INTRODUCTION

A financial Market is a market in which people and entities can trade financial

securities, commodities, and other fungible items of value at low transaction costs and at prices

that reflect supply and demand. Securities include stocks and bonds, and commodities include

precious metals or agricultural goods.

In economics, typically, the term market means the aggregate of possible buyers and sellers of a

certain good or service and the transactions between them.

Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a

stock exchange, and people are building electronic systems for these as well, similar to stock

exchanges.

International Financial Market

Introduction

The last two decades have witnessed the emergence of a vast financial market across national

boundaries enabling massive cross-border capital flows from those who have surplus funds and a

search of high returns to those seeking low-cost funding. The degree of mobility of capital, the

global dispersal of the finance industry and the enormous diversity of markets and instruments,

which a firm seeking funds can tap, is something new.

Major OECD (Organization for Economic Co-operation and Development) countries had began

deregulating and liberalizing their financial markets towards the end of seventies. While the

process was far from smooth, the overall trend was in the direction of relaxation of controls,

which till then had compartmentalized the global financial markets. Exchange and capital

controls were gradually removed, non-residents were allowed freer access to national capital

markets and foreign banks and financial institutions were permitted to establish their presence in

the various national markets.

While opening up of the domestic markets began only around the end of seventies, a truly

international financial market had already been born in the mid-fifties and gradually grown in

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size and scope during sixties and seventies. This refers to the Euro currencies Market where

borrower (investor) from country A could raise (place) funds from (with) financial institutions

located in country B, denominated in the currency of country C. During the eighties and nineties,

this market grew further in size, geographical scope and diversity of funding instruments. It is no

more a "euro" market but a part of the general category called “offshore markets”.

Alongside liberalization, other qualitative changes have been taking place in the global financial

markets. Removal of restrictions has resulted into geographical integration of the major financial

markets in the OECD countries. Gradually this trend is spreading to developing countries many

of which have opened up their markets-at least partially-to non-resident investors, borrowers and

financial institutions.

Another noticeable trend is functional integration. The traditional distinctions between different

financial institutions-commercial banks, investment banks, finance companies, etc.- are giving

way to diversified entities that offer the full range of financial services. The early part of eighties

saw the process of disintermediation get underway. Highly rated issuers began approaching

investors directly rather than going through the bank loan route.

On the other side, debt crisis in the developing countries, adoption of capital adequacy norms

and intense competition, forced commercial banks to realize that their traditional business of

accepting deposits and making loans was not enough to guarantee their long-term survival and

growth. They began looking for new products and markets. Concurrently, the international

financial environment was becoming more volatile- there were fluctuations in interest and

exchange rates. These forces gave rise to innovative forms of funding instruments and

tremendous advances in risk management. The decade saw increasing activity in and

sophistication of the derivatives’ market, which had begun emerging in the seventies.

Taken together, these developments have given rise to a globally integrated financial

marketplace in which entities in need of short- or long-term funding have a much wider choice

than before in terms of market segment, maturity, currency of denomination, interest rate basis,

incorporating special features and so forth. The same flexibility is available to investors to

structure their portfolios in line with their risk-return tradeoffs and expectations regarding

interest rates, exchange rates, stock markets and commodity prices.

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Types of financial markets

Capital Markets

A capital market is one in which individuals and institutions trade financial securities.

Organizations and institutions in the public and private sectors also often sell securities on the

capital markets in order to raise funds. Thus, this type of market is composed of both the primary

and secondary markets.

Any government or corporation requires capital (funds) to finance its operations and to engage in

its own long-term investments. To do this, a company raises money through the sale of securities

- stocks and bonds in the company's name. These are bought and sold in the capital markets.

Stock Markets

Stock markets allow investors to buy and sell shares in publicly traded companies. They are one

of the most vital areas of a market economy as they provide companies with access to capital and

investors with a slice of ownership in the company and the potential of gains based on the

company's future performance. 

This market can be split into two main sections: the primary market and the secondary market.

The primary market is where new issues are first offered, with any subsequent trading going on

in the secondary market.

Bond Markets

A bond is a debt investment in which an investor loans money to an entity (corporate or

governmental), which borrows the funds for a defined period of time at a fixed interest rate.

Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance

a variety of projects and activities. Bonds can be bought and sold by investors on crmarkets

around the world. This market is alternatively referred to as the debt, cror fixed-income market.

It is much larger in nominal terms that the world's stock markets. The main categories of bonds

are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are

collectively referred to as simply "Treasuries."

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Money Market

The money market is a segment of the financial market in which financial instruments with high

liquidity and very short maturities are traded. The money market is used by participants as a

means for borrowing and lending in the short term, from several days to just under a year.

Money market securities consist of negotiable certificates of deposit (CDs), banker's

acceptances, U.S. Treasury bills, commercial paper, municipal notes, euro dollars, federal funds

and repurchase agreements (repos). Money market investments are also called cash investments

because of their short maturities.

The money market is used by a wide array of participants, from a company raising money by

selling commercial paper into the market to an investor purchasing CDs as a safe place to park

money in the short term. The money market is typically seen as a safe place to put money due the

highly liquid nature of the securities and short maturities. Because they are extremely

conservative, money market securities offer significantly lower returns than most other

securities. However, there are risks in the money market that any investor needs to be aware of,

including the risk of default on securities such as commercial paper.

Cash or Spot Market

Investing in the cash or "spot" market is highly sophisticated, with opportunities for both big

losses and big gains. In the cash market, goods are sold for cash and are delivered immediately.

By the same token, contracts bought and sold on the spot market are immediately effective.

Prices are settled in cash "on the spot" at current market prices. This is notably different from

other markets, in which trades are determined at forward prices.

The cash market is complex and delicate, and generally not suitable for inexperienced traders.

The cash markets tend to be dominated by so-called institutional market players such as hedge

funds, limited partnerships and corporate investors. The very nature of the products traded

requires access to far-reaching, detailed information and a high level of macroeconomic analysis

and trading skills.

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Derivatives Markets

The derivative is named so for a reason: its value is derived from its underlying asset or assets. A

derivative is a contract, but in this case the contract price is determined by the market price of the

core asset. If that sounds complicated, it's because it is. The derivatives market adds yet another

layer of complexity and is therefore not ideal for inexperienced traders looking to speculate.

However, it can be used quite effectively as part of a risk management program.

Examples of common derivatives are forwards, futures, options, swaps andcontracts-for-

difference (CFDs). Not only are these instruments complex but so too are the strategies deployed

by this market's participants. There are also many derivatives, structured products and

collateralized obligations available, mainly in the over-the-counter (non-exchange) market, that

professional investors, institutions and hedge fund managers use to varying degrees but that play

an insignificant role in private investing.

Forex and the Interbank Market

The interbank market is the financial system and trading of currencies among banks and financial

institutions, excluding retail investors and smaller trading parties. While some interbank trading

is performed by banks on behalf of large customers, most interbank trading takes place from the

banks' own accounts.

The forex market is where currencies are traded. The forex market is the largest, most liquid

market in the world with an average traded value that exceeds $1.9 trillion per day and includes

all of the currencies in the world. The forex is the largest market in the world in terms of the total

cash value traded, and any person, firm or country may participate in this market.

There is no central marketplace for currency exchange; trade is conducted over the counter. The

forex market is open 24 hours a day, five days a week and currencies are traded worldwide

among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong,

Singapore, Paris and Sydney.

Until recently, forex trading in the currency market had largely been the domain of large

financial institutions, corporations, central banks, hedge funds and extremely wealthy

individuals. The emergence of the internet has changed all of this, and now it is possible for

average investors to buy and sell currencies easily with the click of a mouse through online.

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Primary Markets vs. Secondary Markets

A primary market issues new securities on an exchange. Companies, governments and other

groups obtain financing through debt or equity based securities. Primary markets, also known as

"new issue markets," are facilitated by underwriting groups, which consist of investment banks

that will set a beginning price range for a given security and then oversee its sale directly to

investors.

The primary markets are where investors have their first chance to participate in a new security

issuance. The issuing company or group receives cash proceeds from the sale, which is then used

to fund operations or expand the business.

The secondary market is where investors purchase securities or assets from other investors,

rather than from issuing companies themselves. The Securities and Exchange Commission (SEC)

registers securities prior to their primary issuance, then they start trading in the secondary

market on the New York Stock Exchange, Nasdaq or other venue where the securities have been

accepted for listing and trading.

The secondary market is where the bulk of exchange trading occurs each day. Primary markets

can see increased volatility over secondary markets because it is difficult to accurately gauge

investor demand for a new security until several days of trading have occurred. In the primary

market, prices are often set beforehand, whereas in the secondary market only basic forces like

supply and demand determine the price of the security.

Secondary markets exist for other securities as well, such as when funds, investment banks or

entities such as Fannie Mae purchase mortgages from issuing lenders. In any secondary market

trade, the cash proceeds go to an investor rather than to the underlying company/entity directly.

The OTC Market

The over-the-counter (OTC) market is a type of secondary market also referred to as a dealer

market. The term "over-the-counter" refers to stocks that are not trading on a stock exchange

such as the Nasdaq, NYSE or American Stock Exchange (AMEX). This generally means that the

stock trades either on theover-the-counter bulletin board (OTCBB) or the pink sheets. Neither of

these networks is an exchange; in fact, they describe themselves as providers of pricing

information for securities. OTCBB and pink sheet companies have far fewer regulations to

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comply with than those that trade shares on a stock exchange. Most securities that trade this way

are penny stocks or are from very small companies.

Third and Fourth Markets

You might also hear the terms "third" and "fourth markets." These don't concern individual

investors because they involve significant volumes of shares to be transacted per trade. These

markets deal with transactions between broker-dealers and large institutions through over-the-

counter electronic networks. The third market comprises OTC transactions between broker-

dealers and large institutions. The fourth market is made up of transactions that take place

between large institutions. The main reason these third and fourth market transactions occur is to

avoid placing these orders through the main exchange, which could greatly affect the price of the

security. Because access to the third and fourth markets is limited, their activities have little

effect on the average investor. Financial institutions and financial markets help firms raise

money. They can do this by taking out a loan from a bank and repaying it with interest, issuing

bonds to borrow money from investors that will be repaid at a fixed interest rate, or offering

investors partial ownership in the company and a claim on its residual cash flows in the form of

stock.

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GROWTH OF INTERNATIONAL FINANCIAL MARKETS

Since the 1960’s, the growth of international financial transactions has been profoundly

influenced by the growth in international trade involving exchange of goods and services. The

value of imports in US dollars for the world as a whole went up in the last five decades by a

multiple of 14 from about $ 590 billion in 1960 to about $ 8000 billion in 2000. While

international trade can exist in the absence of international financing arrangements as under

direct exchange, barter and cash payment in gold, there are no international finance or markets

where no goods and services are exchanged between residents of different countries. There

would be no reason for borrowing, lending or investing between countries since nothing could be

bought with the product of loan or investment.

International financial markets and the transactions therein have however facilitated and helped

the expansion of international trade based on comparative absolute advantage resulting in

welfare benefits in terms of higher income among participant nations. Further, the growth of

international financial markets has facilitated cross-country financial flows which contribute to a

more efficient allocation of resources. Efficiency in use rather than origin of or abundance

governs allocation of resources internationally. This means that potentially high return projects

in countries with low savings will not be neglected in favour of low return projects in high

saving countries simply because of where savings are generated.1 American and British

institutional money is flooding foreign markets

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NATURE AND FUNCTIONS

International financial markets undertake intermediation by transferring purchasing power from lenders

and investors to parties who desire to acquire assets that they expect to yield future benefits. International

financial transactions involve exchange of assets between residents of different financial centers across

national boundaries. International financial centers are reservoirs of savings and transfer them to their

most efficient use irrespective of where the savings are generated. There are three important functions of

financial markets. First, the interactions of buyers and sellers in the markets determine the prices of the

assets traded which is called the price discovery process. Secondly, the financial markets ensure liquidity

by providing a mechanism for an investor to sell a financial asset. Finally, the financial markets reduce

the cost of transactions and information

Role (Financial system and the economy)

One of the important sustainability requisite for the accelerated development of an economy is

the existence of a dynamic financial market. A financial market helps the economy in the

following manner.

Saving mobilization: Obtaining funds from the savers or surplus units such as household

individuals, business firms, public sector units, central government, state governments etc. is

an important role played by financial markets.

Investment: Financial markets play a crucial role in arranging to invest funds thus collected

in those units which are in need of the same.

National Growth: An important role played by financial market is that, they contributed to a

nations growth by ensuring unfettered flow of surplus funds to deficit units. Flow of funds

for productive purposes is also made possible.

Entrepreneurship growth: Financial market contribute to the development of the

entrepreneurial claw by making available the necessary financial resources.

Industrial development: The different components of financial markets help an accelerated

growth of industrial and economic development of a country, thus contributing to raising the

standard of living and the society of well-being.

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Functions of international Financial Markets

Intermediary Functions: The intermediary functions of a financial markets include the

following:

Transfer of Resources: Financial markets facilitate the transfer of real economic

resources from lenders to ultimate borrowers.

Enhancing income: Financial markets allow lenders to earn interest or dividend on their

surplus invisible funds, thus contributing to the enhancement of the individual and the

national income.

Productive usage: Financial markets allow for the productive use of the funds borrowed.

The enhancing the income and the gross national production.

Capital Formation: Financial markets provide a channel through which new savings

flow to aid capital formation of a country.

Price determination: Financial markets allow for the determination of price of the

traded financial assets through the interaction of buyers and sellers. They provide a sign

for the allocation of funds in the economy based on the demand and to the supply

through the mechanism called price discovery process.

Sale Mechanism: Financial markets provide a mechanism for selling of a financial asset

by an investor so as to offer the benefit of marketability and liquidity of such assets.

Information: The activities of the participants in the financial market result in the

generation and the consequent dissemination of information to the various segments of

the market. So as to reduce the cost of transaction of financial assets

Financial Functions

Providing the borrower with funds so as to enable them to carry out their

investment plans.

Providing liquidity in the market so as to facilitate trading of funds.

it provides liquidity to commercial bank

it facilitates crcreation

it promotes savings

it promotes investment

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INTERNATIONAL FINANCIAL MARKETS

CONCEPTS

1. Distinction between Euro Crand Euro Bond Market

Both Euro bonds and Euro cr(Euro currency) financing have their advantages and disadvantages.

For a given company, under specific circumstances, one method of financing may be preferred to

the other. The major differences are:

1. Cost of borrowing

Euro bonds are issued in both fixed rate and floating rate forms. Fixed rate bonds are an

attractive exposure management tool since the known long-term currency inflows can be offset

by the known long-term outflows in the same currency. In contrast, Euro currency loans carry

variable rates.

2. Maturity

Euro bonds have longer maturities while the period of borrowing in the Euro currency market

has tended to lengthen over time.

3. Size of the issue

Earlier, the funds available for lending at any time have been much more in the inter-bank

market than in the bond market. But of late, this situation does not hold true. Moreover, although

in the past the flotation costs of a Euro currency loan have been much lower than a Euro bond

(about 0.5 % of the total loan amount versus about 2.25 % of the face value of a Euro bond

issue), compensation has worked to lower Euro bond flotation costs.

4. Flexibility

In a Euro bond issue, the funds must be drawn in one sum on a fixed date and repaid according

to a fixed schedule, unless the borrower pays a substantial prepayment penalty. By contrast, the

drawdown in a floating rate loan can be staggered to suit the borrower’s needs and can be repaid

in whole or in part at any time, often without penalty. Moreover, a Euro currency loan with a

multi-currency clause enables the borrower to switch currencies on any roll-over date, whereas

switching the denomination of a Euro bond from currency A to currency B would require a

costly, combined, refunding and reissuing operation.

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5. Speed

Funds can be raised by a known borrower very quickly in the Euro currency market. Often, a

period of two to three weeks should suffice. A Euro bond financing generally takes more time,

though the difference is becoming less significant.

2. Euro CrMarket

Euro cror Euro Loans are the loans extended for one year or longer. The market that deals in

such loans is called Euro CrMarket.

The common maturity for euro cleans is 5 years. Since Euro banks accept short-term deposits

and provide long-term loans, it is likely that asset liability mismatch may arise. To avoid this

Euro banks often extend floating rate euro cleans fixed to some market interest rate. The London

Inter-Bank Offer Rate (LIBOR) is the most commonly used interest rate. It is the rate charged for

loans between Euro Banks.

Participants in Euro crMarket

The major lending banks in the Euro crmarket are Euro banks, American, Japanese, British,

Swiss, French, German and Asian (specially that of Singapore) banks, Chemical Bank, JP

Morgan, Citicorp, Bankers Trust, Chase Manhattan Bank, First National Bank of Chicago,

Barclay's Bank, National Westminster, BNP, etc. Among the borrowers, there are banks,

multinational groups, public utilities, government agencies, local authorities, etc.

Dealing in Euro credits

When a borrower approaches a bank for Euro credit, a formal document is prepared on behalf of

potential borrowers. This document contains the principal terms and conditions of loan,

objectives of loan and details of the borrower.

Before launching syndication, the approached bank decides primarily, in consultation with the

borrower, on a strategy to be adopted, i.e. whether to approach a large market or a restricted

number of banks to form the syndicate. Each of the banks in syndicate lends a part of the loan.

The duration of this operation is normally about 6 to 8 weeks.

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Characteristics of Euro credit

A major part (more than 80 %) of the Euro debts is made in US dollars. The second (but far

behind) is Pound Sterling followed by Deutsch mark, Japanese yen, Swiss franc and others.

Most of the syndicated debts are of the order of $50 million. As far as the upper limits are

concerned, amounts involved are of as high magnitude as $5 billion and more. In 1990, Euro

tunnel borrowed $6.8 billion.

On an average, maturity periods are of about five years (in some cases it is about 20 years). The

reimbursement of the loan may take place in one go (bullet) or in several installments.

The interest rate on Euro debt is calculated with respect to a rate of reference, increased by a

margin (or spread). The rates are available and generally renewable (roll over credit) every six

months, fixed with reference to LIBOR. The LIBOR is the rate of money market applicable to

short-term credits among the banks of London. The reference rate can equally be PIBOR at Paris

and FIBOR at Frankfurt, etc. It is revised regularly.

The margin depends on the supply and demand of the capital as also on the degree of the risk of

these credits and the rating of borrowers. Financial institutions are in vigorous competition.

There is an active secondary market of Euro debts. Numerous techniques allow banks to sell

their titles in this market.

3. Euro Bond Market

Euro Bond issue is one denominated in a particular currency but sold to investors in national

capital markets other than the country that issued the denominating currency. An example is a

Dutch borrower issuing DM-denominated bonds to investors in the UK, Switzerland and the

Netherlands.

The Eurobond market is the largest international bond market, which is said to have originated in

1963 with an issue of Eurodollar bonds by Autostrade, an Italian borrower. The market has since

grown enormously in size and was worth about $ 428 billion in 1994.

Eurobond markets in all currencies except the Japanese Yen are quite free from any regulation

by the respective governments. Straight bonds are priced with reference to a benchmark,

typically treasury issues. Thus a Eurodollar bond will be priced to a yield a YTM (Yield-to-

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Maturity) somewhat above the US treasury bonds of similar maturity, the spread depending upon

the borrowers ratings and market conditions.

Floatation costs of the Eurobond are comparatively higher than costs indicated with syndicated

Euro credits.

4. Euro CPs

Commercial paper is a corporate short-term, unsecured promissory note issued on a discount

to yield basis. Commercial paper maturities generally do not exceed 270 days. Commercial paper

represents a cheap and flexible source of funds While CPs are negotiable, secondary markets

tend to be not very active since most investors hold the paper to maturity .The emergence of the

Euro Commercial Paper (ECP) is much more recent. It evolved as a natural culmination of the

Note Issuance Facility and developed rapidly in an environment of securitization and

disintermediation of traditional banking. CP has also developed in the domestic segments of

some European countries offering attractive funding opportunities to resident entities.

5. Euro CDs

A Certificate of Deposit (CD) is a negotiable instrument evidencing a deposit with a bank. A CD

is a marketable instrument so that the investor can dispose it off in the secondary market

whenever cash is needed. The final holder is paid the face value on maturity along with the

interest. It is used by the commercial banks as short- term funding instruments. Euro CDs are

mainly issued in London by banks. Interest on CDs with maturity more than a year is paid

annually than semi-annually.

6. International Capital Markets

International Capital Markets have come into existence to cater to the need of international

financing by economies in the form of short, medium or long-term securities or credits. These

markets also called Euro markets, are the markets on which Euro currencies, Euro bonds, Euro

shares and Euro bills are traded/exchanged. Over the years, there has been a phenomenal growth

both in volume and types of financial instruments transacted in these markets. Euro currency

deposits are the deposits made in a bank, situated outside the territory of the origin of currency.

For example, Euro dollar is a deposit made in US dollars in a bank located outside the USA;

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likewise, Euro banks are the banks in which Euro currencies are deposited. They have term

deposits in Euro currencies and offer credits in a currency other than that of the country in which

they are located.

A distinctive feature of the financial strategy of multinational companies is the wide range of

external services of funds that they use on an ongoing basis. British Telecommunication offers

stock in London, New York and Tokyo, while Swiss Bank Corporation-, aided by Italian,

Belgian, Canadian and German banks- helps corporations sell Swiss franc bonds in Europe and

then swap the proceeds back into US dollars.

Firms have three general sources of funds available: (i) internally generated cash, (ii) short-term

external funds, and (iii) long-term external funds. External investment comes in the form of debt

or equity, which are generally negotiable (tradable) instruments. The pattern of financing varies

from country to country. Companies in the UK get an average of 60-70% of their funds from

internal sources. German companies get about 40-50% of their funds from external suppliers. In

1975, Japanese companies got more than 70% of their money from outside sources, but this

pattern has since reversed; major chunks of finances come from internal sources.

Another significant aspect of financing behaviour is that debt accounts for the overwhelming

share of external finance. Industry sources of external finance also differ widely from country to

country. German and Japanese companies have relied heavily on bank borrowing, while the US

and British industry raised much more money directly from financial markets by the sale of

securities. However, in all countries, bank borrowing is on a decline. There is a growing

tendency for corporate borrowing to take the form of negotiable securities issued in the public

capital markets rather than in the form of commercial bank loans. This process known as

securitisation is most pronounced among the Japanese companies.

7. Petro Dollar

During the oil crises of 1973, the Capital markets have played a very important role. They

accepted the dollar deposits from oil exporters and channeled the funds to the borrowers in other

countries. This is called ‘recycling the petrodollars’.

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8. Junk Bonds

A junk bond is issued by a corporation or municipality with a bad crrating. In exchange for the

risk of lending money to a bond issuer with bad credit, the issuer pays the investor a higher

interest rate. "High-yield bond" is a nicer name for junk bond The crrating of a high yield bond is

considered "speculative" grade or below "investment grade". This means that the chance of

default with high yield bonds is higher than for other bonds. Their higher credit risk means that

"junk" bond yields are higher than bonds of better crquality. Studies have demonstrated that

portfolios of high yield bonds have higher returns than other bond portfolios, suggesting that the

higher yields more than compensate for their additional default risk.

Junk bonds became a common means for raising business capital in the 1980s, when they were

used to help finance the purchase of companies, especially by leveraged buyouts, the sale of junk

bonds continued to be used in the 1990s to generate capital

9. Samurai Bonds

They are publicly issued yen denominated bonds. They are issued by non-Japanese entities.

The Japanese Ministry of Finance lays down the eligibility guidelines for potential foreign

borrowers. These specify the minimum rating, size of issue, maturity and so forth. Floatation

costs tend to be high. Pricing is done with respect to Long-term Prime Rate.

Shibosai Bonds

They are private placement bonds with distribution limited to banks and institutions. The

eligibility criteria are less stringent but the MOF still maintains control.

Shogun / Geisha Bonds

They are publicly floated bonds in a foreign currency while Geisha are their private counterparts.

10. Yankee Bonds

These are dollar denominated bonds issued by foreign borrowers. It is the largest and most active

market in the world but potential borrowers must meet very stringent disclosure, dual rating and

other listing requirements, options like call and put can be incorporated and there are no

restrictions on size of the issue, maturity and so forth.

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Yankee bonds can be offered under rule 144a of Sec. These issues are exempt from elaborate

registration and disclosure requirements but rating, while not mandatory is helpful. Finally low

rated or unrated borrowers can make private placements. Higher yields have to be offered and

the secondary market is very limited.

Development of international capital markets

The financial revolution has been characterized by both a tremendous quantitative expansion and

an extraordinary qualitative transformation in the institutions, instruments and regulatory

structures.

Global financial markets are a relatively recent phenomenon. Prior to 1980, national markets

were largely independent of each other and financial intermediaries in each country operated

principally in that country. The foreign exchange market and the Eurocurrency and Eurobond

markets based in London were the only markets that were truly global in their operations.

Financial markets everywhere serve to facilitate transfer of resources from surplus units (savers)

to deficit units (borrowers), the former attempting to maximize the return on their savings while

the latter looking to minimize their borrowing costs. An efficient financial market thus achieves

an optimal allocation of surplus funds between alternative uses. Healthy financial markets also

offer the savers a range of instruments enabling them to diversify their portfolios.

Globalization of financial markets during the eighties has been driven by two underlying forces.

Growing (and continually shifting) imbalance between savings and investment within individual

countries, reflected in their current account balances, has necessitated massive cross-border

financial flows. For instance, during the late seventies, the massive surpluses of the OPEC

countries had to be recycled, i.e. fed back into the economies of oil importing nations. During the

eighties, the large current account deficits of the US had to be financed primarily from the

mounting surpluses in Japan and Germany. During the nineties, developing countries as a group

have experienced huge current account deficits and have also had to resort to international

financial markets to bridge the gap between incomes and expenditures, as the volume of

concessional aid from official bilateral and multilateral sources has fallen far short of their

perceived needs.

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The other motive force is the increasing preference on the part of investors for international

diversification of their asset portfolios. This would result in gross cross-border financial flows.

Investigators have established that significant risk reduction is possible via global diversification

of portfolios.

These demand-side forces accompanied by liberalization and geographical integration of

financial markets has led to enormous growth in cross-border financial transactions. In virtually

all major industrial economies, significant deregulation of the financial markets has already been

effected or is under way. Functional and geographic restrictions on financial institutions,

restrictions on the kind of securities they can issue and hold in their portfolios, interest rate

ceilings, barriers to foreign entities accessing national markets as borrowers and lenders and to

foreign financial intermediaries offering various types of financial services have been already

dismantled or are being gradually eased away. Finally, the markets themselves have proved to be

highly innovative, responding rapidly to changing investor preferences and increasingly complex

needs of the borrowers by designing new instruments and highly flexible risk management

products.

The result of these processes has been the emergence of a vast, seamless global financial market

transcending national boundaries. But control and government intervention have not entirely

disappeared. E.g. South East Asia- Korea, Taiwan, etc- permit only limited access to foreign

investors. However, despite these reservations, the dominant trend is towards globalization of

financial markets.

International financial markets can develop anywhere, provided that local regulations permit the

market and potential users are attracted to it. The most important international financial centers

are London, Tokyo and New York. All the major industrial countries have important domestic

financial markets as well but only some such as Germany and France are also important

international financial centers. On the other hand, even though some countries have relatively

unimportant domestic financial markets, they are important world financial centers such as

Switzerland, Luxembourg, Singapore and Hong Kong.

International Capital Markets, also called Euro markets, are the markets on which Euro

currencies; Euro bonds, Euro equity and Euro bills are exchanged. International financing in the

18

form of short-, medium- or long-term securities or credits has become necessary for the

international economy. Financing techniques have diversified, volumes dealt have increased and

the process is continuing to grow.

Notable developments in international capital markets can be traced to the end of 1950s. There

are several reasons for their growth. The significant ones are:

Transfer of assets of erstwhile Soviet Union to Europe. In the 1950s and early 1960s, the

former Soviet Union and Soviet-bloc countries sold gold and commodities to raise hard currency.

Because of anti-Soviet sentiment, these Communist countries were afraid of depositing their US

dollars in US banks for fear that the deposits could be frozen or taken. Instead they deposited

their dollars in a French Bank whose telex address was Euro-Bank. Since that time, dollar

deposits outside the US have been called Eurodollars and banks accepting Eurocurrency deposits

have been called Euro banks. International capital markets subsequently came to be known as

Euro markets.

Restrictive measures taken by the administration. Several regulatory measures (initiated

particularly in the USA) also contributed (in an indirect manner) to the development of

International capital markets. The important ones are as follows:

Regulation 'Q'. In 1960, Regulation 'Q' in the USA fixed a ceiling on interest rates offered by

American banks on term deposits and prohibited them to remunerate the deposits whose term

was less than 30 days. Besides, at the end of the 1960s, the Federal Reserve reduced the growth

of total monetary mass. The money market rate went up. American banks borrowed on the Euro

dollar market, which resulted in:

• The increase of indebtedness of these banks on the Euro dollar market;

• The flight of American Capital, attracted by the interest rate on Euro market.

Tax of interest equalization. In 1963, tax was imposed on the purchase of foreign securities

(portfolio investments) by American residents. The objective was to reduce the deficit of BOP of

the USA and to establish equilibrium in international structure of interest rates. In fact, in order

19

to avoid tax payment, some companies launched the issue of dollar bonds outside the USA. This

contributed to the growth of Euro dollar market. Realizing its adverse effects, subsequently, the

tax was withdrawn in 1974.

Program of voluntary restrictions on investments. The USA initiated/imposed various restrictions

on its financial system to tackle BOP problems. For instance, banks were directed not to lend or

invest in foreign operations beyond the limits of the previous year(s). As a result, the business

community felt a scarcity of funds. This in turn led them to take recourse to the Euro dollar

market.

Differential of American lending and borrowing rates. The interest rate paid by American

banks was low, vis-à-vis, the expected rate from borrowers. European banks availed of this

opportunity; they offered higher rates of interest at the cost of contenting themselves with

smaller margins than those offered by American banks, to attract investors. They could do so by

operating on Euro dollar markets, which were not subject to interest-rate and other regulations.

For instance, banks were neither constrained to respect a certain compulsory reserve ratio on

their deposits in Euro dollars nor constrained to maintain their interest rates below a certain

ceiling. There may be other reasons as well for development of Euro dollars. Globalization of big

multinationals has further boosted this development. The financing system practiced hitherto also

was not able to respond to capital needs of the international economy.

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Eurobond market

What is a bond-A bond is a loan and you are the lender. The borrower is usually the

government, a state, a local municipality or a big company like General Motors. All of these

entities need money to operate -- to fund the federal deficit, for instance, or to build roads and

finance factories -- so they borrow capital from the public by issuing bonds.

When a bond is issued, the price you pay is known as its "face value." Once you buy it, the issuer

promises to pay you back on a particular day -- the "maturity date" -- at a predetermined rate of

interest -- the "coupon." Say, for instance, you buy a bond with a $1,000 face value, a 5% coupon

and a 10-year maturity. You would collect interest payments totaling $50 in each of those 10

years. When the decade was up, you'd get back your $1,000 and walk away.

A key difference between stocks and bonds is that stocks make no promises about dividends or

returns. General Electric's dividend may be as regular as a heartbeat, but the company is under no

obligation to pay it. And while GE stock spends most of its time moving upward, it has been

known to spend months -- even years -- going the other way.

When GE issues a bond, however, the company guarantees to pay back your principal (the face

value) plus interest. If you buy the bond and hold it to maturity, you know exactly how much

you're going to get back (in most cases, anyway). That's why bonds are also known as "fixed-

income" investments -- they assure you a steady payout or yearly income. And although they can

carry plenty of risk, this regular income is what makes them inherently less volatile than stocks.

Euro Bond: issue is one denominated in a particular currency but sold to investors in national

capital markets other than the country that issued the denominating currency. An example is a

Dutch borrower issuing DM-denominated bonds to investors in the UK, Switzerland and the

Netherlands.

The Eurobond market is the largest international bond market, which is said to have originated in

1963 with an issue of Eurodollar bonds by Autostrade, an Italian borrower. The market has since

grown enormously in size and was worth about $ 428 billion in 1994.

Eurobond markets in all currencies except the Japanese Yen are quite free from any regulation

by the respective governments.

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Straight bonds are priced with reference to a benchmark, typically treasury issues. Thus a

Eurodollar bond will be priced to a yield a YTM (Yield-to-Maturity) somewhat above the US

treasury bonds of similar maturity, the spread depending upon the borrowers ratings and market

conditions.

Floatation costs of the Eurobond are comparatively higher than costs indicated with syndicated

Euro credits.

Primary market: A borrower desiring to raise funds by issuing Euro bonds to the investing

public will contact an investment banker and ask it to serve as lead manager of an underwriting

syndicate that will bring the bonds to market. The underwriting syndicate is a group of

investment banks, merchant banks, and the merchant banking arms of commercial banks that

specialize in some phase of public issuance. The lead manager will usually invite co managers to

form a managing group to help negotiate terms with the borrower, ascertain market conditions

and manage the issuance.

The managing group along with other banks, will serve as underwriters for the issue, that is, they

will commit their own capital to buy the issue from the borrower at a discount from the issue

price, if they are unable to place the bonds with investors. The discount or the underwriting

spread is typically in the 2 or 2.5% range. Most of the underwriters along with other banks will

be a part of the placement or selling group that sells the bonds to the investing public.

The total elapsed time from the decision date of the borrower to issue Eurobonds until net

proceeds from the sale are received is typically 5 to 6 weeks.

The lead manager prepares a preliminary prospectus focusing on economic and financial

characteristics of the project and financial standing of the borrower.

After having consulted a certain number of banks, the lead manager decides on the interest rate.

Subsequently, the issue price is fixed. Clauses of reimbursement before maturity are provided

for. After, the issue advertising is done in International Press in the form of tombstone. This

tombstone indicates the lead manager, co-lead managers and members of the guarantee

syndicate.

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Secondary Market : Eurobonds purchased in the primary market can be resold before their

maturities in the secondary market. The secondary market is an over the counter market with

principal trading in London. However, important trading is also done in other major European

cities. The bonds are quoted in percentage of their value, without taking into account the coupon

already running.

The secondary market comprises of market makers and brokers. Market makers stand ready to

buy or sell for their own account by quoting a two way bid and ask prices. Market traders trade

directly with one another, through a broker, or with retail customers. The bid-ask is their only

profit. Brokers accept buy or sell orders from market makers and then attempt to find a matching

party for the other side of the trade; they may also trade for their own account. Brokers charge a

small commission to the market makers that engaged them. They do not deal directly with retail

clients.

Global Bond: They have a minimum value of $1 billion and are effected simultaneously in

Europe, America and Asia. The salient features of these bonds are that they permit to raise very

high amounts. They offer very high liquidity since they are quoted on several exchanges while

secondary market functions round the clock, with uniform price all over the world. They are

especially used by governments, public enterprises, international organizations and private

financial institutions.

External Bond Market: The external bond market refers to bond trading activity wherein the

bonds are underwritten by an international syndicate, are offered in several countries

simultaneously, are issued outside any country's jurisdiction, and are not registered. The

Eurobond market is a major external bond market. The external bond market combined with the

internal bond market comprises the global bond market. Examples of an external bond are the

"global bond," issued by the World Bank, and Eurodollar bonds.

Internal Bond Market: The internal bond market refers to all bond trading activity in a given

country and is comprised of both a domestic bond market and a foreign bond market. Also

referred to as the "national bond market." The internal and external bond markets comprise the

global bond market

Bulldog Bonds : A sterling denominated foreign bond, priced with reference to the UK gilts.

23

Rembrandt Bond: Denominated in the Dutch guilder.

24

Risk in international financial markets

Foreign investment risk

Risk of rapid and extreme changes in value due to: smaller markets;

differing accounting, reporting,or auditing standards;nationalization, expropriation or

confiscatory taxation; economic conflict; or political or diplomatic changes. Valuation, liquidity,

and regulatory issues may also add to foreign investment risk.

Liquidity risk

This is the risk that a given security or asset cannot be traded quickly enough in the market to

prevent a loss (or make the required profit). There are two types of liquidity risk:

Asset liquidity - An asset cannot be sold due to lack of liquidity in the market - essentially a

sub-set of market risk. This can be accounted for by:

Widening bid-offer spread

Making explicit liquidity reserves

Lengthening holding period for VaR calculations

Funding liquidity - Risk that liabilities:

Cannot be met when they fall due

Can only be met at an uneconomic price

Can be name-specific or systemic

Market risk

The four standard market risk factors are equity risk, interest rate risk, currency risk, and

commodity risk:

Equity risk is the risk that stock prices in general (not related to a particular company or

industry) or the implied volatility will change.

Interest rate risk is the risk that interest rates or the implied volatility will change.

Currency risk is the risk that foreign exchange rates or the implied volatility will change,

which affects, for example, the value of an asset held in that currency.

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Commodity risk is the risk that commodity prices (e.g. corn, copper, crude oil) or implied

volatility will change.

Cr.risk

Cr.risk, also called default risk, is the risk associated with a borrower going into default (not

making payments as promised). Investor losses include lost principal and interest, decreased cash

flow, and increased collection costs. An investor can also assume credit risk through direct or

indirect use of leverage. For example, an investor may purchase an investment using margin. Or

an investment may directly or indirectly use or rely on repo, forward commitment,

or derivative instruments.

Asset-backed risk

Risk that the changes in one or more assets that support an asset-backed security will

significantly impact the value of the supported security. Risks include interest rate, term

modification, and prepayment risk.

Other risk

Reputational risk

Legal risk

IT risk etc

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CASE STUDY-

2014–15 Russian financial crisis

The 2014–15 Russian Financial Crisis and the associated shrinking of the Russian economy is

the result of the collapse of the Russian ruble beginning in the second half of 2014. A decline in

confidence in the Russian economy caused investors to sell off their Russian assets, which led to

a decline in the value of the Russian ruble and sparked fears of a Russian financial crisis. The

lack of confidence in the Russian economy stemmed from at least two major sources. The first is

the fall in the price of oil in 2014. Crude oil, a major export of Russia, declined in price by nearly

50% between its yearly high in June 2014 and 16 December 2014. The second is the result

of international economic sanctions imposed on Russia following Russia's annexation of

Crimea and Russian military intervention in Ukraine. Russian President Vladimir Putin accused

the Western nations of engineering the Russian economic crisis. He has also said, "Our

(Western) partners have not stopped. They decided that they are winners, they are an empire now

and the rest are vassals and they have to be driven into a corner."

The crisis has affected the Russian economy, both consumers and companies, and regional

financial markets, as well as Putin's ambitions regarding the Eurasian Economic Union. The

Russian stock market in particular has experienced large declines, with a 30% drop in the RTS

Index from the beginning of December through 16 December.

Fall in Oil Prices

The price of oil fell from $100 per barrel in June 2014 to $60 per barrel in December 2014.The

drop in the oil prices was caused by a drop in the demand for oil across the world, as well as

increased oil production in the United States. This fall in oil prices hit Russia hard, as roughly

half of the Russian Federation's governmental revenue comes from the sale of oil and

gas. Russia's economy suffers from Dutch disease, a term economists use to describe a situation

in which a country focuses on developing its natural resources to the detriment of other

economic activity. In 2014, Russia needed an oil price of $100 per barrel to have a balanced

budget. As the price of oil falls, Russia continues to sell its oil at operational capacity, without

the ability to dramatically increase oil production to compensate for the lower price and thus

reduced profit from selling oil, the government has substantially less income. Russia is not alone

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in feeling the ill effects of falling oil prices, as several other countries,

including Venezuela, Nigeria, and Kazakhstan, also faced reduced revenues and economic

activity.

Economic Sanction

Any international aid to Russia is considered unlikely as a result of the 2014–15 Russian military

intervention in Ukraine. Officials in the U.S. government have also said, despite the financial

crisis, that the United States and the European Union will not ease economic sanctions imposed

on Russia due to Russia's annexation of Crimea and Russian assistance to Novorossiya militants

fighting Ukraine in the War in Donbas. The U.S. believes the sanctions have negatively affected

the Russian economy so far and also expects the economic sanctions to lead to the further decline

of the Russian economy.

Economic sanctions have also contributed to the decline of the ruble since Russian companies

have been prevented from rolling debt, forcing companies to exchange their rubles for U.S.

dollars or other foreign currencies on the open market to meet their interest payment obligations

on their existing debt.

Financial and Economic Impact

Impact in Russia

Currency exchanger in Moscow. The majority of banks in Russia have tables only with four

digits, while in December 2014 some banks set exchange rates that needed five-digit tables.

On 16 December 2014, the RTS Index, denominated in U.S. dollars, declined 12%, the most on

any given day since the midst of the global financial crisis in November 2008, and

the Micex index declined 8.1% at one point before ending the day higher. This increased the

decline of RTS Index, up until 16 December, of nearly 30% during the month of December. In

response to rising interest rates and bank runs, the interest rate on Russian three-month interbank

loans rose to 28.3%, higher than at any point in 2008.

To get rid of their rapidly declining Russian rubles, many Russians have chosen to

purchase durable goods, such as washing machines, televisions, furniture, and jewelry, and to

change their pensions and savings from being in rubles to US dollars or euros. Several currency

exchangers offered cash only at much greater exchange rates: USD up to 99.8 RUB (official rate

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was 61.15) and EUR up to 120–150 RUB (official rate was 76.15).Some foreign companies have

halted their business activities in Russia, including Volvo car dealerships and the online stores

of Apple and Steam, due to the high volatility and decline of the Russian ruble.

Additionally, Ikea temporarily suspended sales of certain goods in Russia, in part due to the

volatility and in part due to a lack of adequate supply, as numerous Russians bought Ikea

furniture.

Many Western financial institutions, including Goldman Sachs, have started cutting the flow of

cash to Russian companies since they have restricted some longer-term ruble-

denominated repurchase agreements (repos). These actions are intended to protect the Western

firms from the high volatility of the ruble. Repos had allowed Russian companies to exchange

securities for cash with Western financial institutions, so the restrictions are likely to add

pressure to the Russian financial system.

Russia may also be excluded from the MSCI Emerging Markets Index, composed of 26

countries' indices, if capital controls or currency controls are implemented by Russia, since such

measures would make it more difficult for foreign entities to access Russian securities markets.

Russia would be reclassified as a standalone market in that event.

The 20 December print edition of The Economist predicted that Russia would face the "lethal

combination" of a major recession and high inflation in 2015.Others predicted that the crisis

would spread to the banking sector. On the other hand, President Putin has argued that Russia

was not in crisis, and that cheaper oil prices would lead to a global economic boom that would

push up the price of oil, which would in turn help the Russian economy.

Yearly inflation in Russia since 2008

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On the week of December 15, the Russian reserves on gold and foreign currencies were reduced

by "US$15.7 billion to below US$400 billion for the first time since August 2009 and down from

[more than] $510 billion at the start of the year. Within December 15–25, annual inflation has

climbed to more than ten percent. Prices of goods, including beef and fish, rose forty to fifty

percent within a few months before the end of the year due to Russia's ban on Western imports.

Car sales in Russia went down 12 percent from previous year, 2013. The largest Russian oil

company Rosneft, whose large shares are owned by the British oil company BP, lost U.S. and

European assets and 86 percent of profits in the third quarter 2014. Rosneft pinned the decline on

falling oil prices and ruble devaluation.

The crisis threatened the continued existence of the Continental Hockey League, and several

teams missed or delayed payments to their players.

Russian President Vladimir Putin ordered cabinet ministers to not take their day off on New

Year's Day because of the crisis.

As of December 2014, prices of meat, fish, and grain were inflated by ruble devaluation,

affecting Chinese-run businesses in Vladivostok. Some businesses were closed down, especially

due to future rising lease fees.]

Because of currency devaluation, costs of developing solar power were reported in February

2015 to have increased, including photovoltaics mostly made in China, Germany, the United

States, and Japan.

Global Financial Markets

The financial crisis in Russia has affected other global financial markets. U.S. financial markets

declined, with the Dow Jones Industrial Average down nearly 3% in 3 business days, in part due

to the Russian financial crisis. The crisis drew comparisons to the 1998 Russian financial

crisis that affected global markets. Economist Olivier Blanchard of the IMFnoted that the

uncertainty caused by Russia's economic crisis could lead to greater worldwide risk aversion in a

manner similar to the Financial crisis of 2007–08However, the 2014 international sanctions on

Russia decreased Russia's financial connections with the broader financial world, which in turn

lowered the risk that an ailing Russian economy would affect the worldwide economy. Since

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1998, Russia and many other countries have adopted a floating exchange rate, which could also

help to prevent Russian financial woes from affecting the rest of the world.

Foreign exchange trading service FXCM said on 16 December it would restrict U.S. dollar-ruble

trading starting 17 December, due to the volatility of the ruble. They also said that most Western

banks have stopped reporting the exchange rate of the U.S. dollar for rubles

(USD/RUB). Liquidity in the U.S. dollar-ruble market has also declined sharply

Capital outflow from Russia, billions of USD

Financial institutions that hold relatively high amounts of Russian debt or other assets have been

affected by the Russian financial crisis. The PIMCO Emerging Markets Bond Fund also had

21% of its holdings in Russian corporate and sovereign debt as of the end of September 2014,

which has declined about 7.9% from about 16 November 2014 to 16 December 2014.

Companies from North America and Europe that heavily relied on Russian economy have been

affected by the crisis. American car company Ford Motor Companyexperienced a 40-percent

decline on car sales in January–November 2014, according to Association of European

Businesses, and terminated "about 950 jobs at its Russia joint in April [2014]." German car

company Volkswagen experienced a 20-percent decline in the same period. American oil

company ExxonMobil alongside Rosneft were unable to continue an Arctic project after the

discovery of oil there due to sanctions over the crises in the Ukraine. British oil company BP lost

17 percent of market shares. French energy company Total S.A. shelved joint shale exploration

plans with Russian oil company Lukoil due to sanctions

German engineering company Siemens lost 14 percent of Russian revenue in 2014. German

sportswear company Adidasclosed down stores and suspended development plans in Russia.

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Danish beer company Carlsberg Group lost more than 20 percent of Russian shares. American

fast food company McDonald's lost twelve stores, which were closed down by Russian officials

due to "sanitary violations". French food conglomerate Danone experienced loss of operating

margins in the first half of 2014 due to rising milk prices

Many of Israel's 1 million immigrants from the former Soviet Union are estimated to have

business ties with Russia and are estimated to be effected by the Russian crisis.

In January 2015, ratings agency Standard & Poor's lowered Russia's crrating to junk status and

economic rating from BBB- to BB+. Moody's followed this decision in February 2015.

Impact on former Soviet states

The devaluation of the Russian ruble affected the currencies of many post-Soviet stateswhich are

tied through trade and remittances by migrant workers in Russia. For many post-Soviet states,

trade with Russia represents over 5% of their GDP.

In Armenia, the dram depreciated from being traded at around դր.410–15 against the dollar in

late November to a record low of 575 to the dollar on 16 December. By mid-December inflation

reached 15% to 20%. Parliament Vice-Speaker admitted panic in the country. The dram

recovered significantly and stabilizedon 18–19 December to around 460–80. However, inflation

remained high, reaching 40% for some products.

In Azerbaijan, low oil prices have battered its oil-dependent economy. However, it looks

impervious to economic turmoil as the government has maintained in reserve a large stabilization

fund which has kept the manat afloat against the dollar within its usual band. Most of the

country's trade is done with Turkey On February 21, 2015 the Central Bank of

Azerbaijan devalued the manat by 33.5% to the dollar.

The Belarusian ruble plummeted to its weakest since 1998 by 15 December.

In Estonia, which abandoned the kroon on 31 December 2010 and adopted the euro on 1 January

2011, the economic growth forecast was cut from 3.6 percent to 2.0 percent in April 2014 due to

sanctions on Russia. As of April 2014, 11 percent of Estonia's exports had gone to Russia, and

100 percent of their natural gas had been imported from Russia.

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In Georgia, the lari had collapsed to its lowest level versus the dollar in more than a decade by 5

December. By 11 December the lari plunged from the pre-crisis average of 1.75 to the dollar

to 1.92–1.98.

In Kazakhstan, the tenge was devalued nearly 19–20 percent in February 2014. However, the

more significant devaluation of the ruble is making Kazakh goods less affordable to Russian

citizens which reduces sales and manufacturing growth.

In Kyrgyzstan, remittance rates had dropped to 29 percent as of October 2014 for the first time

since 2009The Kyrgyzstani some was devalued 15 percent on 12

December. Some Kyrgyz migrants returned from Russia to Kyrgyzstan due to the crisis.

In Latvia, which abandoned the lats on 31 December 2013 and adopted the euro on 1 January

2014, Russia's ban on EU imports since 2014 has affected the Latvian economy, which has been

heavily dependent on economic trade with Russia.

In Lithuania, before it abandoned the litas on 31 December 2014 and adopted the euro on 1

January 2015, the crisis prompted some Lithuanians to emigrate from the country. Sanctions

hitting Russia and/or the EU affect Lithuania's dairy and transportation industries

Moldova also faced devaluation of currency

In Tajikistan, remittance rates dropped to 49 percent as of October 2014 for the first time since

2009 The someone was devalued 5.5 percent on 12 December.

In Uzbekistan, the some was devalued 9 percent on 12 December. According to Daniel Kilo,

who runs Fergana.ru:

There are 2.4 million Uzbek migrants in Russia, and those are just the official figures. These

people and their families are all surviving because of money made in Russia. Essentially Russia

has saved Uzbekistan and Tajikistan from revolution, and if all these people return, it will cause

a social explosion.

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CONCLUSION

While growth is returning, the recovery is uneven and fragile, unemployment in many countries

remains at unacceptable levels and the social impact of the crisis is still widely felt.  

Strengthening the recovery is key.  To sustain recovery, we need to follow through on delivering

existing stimulus plans, while working to create the conditions for robust private demand.  At the

same time, recent events highlight the importance of sustainable public finances and the need for

our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal

sustainability, differentiated for and tailored to national circumstances. 

Those countries with serious fiscal challenges need to accelerate the pace of consolidation. This

should be combined with efforts to rebalance global demand to help ensure global growth

continues on a sustainable path. Further progress is also required on financial repair and reform

to increase the transparency and strengthen the balance sheets of our financial institutions, and

support credit availability and rapid growth, including in the real economy.

34