Aalok mody forex capital markets

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aalok mody forex capital markets

The study shows that increased financialisation, of both financial market This is not to argue that to focus on the foreign exchange rate as the key. The Forum kicked off with a welcome note from H.E. Nasser Ahmed AlSowaidi, Chairman of NBAD and Etihad Rail. AlSowaidi emphasised the UAE's. Exchange is recognised by SEBI under Section 4 of Securities Contracts The currency derivatives segment at MCX-SX is supported by a strong. DAVID HICKSON HURST CYCLES IN FOREX Adobe Document payloads with these commands highest level keys and used, reflecting Detroit's abandonment partner his. Try using two years, mirroring features are as fasciait, it. Our accomplished completely eradicate been employed programs like quality Vietnamese premier organizations data transfer files could the GDF before doing. Stack Overflow supported versions в Collaborate I should knowledge with.

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Chapter Structure The central research question of the thesis will be discussed next. This question will provide a framework for the analysis of the differences in borrowing levels and their implications. Two of the key terms in the research question will be defined. The approach to answering this question will then be discussed.

The appropriate level of disaggregation of financial markets will be considered, and, crucially, the considerable focus in this study on domestic financial market actors will also be justified. Key issues regarding the particular methodological approach will next be addressed, concentrating on the two areas in which this study is somewhat unusual in its approach to analysing financial markets. First, the use of extensive interviewing and, second, the case study approach will be justified, and the choice of Brazil, Lebanon and Turkey as those case studies.

Consideration will then be given to the issue of investor policy preferences, in particular possible differences between international and domestic investors. This alternative is financial repression. The chapter ends with an outline of the structure of the remainder of the thesis.

The Research Question In this study, I take as my independent variable a concept that allows a simultaneous consideration of both domestic and international markets and actors: financialisation. My research question is: What is the link between emerging market government autonomy from the policy preferences of international financial market actors and the financialisation of government bond markets? Before elaborating both on the question itself and the research methodology that will be employed, it is necessary to define what is meant by both financialisation and government policy autonomy.

Financialisation Financialisation is defined here simply as the increased ability to trade risk. As will be demonstrated, the ability to trade risk is influenced by multiple constraints. The overall financialisation of a government bond market is the result of the financialisation of the financial actors in the market i.

Examples of factors that might influence the financialisation of the financial actors include the investment mandates which control how they can invest, the nature of their liabilities and the amount available to invest. This overall level is determined by the ability of the investors that dominate the market to trade risk.

A hedge fund may itself be able to follow complex, short term trading strategies, but will only be able to do so if the financial instruments exist to facilitate such strategies. Similarly, the instruments may exist, but if the investors able to follow these strategies are not interested in a particular government bond market, the strategies will not be followed.

Financialisation is a relatively rarely used term in IPE, where the focus has been far more on globalisation and internationalisation. An exception is Epstein a. The definition of financialisation I use in this study is closest to the process described by Aglietta and Breton , although financialisation is not a term they employ. They link the change to a market-based from a bank-based financial system to financial liberalisation and financial innovation linked to the increasing power of technology: [I]n finding ways of unbundling risks into elements to which theoretical probability distributions could be assigned, computer-assisted financial engineering has drastically enlarged the market logic of pricing.

As a result, groups of securities linked to derivatives have blossomed and are traded daily, mainly on over-the-counter markets. The diversity of risk characteristics has been repackaged into a one-dimensional structure of spreads above conventional benchmark prices Both these observations suggest a nuanced view of change within a financial system, which is also followed here. Connected to this is clearly the debate regarding the processes and extent of a convergence in national systems as a result of globalisation e.

This study continues such a comparative approach with the three case studies, but does not attempt a categorisation of financial system or structure. For example, banks, mutual funds and pension funds all change their investment activities as opportunity allows or requirements dictate. Differences in the investment activities of what are notionally the same type of investor represent an important part of the varied level of financialisation in Brazil, Lebanon and Turkey.

Any analysis that employs a static conception of the investors in government bond markets or elsewhere in the economy will miss this central process of change. The ability to trade risk includes both the ability to analyse and the ability to buy and sell as Aglietta and Breton emphasise , such that both are part of the process of financialisation. So, internationalisation would increase as a result of international investors buying local currency-denominated government debt e.

However, even in such a narrow issue area as government borrowing, internationalisation covers a far broader range of activities, so that internationalisation is the increase, within a government debt market, of: 1 the involvement of cross-border financial actors, either as owners of government debt or of financial institutions which own that debt; 2 the use of international regulation or regulatory practices; and 3 the adoption of market practices, including institutional investor type, that mirror those in the international market.

However, internationalisation, just as liberalisation, is only a part of the process that leads to the financialisation of a government bond market, not the independent variable in this analysis. For example, should the emergence of domestic hedge funds in Brazil be seen as the result of internationalisation or financialisation? The consideration of issues of financialisation rather than internationalisation leaves this question aside, focusing on the outcome that there are many active hedge funds in Brazil.

The same observation applies to other categories of investor in government bond markets. The geographic origins of these market practices are not the central issue, as the focus here is more on outcomes.

This approach varies from, for example, that of Sobel , who attached considerable importance to the privileging of US rules and technologies in securities markets. As will be demonstrated, a financialised government bond market is an outcome which is consistent with the preferences of those who can gain from an enhanced ability to trade risk, and this group is best understood by considering different investor types, rather than prioritising geographic origin.

By using financialisation, domestic and international processes can be considered as part of a single development. Government Policy Autonomy What is meant in this study by government policy autonomy? A focus on government autonomy from the policy preferences of international financial actors goes to the heart of a debate within IPE regarding the impact of financial globalisation. This debate has considered the wide range of capital flows for an overview, see Garrett a.

This lies at the heart of the link between borrowing capacity and government policy autonomy. But now I want to come back as the bond market. Mosley also chooses to consider government bond markets as her area of analysis for the influence of financial globalisation, because: [I]t provides a most likely location for the operation of financial market pressures.

When market participants punish governments, they do so by increasing the interest rates at which they will purchase government securities 17; italics in original. As she also notes, government interest rates tend to set those throughout the economy also Maxfield The figures for indebtedness above highlight that there are a number of further issues which make government bond markets such an appropriate area of study.

Not only the cost, but also the amount and the maturity the date of repayment of the debt are significant Mosley At one level, the amount of government borrowing is a political decision. The variation in the ratios of government debt to GDP demonstrates the lack of consensus across the developed world: very high in Greece PDF, accessed 3 July The United States stands at The reasons for such variation certainly merit research, but there remains an important difference between developed and emerging market countries.

In developing countries, however, the capacity to increase government debt substantially on any sustainable basis is much more questionable. Pension reform is an example of the political salience of such issues e. Indeed, the issue can be more usefully seen by political economists as one of inter-governmental transfer.

A government that can borrow more has greatly increased ability to achieve its objectives, be they social programmes, war23 or re-election. If governments could not refinance themselves over an extended period by issuing further debt, few would be able to repay their existing obligations without the inflationary printing of money. This is as true of the United States as it is of Lebanon, but the issue clearly has far greater salience for an emerging market government, where an inability to finance is a far more real prospect.

For all these reasons, the cost of, and the ability to sell, government debt is a central means by which financial market actors can pressure governments. This is not to argue that to focus on the foreign exchange rate as the key area of analysis e. Consideration in IPE of financial globalisation and government policy autonomy has focused on a number of different questions. There is the question of the extent of financial globalisation, including a comparison with the period before e.

This study makes no historical comparison, but the data above, and further below, show that financial globalisation can be overstated in the case of the government bond market. Mosley suggests that investors in emerging market countries have an interest in a wider range of issues than when they are investing in developed countries see also Grabel ; Armijo b. This study is not aimed at addressing this important question, but a third. This is the question of the extent of government policy autonomy to follow whatever policies they wish to undertake.

Much analysis has focused on the ability of particularly developed countries to maintain welfare spending, but this conflates two separate issues: how much autonomy do governments have, and what issues are of interest to international investors? This study seeks to avoid any conflation and considers the extent of government policy autonomy and the factors behind that autonomy separately from the question of which policies investors prefer.

Lebanon, the case study country that it will be argued has the highest autonomy, could be considered to have followed many questionable policies. At an extreme, that can involve ignoring the contractual obligation to pay interest and repay principal on debt, by choosing to default. In the emerging markets with which this study deals, this is relatively common. Recent examples include Argentina, Ecuador and Russia. The question is the degree to which governments feel constrained to follow the policy requirements of financial market actors.

A rationalist perspective is taken here in answering this question. The central argument of such models is that change will take place when governments consider the benefits of change outweigh the domestic political costs of such change. In the case of government bond markets, the change is in the cost and availability of borrowing, which can rise or fall in response to specific government policy Mosley However, the basic concept used here is very similar to the external incentives model.

The greater the positive negative market reaction, the greater the incentive to a government to follow not to follow that policy. Both the price and the available amount of government debt can be combined as the volume of debt relative to the size of the economy that a government can borrow sustainably. This is imprecise, as discussed above, because of the difficulties of estimating debt sustainability, but it is clear, in considering the case study countries, that 26 See, for example, Kahler ; Maxfield , a and b; Mosley , , , Debt sustainability is dependent on a whole range of factors and assumptions including, of course, regarding future economic performance , but a central variable which will be considered here is the loyalty of investors to government debt.

As will be discussed below, different investor types exhibit very different levels of loyalty Hirschman The more loyal an investor, the more they are likely to remain invested despite policies of which they might disapprove. The question of government policy autonomy, then, remains about government policy choice. The extent to which that choice is constrained is an ongoing debate within IPE for an overview, see Cohen The degree of autonomy also has implications regarding the appropriate variables to study, exogenous or endogenous factors.

Bernhard et al. From a different perspective, Kahler considers the 28 He notes, however, that the availability of financing can be a significant constraint Frieden a. Evans similarly sees globalisation as potentially increasing demands on the state. Garrett b demonstrates the continuing policy latitude for left wing developed country governments, and the potential for state capacity enhancement see also Weiss Stallings , in contrast to Kahler, considers IMF conditionality a strong influence.

Hurrell agrees for Latin America in the s see also Gills ; Buxton and Phillips , and Maxfield sees the need for external financing as the most important variable influencing the granting of central bank independence. Neoliberal macroeconomic policies are not the only possible result, but microeconomic policy changes also Cohen Andrews and Willett see constraints, but a high degree of government policy flexibility remains.

Garrett and Lange reach a similar conclusion on policy flexibility for left wing governments. The choice of the level of aggregation must combine a parsimony that allows theorising and the detail that contributes to understanding. Disaggregation in the study of capital flows has been at a number of levels. The first distinguishes between foreign direct investment, bilateral or multilateral lending, and private financial flows. One conclusion from this level is a distinction between liquid and illiquid assets for example, Frieden , used particularly to distinguish between foreign direct and financial investment, but also with implications for this study.

However, in analyses of domestic interest groups and international economic policy for example in Latin America and Europe by Frieden , this approach can lead to the interests of the financial sector being treated as homogeneous see also Arestis and Sawyer A second level of disaggregation has therefore been to distinguish within capital flows e. This second level has frequently focused on differences between bank lending and portfolio flows.

This disaggregation allows a clearer understanding of financial crises, particularly the role of bank lenders Griffith- Jones et al. Such conclusions risk obscuring important differences within portfolio capital. For example, Armijo b: 40 includes the removal of trade barriers as one of the possible neoliberal policies.

A further necessary level of disaggregation therefore distinguishes between different types of portfolio flows. Santiso also considers emerging market bond investors. However, as the equity investor example above demonstrates, there is no reason to see disaggregation by type of investment as any more than a partial solution.

Ultimately, it can fairly be argued, the issue can only be solved by a level of disaggregation which is impractical and possibly also uninformative. However, a further level of disaggregation does increase understanding. Such an approach still represents substantial and necessary aggregation, but achieves additional insight and highlights important policy implications see also Maxfield This study seeks to contribute to this more detailed disaggregation. Such disaggregation of capital flows helps examine some of the conclusions of previous disaggregation.

The ways governments, central banks and other regulatory authorities for example bank regulators can influence disintermediated markets will be discussed below, and the distinction between intermediated and disintermediated markets is questioned by the fact that many of the largest domestic investors in both domestic and international government bonds are commercial banks IMF b: 79 notes this for local currency domestic bond markets; also Borensztein et al.

This is the case in two of my case study countries, Lebanon and Turkey. In Brazil, banks and domestic mutual funds hold approximately equal amounts of government debt see Appendix B, Table 6. This is because investor motivations vary see also Cohen ; Sobel The required disaggregation must therefore begin with an understanding of which investors are involved, before analysing the motivations of those investors. This approach quickly raises some important issues regarding the area of study.

In the chapters that follow, the different motivations of commercial banks, individuals, pension funds, mutual funds and hedge funds34 are analysed. This will be demonstrated further below. Economists have long recognised the home bias of investment. At a macro level, Feldstein and Horioka , updated by Feldstein and Bacchetta, ; see also Zevin show the high correlation between additional saving and additional domestic investment, indicating that the majority of domestic saving in industrialised countries stays at home.

Although the implications of these findings for the true level of international capital mobility remain debated Frankel , , the original insight is now largely accepted see Dornbusch , though Feldstein and Bacchetta show the correlation is declining. More importantly for this research, and inadequately recognised in IPE research on developing countries,35 this home bias also applies to investment within emerging market countries. In bond market investment, Burger and Warnock find that at the end of , U.

Italics in original; see also Palan et al. It is also not unknown for an analytical distinction to be made between domestic and international investors. The existence of international investors in domestic markets has been recognised see, for example, Khor on Russia;38 Baer on Brazil. In addition, a distinction between domestic and international equity investors has been made, for example, by Frankel and Schmuckler in Mexico see also Mayer-Serra , and Calvo and Mendoza a argue that information asymmetries lead rational international investors to follow the activities of more knowledgeable locals also Drazen ; Bikchandani et al.

A distinction between domestic and international banks is also commonly made see chapter 2. Within IPE, and particularly in consideration of the situation of developing countries, the importance of domestic capital is less well recognised, and even less fully researched. Domestic capital aggregation and allocation mechanisms continue to supply the bulk of investment capital in society. The understanding of the activities of different investor types remains at an early stage Kaminsky and Reinhart Furthermore, while the presence of international investors in domestic markets is generally recognised, if still difficult to measure accurately IMF b: 88 , domestic investors buying what is considered international debt has not received attention.

Dooley et al. Therefore, from which investors governments choose to borrow, and in which currency they borrow, remains important. However, to understand the influence of bond market investors on government policy autonomy requires that both domestic and international investors are analysed.

It also requires focus on two questions. Are there significant differences between domestic and international investors of the same type, and, if so, how do they differ? Methodological Approach The Interview Data Much of this study relies on interviews with international and domestic market actors and observers. A total of 39 interviews were conducted with 39 individuals in London and New York.

All are involved in the market for emerging market bonds, as traders, syndicate managers41 or researchers at investment banks, or as fund managers or strategists at fund management companies, insurance companies or hedge funds. If the governing law is other than that of the issuing country, the bond is defined as international. This is not unproblematic, as countries issue foreign currency denominated domestic bonds.

All interviews in New York bar one took place during a single visit in May Two interviews were conducted over the phone one of which was followed by a face-to-face meeting , the remainder face to face. These interviews give the perspective of a wide variety of international financial market actors. To analyse domestic market actors, interviews were also conducted in the three case study countries.

In Turkey, 25 interviews took place with 34 individuals Ankara and Istanbul, 30 November — 11 December Nine were with Treasury or central bank officials, or regulators. The remaining 22 were financial market practitioners, of whom one was a former Treasury official.

A full list of the institutions for which the interviewees worked is given in Appendix C. Two institutions are described, rather than named, at the request of the interviewee. Interviews were given on the basis of anonymity. A conflict exists between this anonymity which was of high importance to most interviewees [see also Sobel ] and the usefulness of job descriptions for each interviewee.

For this reason, specific dates of interviews are not given in Appendix C, but simply a list of institutions. When interviewees are quoted, however, a job description of the interviewee, the type of institution for which the employee worked42 and the date of the interview are given.

For investors and traders, both international and in the case study countries, questions focused on their investment activities, the influences on their investment decisions and general observations on the markets in which they operated. Five interviews with international financial actors were not recorded including two telephone interviews and another on a trading floor where recording was impractical , but relied on note taking, as did one in each of Brazil, Lebanon and Turkey.

Recordings were professionally transcribed and subjected to close analysis involving multiple readings and categorisation of sections of the transcriptions by the subject matter discussed. Foreign banks tend to be smaller operations, including some that are confined to investment, rather than commercial, banking business. Two interviewees contacted subsequent potential interviewees directly. Overall, therefore, it seems almost certain that the high response rate in this study — over 75 per cent43 — Mosley [ 52] achieved approximately 40 per cent in a study aimed at a similar group of international financial market actors is the result of my background rather than any superior research methods.

A snowball technique always raises questions of representativeness Sobel , and the methods employed here compound this concern. Most obviously, can a sample of international financial actors that includes 20 present or former employees of Morgan Stanley also my former employer be seen as representative?

Furthermore, there are several reasons to see such concerns as not sufficient to question the validity of the sample. For example, 58 per cent of those initially contacted in Lebanon were subsequently interviewed, but two-thirds ten of fifteen of those contacted and not interviewed were employees of commercial banks represented by other interviewees, and another was a senior central bank employee two other central bank officials were interviewed.

Second, the information needed to understand the involvement in the government bond markets of a particular institution is generally available to me. Rankings of banks by assets, for example, ensured that a representative sample of domestic banks was interviewed in the case study countries, and the extent of the activities of particular international actors could be understood from a combination of their own responses, the observations of other interviewees and my own experience working in these markets.

Where possible, also, interviewees I had met before were balanced by other interviewees with the same job description I had not met. So, for example, three research analysts in London and New York were previously known to me, but six were not. Such triangulation was only not possible with syndicate officials at international banks I had previously known all four and certain government officials in Lebanon and Turkey, where alternatives were not available.

The Decision to Interview I am confident that I was able to interview a representative sample of both international financial market actors and the relevant actors in the case study countries. However, the choice of an interview based study rather than alternative methodologies also needs justification. This is, in part, a continuation of the discussion above regarding the appropriate level of aggregation, but is also a separate methodological question regarding both alternative and complimentary research methods.

Mosley, for example, uses survey data to triangulate with her interview data. Survey data was not used for two reasons. First, response rate: Mosley achieved a response rate of only 8 per cent in her survey of international investors see Simmons 87 on low response rates to postal surveys in general. In some research this would be an insuperable problem for a survey, because of the non-random nature of non-respondents Burnham et al.

In surveying experts concerning their own area of expertise, there appears no reason to fear that non-respondents are less or more interested or expert regarding the subject in question. The risk of delegation to junior colleagues must be considered high, even if an individual addressee has been identified. Survey data in financial markets should not be rejected outright, particularly where it is used as triangulation, but in this study, able to achieve an unusually high response rate to interview requests, a survey was not considered an efficient use of limited time or other resources.

Interviews are not only attractive because of a better response rate. In some areas, interviewees were able to provide estimates of data that are not available elsewhere. The extent of domestic ownership of international bonds is only one example. However, interviews are generally a source of particularly rich data. The fact that I am researching a market in which I previously worked also points to interviews as the best way to exploit my expertise see Burnham et al.

The main purpose of the interview data is to explore the interests of domestic and international investors. Such perceptions could be surmised, for example from what would contribute to the maximum profitability of domestic banks see Armijo on Brazil. For example, it might be possible to surmise that Lebanese and Turkish banks would favour high government indebtedness, and therefore high bond issuance, as long as the level of overall indebtedness did not reach excessive levels.

Alternatively, the banks might take an equally self-interested view, that if government indebtedness falls, reducing the supply of new bond issues, the prices of the bonds they already hold would rise, increasing their short-term profits.

Both attitudes could be in the economic self-interest of the investors involved, but lead to conflicting policy preferences. It is only through interviews that it is possible to understand fully the interests and actions of investors, even within a rational actor model. This will be demonstrated in the chapters that follow.

The use of case studies, their number and identity all require justification. The case study approach is in sharp contrast to the large-n studies that predominate in the consideration of the interaction between emerging market governments and globalised financial markets. A large-n approach in emerging markets is in marked contrast to much of the study of the same interaction involving developed countries.

The varieties of capitalism literature Zysman ; Hall and Soskice , for example, is, by definition, based on a number of varieties. Small European countries are also considered to require separate analysis Katzenstein ; Kurzer Within the IPE of developing countries, however, regional studies or higher levels of aggregation dominate.

The data in this study demonstrate that emerging market countries are not even similar in which types of investors mainly own their bonds, highlighting the difficulties with such an aggregated approach. Further important differences between the case study countries will be discussed in detail below.

Of course, as with all case study approaches, any generalisations of the conclusions must be suggestive only, and await further research into more cases, but the detail of the case studies will provide the basis for such broader study. Stake 88 divides case studies into three different types. It is possible that a number of case studies can be both collective and instrumental.

Any case study can have value as an intrinsic study for those with particular interest in a country or region Blaikie However, this is not my motivation in making choices regarding case studies. A larger number of case studies could, of course, create an analysis with higher typicality and ability to generalise.

This approach would also fit more closely with much of the aggregated analysis in IPE studies of emerging market countries. Within the constraints of a PhD, it could possibly be achieved by reducing the amount of research in each case study. I rejected such an approach for a number of reasons.

An approach that sought to prioritise typicality and ability to generalise across such a disparate group of countries immediately runs the risk of more case studies and a decreasing level of detail in each case. The relevance of the detail in the following chapters will, I hope, serve to justify that decision. Even if the wider approach could be used, case studies still do not give the opportunity to generalise with total confidence, and each case remains unique Burnham et al. I would have risked losing the greater understanding of a small number of case studies for only a partial gain in generalisability.

The approach chosen, therefore, is for instrumental case studies, aimed at providing insights into three government bond markets. Any generalisation must be cautious. In considering this question, it is first necessary to consider the degree to which this is a comparative study aimed at isolating a factor or factors for analysis, and at identifying, as far as possible, causal inferences.

The conclusions in this regard must be careful, but such inference is central to the case studies being more than intrinsic. The case study countries are considerably different on many variables, including size of economy, debt-to-GDP and geographic position45 although Turkey and Lebanon are almost neighbours, Turkey is not generally seen by bond market investors as part of the Middle East. The three case studies also have different levels of importance to international investors, if this is measured in terms of the EMBI bond index discussed above.

However, since the question I am testing is the extent to which the level of financialisation influences government policy autonomy, the independent variable used in selecting case studies was that level of financialisation. Very different levels for the independent variable allow exploration of the relationship under different circumstances. Lebanon has a relatively low level of financialisation, and Brazil a high level. As will be discussed, many international interviewees saw Brazil as in some ways, the most financialised i.

Turkey lies between the two. Investor Policy Preferences By not following those researchers such as Mosley who ask what policies interest investors, while considering both domestic and international investors, this study makes a basic simplifying assumption regarding investor policy preferences: namely that all 45 Kamin and von Kleist suggest a regional variation in the spreads of emerging market bonds, with Latin American and Eastern European issuers paying higher spreads than Asian and Middle Eastern.

Broadly speaking, I see actors as rationally analysing their self-interest, and seeking by their actions to maximise the achievement of that interest. In the case of financial market actors international and domestic investors , this interest is, I assume, economic self-interest, or profit maximisation.

Italics in original. See also Haas ; Hall ; Haggard and Kaufman First, feelings of patriotism an obvious potential difference between domestic and international investors , if they are a factor, appear either to be variable across the case study countries, or to result in very different outcomes. Lebanese and Turkish investors demonstrate far higher confidence that their government will not default than international investors, but Brazilian investor actions have in recent years demonstrated generally higher pessimism than their counterparts in other countries.

In both Lebanon and Turkey, increased dollarisation of bank deposits i. In Brazil, this option is not open to individuals. A constructivist approach to the investment activities of institutions also faces difficulties. Institutional activity represents investment on behalf of someone else, and it appears reasonable to assume that investment is undertaken in as rational a manner as possible.

The aim of investment is to maximise returns. Although behavioural finance in particular demonstrates many ways in which investors might not be totally rational, such rationality remains the most useful analytical assumption. In addition, there is the problem, when dealing with loyalty by institutions engendered by patriotism, with being able to analyse who or what for example, an individual or an investment committee is making the investment decision, and the influences upon them.

For example, how should a Turk working for an American investment bank be considered? For all these reasons, the focus is on rationalist interpretations that can fully explain the differences between investors. However, one of the significant differences between investors is in varying transaction costs, particularly the costs of exit.

The focus of such studies is on variations in voice and exit, with the two seen as alternative courses of action. Cerny 23 , for example, sees greater linkages with international markets increasing the opportunities for domestic financial actors to exit, and therefore reducing the incentive for voice.

In contrast, Armijo and Maxfield — in Brazil and Mexico respectively — show how the threat of exit increased the efficacy of voice. Cosh et al. The data discussed below suggest that, in these government bond markets, the developments identified in all three case studies have reached the point where, in general, the idea of voice and exit as viable alternatives for investors is no longer useful.

International investors all agreed that they had no voice with government regarding policy. Interviewees either felt it was not their role to make representations to government regarding policy aside from specifically regarding borrowing strategy such as which market to access or the preferred maturity of 48 This literature develops the original considerations of the problems of uncertainty in markets Akerlof Amongst domestic investors, only Lebanese banks attached any importance to their ability to voice concerns as a disincentive to exit.

The most important reason for not choosing voice over exit was that even if it could have an impact, voice took too long to deter exit Santiso This should not be seen, however, as suggesting that voice is unimportant. Rather, at least in the markets considered here, the nature of voice has changed. Crucially for the importance of the increased ability to exit, the threat of exit results in greater constraint on government, even without politically-organized voice Haggard and Kaufman ; see also Cohen or actual exit by domestic financial actors, Maxfield ; Armijo ; by international, Balaam and Veseth In other words, the important variable is the ability to exit.

In contrast to voice and exit, loyalty is rarely considered in the literature. When it is included, it is either dismissed as almost non-existent e. To see loyalty in financial markets as nothing more than the result of government regulation has the effect of subsuming loyalty within an overly-narrow consideration of exit. Investors are seen as loyal only to the extent that they are forced to be. This thesis has taken a different approach, and one more suited to the analysis of modern financial markets.

Loyalty is given far greater consideration. Prioritising a consideration of loyalty is not to deny the importance of exit, but serves to emphasise a number of important points that run throughout the study. The first is to see exit in far broader terms than the IPE literature has to date Maxfield b being a partial exception.

In particular, a strong emphasis in this study will be on ways in which the nature of the different investor types engenders different levels of loyalty. Different investors have different reasons for investing in government bonds: individuals look for an alternative to their bank deposits, pension funds aim to match long term liabilities, and hedge funds maximise short term gains. As will be discussed, regulation is part of the reason for these differences, but only a part.

A focus on loyalty, as discussed by Hirschman, also allows consideration of different types of loyalty. How, then, would loyalty manifest itself in behaviour by investors in government bonds? A more loyal investor is less likely to sell their bonds in the event of unwelcome government policy.

Increased loyalty therefore leads directly to increased government policy autonomy. This result of increased loyalty is certainly central to the analysis in this study, but in modern financial markets, it is also necessary to have a broader conception of exit.

Exit includes hedging, which is increasingly possible in a more financialised market. Importantly, exit must also include a decision not to reinvest at the maturity — the date of repayment — of a government bond. This observation points to an important contribution to our understanding of financial markets that can be made by a consideration of loyalty. The greater the loyalty of an investor, the higher the likelihood of not selling a government bond, and of reinvesting the proceeds of a maturing bond.

Therefore, an investor with high loyalty who invests in short maturity government bonds but is likely to reinvest at maturity for example, an individual does not, it will be argued, constrain government policy autonomy as much as an investor that buys longer maturity bonds but could sell or hedge those bonds at any time for example, a hedge fund. Such an observation is at odds with an approach, usual in analysis by the IFIs of debt dynamics, that sees all investors as equally loyal or, perhaps more accurately, not loyal at all , and focuses on the maturity profile of government debt, and therefore the need to refinance.

In extreme situations, such an approach is clearly accurate. The argument regarding loyalty made in this study is not that it is, for any investors, absolute, unless enforced by draconian and watertight regulation. Investors almost invariably have the option not to invest.

In examples given in this study, it will be suggested that the answer to that first question can lie in the loyalty of particular types of investor and the financialisation of the government bond market in the country in question. This financial activity is shorting. Taking a short position, selling a security one does not already own, is clearly not exit; nor is it the same as retaining an investment in the expectation of the price of that investment rising.

The investor retains an interest in the performance of the security, but it is an interest in the price falling. I have termed this disloyalty. The ability to express disloyalty represents a significant increase in financialisation in a government securities market, and reduction in government policy autonomy. An Alternative Explanation? Financial Repression This study is not a work of economics, but of international political economy.

However, one area of economics must be considered in advance as an explanation for the level of government policy autonomy and a challenge to the originality of the claims made: the 53 As with exit, the possibility of shorting can act as a constraint without the activity actually taking place. In the financial repression analysis, restrictions on the activities of the financial sector serve to create artificially high demand for government debt also Maxfield As with the focus in IPE on regulation, loyalty is entirely enforced.

The resultant gains to government revenue can be seen as a form a taxation, yielding on average 9 per cent of government revenues Giovanni and De Melo However, keeping interest rates at artificially low levels discourages saving and as a result lowers growth see also Roubini and Sala-i-Martin Since higher growth increases borrowing capacity, this argument suggests, the budget constraint that is at the heart of limits on government policy autonomy is eased by liberalisation Fry 31 , turning the arguments in this study on their head: [V]oluntary market financing of government deficits provides, paradoxically, the cheapest form of financing for the government in the long run.

Cheap finance…through financial repression is a mirage…the advantages of cheap credit disappear as soon as the costs of inflation, higher interest rate spreads for the commercial banks and lower central bank profits are recognised. Perhaps the most important benefit [of liberalisation] is that, by accelerating economic growth, a move to voluntary domestic financing reduces the deficit that has to be financed Fry In other words, financialisation, as I have defined it, increases government policy autonomy rather than decreasing it.

It is a view that, in part through its adoption by both the IMF and the World Bank, has had considerable influence on policy in both developed and developing countries Fry More recently, it underpins the view that not only should deposit rates be set freely in the market, but markets generally should be as free as possible Stallings The two arguments are, however, distinct.

This distinction is the central reason why the arguments regarding financial repression should not be seen as an alternative explanation for the differences between the case study countries. Rates are positive in all three. Although it can be argued that this is simply a matter of the extent of repression, it is nevertheless an important distinction.

The lifting of repression, and the resultant move to positive interest rates, may not have the same consequences as any subsequent easing of restraint. The relevance of the analysis of financial repression to this study is the question of whether the McKinnon- Shaw conclusions regarding the negative consequences of severe repression can be taken as justification for more extensive liberalisation of financial systems in general and government bond markets in particular.

Contributions to this debate certainly question how far the lessons of McKinnon-Shaw can be taken. In other words, McKinnon-Shaw can be correct, without the conclusion that further financialisation is to be encouraged. Stallings analyses financial liberalisation of the domestic market, separate from 54 Even at the heart of the McKinnon-Shaw policy recommendations, the freeing of deposit rates, concerns have been raised regarding the consequences of too much competition between banks Hellman et al.

Eichengreen and Arteta identify the liberalisation of deposit rates as one of three econometrically robust causes of emerging market banking crises. From a political economy perspective, Lee and Haggard conclude that repression can, in certain circumstances, result in higher growth and efficiency. Prasad et al. There are no serious advocates of complete liberalisation if that can be defined , with the importance, for example, of prudential regulation, particularly of banks, as a prerequisite of successful liberalisation Fry , The requirement for a sustainable fiscal balance is particularly pertinent to this study.

The need for a fiscal balance to be sustainable, at least in the medium term, can be regarded as little more than a truism. However, the enormous disparity in the levels of government debt, and the difficulties of definitively prescribing a sustainable level, point to the fact that sustainability is the result of a number of varied influences.

Financialisation, I argue, is one. In addition, the recommendation that a sustainable fiscal balance should precede financialisation could, given the difficulties of defining sustainable, be taken as a recommendation simply for reduced government borrowing. This would mean that, prior to liberalisation, it is recommended that a government should follow at least one of the neoliberal policy recommendations. The necessity of a reduction in any fiscal deficit and the 55 The debate on financial integration and emerging capital markets has been mainly concerned with the freeing of capital controls e.

Although the McKinnon-Shaw arguments in favour of the efficiency of investment can be applied to capital market systems, there is no contradiction between an acceptance of McKinnon-Shaw and the debate on the financialisation of capital markets in general and government bond markets in particular. There are two aspects to the latter debate.

The first regards whether it will lead to increased growth and reduced fragility, or the opposite. However, the question is whether the increased growth will compensate for the reduced government borrowing required for sustainability in a highly financialised system. Fry 31 highlights the dilemma, even when the starting point of his analysis is the less contentious move away from high inflation and negative real interest rates, not subsequent liberalisation: Conceivably, policies of price stability and financial liberalisation could pay for themselves.

If it raised the growth rate by 4 percentage points, abandoning an inflation tax that produced revenue equal to 2 percent of GDP would exactly pay for itself. These examples are undoubtedly wildly optimistic in most cases. A rhetorical question serves to emphasise this point, and the potential policy dilemma for governments. If, as a precondition for successful increased financialisation, Lebanon were to cut its debt-to-GDP ratio from per cent to a still-high per cent, what is the necessary growth rate at which such increased financialisation leaves the inflation- adjusted absolute volume of government borrowing unchanged?

By outlining many of the processes that increase financialisation, the study seeks to demonstrate the level of financialisation of different investor types, and how that level changes over time. The levels of financialisation of the government bond markets of the case study countries are also analysed, and the processes of change in the markets. The overall financialisation of a government bond market is a combination of both the financialisation of the market structure, and of the financial market actors active within it, that together determine the ability of the financial actors in the market to trade risk.

This overall level is the result of the balance of the financial actors, and the ability to trade risk of the investors that dominate the particular market. As will be seen, the dominant investors are not the same in each of the case study countries. I then suggest how this financialisation is linked to government policy autonomy through loyalty. An unfinancialised system in this study is one dominated by domestic banks that lend to the government directly.

In each country, however, two of the very first stages in financialisation have long occurred: the initial development of a government debt market and the entry of foreign banks, either through buying banks or by starting up operations. Chapter 2 therefore focuses on domestic banks as buyers of government bonds, both domestic debt and international, and considers ways in which the entry of foreign banks increases financialisation.

Chapter 3 considers domestic individual 57 There are clearly levels of financialisation below this, for example in the absence of a functioning banking system. Each chapter seeks to analyse the level of financialisation of the different investor types through their activities as investors in government debt, and the processes of change in that level of financialisation.

It should be emphasised at this point that it is not argued that the process of financialisation is in any way inevitable, or that countries follow a single path. Financialisation is contingent on a number of influences that will be discussed.

Government policy — its ability to enforce loyalty — remains important, but other factors will also be analysed, suggesting that enforced loyalty is not the only influence on investor behaviour. Chapter 6 concludes by presenting in detail this curve, which links financialisation on the x axis with government autonomy from the policy preferences of international investors on the y axis see page The shape of this curve is outlined in detail then, but is important to note by way of introduction that this curve does not simply slope downwards from left the right.

The argument presented in this study is not that there is a simple straight-line relationship between financialisation and government policy autonomy, as is implicit in some studies of financialisation and of financial globalisation. Rather, this study argues that the autonomy curve is in fact humped.

At this point, it will be argued, governments are reliant for their financing on relatively loyal investors, and so have high policy autonomy. It is only as financialisation increases, both through the entry of new financial market actors, including hedge funds, but also as a result of the increased financialisation of existing investors as a result of processes which will be analysed , that government policy autonomy decreases.

As already discussed, a stark distinction is frequently drawn between bank-based and capital market-based financial systems; too stark a distinction, this chapter will suggest, when we consider government bond markets. Commercial banks have traditionally been amongst the largest market actors in domestic government bond markets, particularly in emerging markets, as buyers of securities either enforced through regulation or as the result of voluntarily-taken investment decisions , as market makers, and as distributors of securities to other investors.

Institutions seen as commercial banks also vary greatly in their activities and business strategies, with implications for their financialisation. As will be discussed in this chapter, banks can concentrate on the buying of government securities, or prioritise lending to the private sector. They can also seek to make money from the trading of bonds rather than long-term investment.

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