offers to Thailand and other affected countries
failed to restore confidence or prevent the international
contagion effect.
– Backed by the United States, the IMF prescribed a strong and
bitter medicine: the troubled economies of East Asia had to cut
back public spending, raise interest rates and increase the value
of their currencies.
– These measures were meant to restore the credibility of
macroeconomic policy in the region, but there was a high social
cost.

42. – The role of the IMF in preventing, and managing, financial
crises. The key questions in this debate concern, among other
issues:
1.The conditionality of IMF aid
Conditions imposed by IMF loans often led to serious clashes
with local governments and populations.
2. The problem of moral hazard
By offering aid before or during a financial crisis, the IMF may
encourage countries to abandon economic prudence and rely
on bailouts by international donors.

43. Financial Crisis of 2008
– A decade after the Asian crisis, another financial crisis hit the
world economy in 2008.
The crisis started in 2007, Over many years of low interest rates, lax
bank lending practices and inadequate regulation by
governments, a speculative bubble had been building up in the
real estate sector which finally burst in 2007.
– The risks to the global financial system became apparent in 2008
when Lehman Brothers, one of the world’s largest investment
banks and heavily exposed to the subprime mortgage crisis, went
bankrupt.

44. – The US government refused to bail out Lehman Brothers, but as
panic started to spread in the worldwide market. The government
authorized a large rescue package to support banks at risk and to
inject a fiscal stimulus into the ailing US economy.
– By this time, the global dimensions of the crisis were all too visible,
with ever more governments in the industrialized world stepping in
to support the banking system and economic activity more
generally.
– The global financial crisis signaled a wider malaise of global
capitalism, indeed a fundamental crisis of capitalism as Marx and
neo-Marxists had long predicted.

45. Cause of crisis
– The main reason behind the events of 2007–08 was a weak regulatory system for
the banking system, which failed to detect the build-up of a speculative bubble in
the housing market and allowed banks to take overly large risks that posed a wider
systemic threat to the stability of the financial system.
– Confidence in the functioning of the market system was severely shaken, and
governments around the world were called upon to step in and rescue the banking
system. In the immediate aftermath of the crisis, the political pendulum seems to
have swung back in favor of governments that came to the rescue of the global
economy.
– However, the large-scale spending programmes combined with a fall in tax revenue
due to the global recession has forced governments to cut back expenditure again
in an effort to balance budgets and avoid a further loss of confidence in global
financial markets. It is thus too early to tell how the global financial crisis will affect
the role of the state in the global economy.

46. – Confidence in the functioning of the market system was severely shaken,
and governments around the world were called upon to step in and rescue
the banking system. In the immediate aftermath of the crisis, the political
pendulum seems to have swung back in favor of governments that came to
the rescue of the global economy.
– However, the large-scale spending programmes combined with a fall in tax
revenue due to the global recession has forced governments to cut back
expenditure again in an effort to balance budgets and avoid a further loss
of confidence in global financial markets. It is thus too early to tell how the
global financial crisis will affect the role of the state in the global economy.

47. Thank
you