Bankovní institut vysoká škola Praha
Katedra bankovnictví a pojišťovnictví
Mezinárodní finanční systémy a jejich instituce v moderních podmínkách mezistátních vztahů
Diplomová práce
Autor: Victoria Shevtchenko
Finance
Vedoucí práce: Ing. V.Karásek
Praha Duben 2011
"
Bankovni institut vysoka skola" (Prague)
Department of Banking and Insurance
International financial systems and their institutions in contemporary conditions of international relations
Diploma thesis
Autor: Victoria Shevtchenko
Finance
Diploma's supervisor: Ing. V.Karásek
Prague April, 2011
Declaration
I declare that I developed the diploma independently, using indicated literature.
I certify that the electronic version of the work coincides with the printed version, and I accept the fact that the work will be archived in the library and the BIVS and will be available to third parties on internal electronic database of the institute.
Prague, April 2011 Shevtchenko Victoria
Gratitude
I would like to thank the diploma's supervisor for providing advice in writing this work.
Thesis annotation:
This research paper describes the main effects of the revaluation of deepening globalization and the role of international financial institutions in the world economy. The wave of financial crises required the development of new theory and practical tools for neutralizing the negative trends in the global financial sector. Under these conditions, relevant to analyze the trends and the financial component of the globalization process, the study of systemic risks in global capital markets, as well as economic mechanisms to improve the sustainability of national finance to today's challenges.
Anotace:
Diplomová práce je věnována hlavním důsledkům prohlubující se globalizace a roli mezinárodních finančních institucí ve světové ekonomice. Vznik finančních krizí vedl k požadavku vytvoření nových teorií a praktických nástrojů pro eliminaci negativních trendů ve finanční sféře. Je nezbytná analýza trendů a finančních komponent v procesu globalizace, studium rizik na kapitálových trzích a využívání ekonomických mechanismů pro posílení udržitelnosti národních financí v současných podmínkách.
Klíčová slova: globalizace, světová ekonomika, finanční instituce, kapitálové trhy
Table of contents
Introduction………... 7 1. International financial institutions in world economic development…………... 9 1.1. Finances and their role in structural transformations of a world economy... 9 1.2. Capital markets and their functions in terms of deepening world economic
ties………... 14
1.3. Financial assistance and capitalized reserves in system of transformation processes ………. 22 2. International finances and globalization processes……….. 33 2.1. Trends and financial component of globalization processes ………. 33 2.2. Analysis and development phases of international monetary-financial
system……… 42
2.3. Influence of globalization on a world financial market system risks…… 49 3.Role of international financial institutions in transformation processes of Czech
Republic……….. 58
3.1 Role of international monetary and financial institutions in transition of Czech Republic to market economy ………. 58 3.2. Czech alternative of accelerated transformation of national economy and problems of joining the Eurozone………... 65 3.3.Economic mechanisms of increasing national finances stability…………. 72 Conclusion………... 79 Bibliography……… 80
Introduction
The relevance of this thesis is defined by necessity to revaluate the consequences of financial globalization and role of international financial institutions in development of world economy. Wave of financial crisis determined the working out of new theory and practical tools aimed to neutralize all the negative tendencies in financial sphere. These terms determine the relevance of trends’ analysis as well as financial component of globalization process; research in field of system risks, existing in world financial markets, and economic mechanisms to increase stability of national finances.
The object of this thesis is a set of observed in world economy starting from 1980 processes of forming the brand new role of world finances, associated by a concept of
―financial globalization‖. The objects of research are creation, functioning and interaction of both world capital markets and credit and financial markets as well as modern mechanisms of their regulation. The aim of this thesis is analysis of world finances role in terms of local and global transformation processes by example of Czech Republic.
In order to fulfill the aims set, it is necessary to solve following tasks: (1) to investigate the essence and principles of finances organization in international economic system; (2) to carry out complex structure analysis of modern global financial organizations, to describe regularities of their development as well as main tendencies of this development; (3) to study main principles of international finances functioning as well as organization of activity carried by worldwide banking institutions; (4) to give the basic characteristics of financial globalization process, as well as system risks of world financial markets and to find out the degree of world economy transformation, being influenced by general financial processes; to study economic mechanisms of financial markets regulation by an example of Czech Republic and to generalize currently existing approaches to improve regulation of national finances in terms of their liberalization.
In this thesis there have been used such research methods as an ascension from abstract to concrete, observation and exploratory forecast. In course of work, the author used works of native as well as foreign economists, theorists, and financial analysts, periodicals in area of world
finances, open sources of international statistical information and official web recourses (in total - 106 resources).
In the latest information recourses [1, 5-79] the discussion of world economy globalization process has been developed intensively, however taking into consideration
currently on the stage of studying. The novelty of this thesis is defined by research of latest tendencies in development of world financial market, and an attempt to carry out analysis of implemented by Czech Republic policy in terms of integration into the world economy.
The above mentioned considerations have defined the structure of this Master’s Thesis, which consists of the introduction, three chapters, and the conclusion, bibliography and multimedia presentation.
In the first chapter is carried out the analysis of finances role in structural transformations of the world economic system, are described mechanisms and tendencies of world financial market development as well as new aspects of provision international financial help, value and dynamics of capitalized reserves in terms of acceleration of world transformation processes.
In the second chapter are investigated processes of formation and functioning of global financial organizations; condition of their institutional structure is described in details. Special attention in thus is paid to the World Bank group and to International currency market. There is also studied modernization process of financial markets international regulation policy under the influence of negative changes at both loan and financial markets, are defined the ways of system risks decrease as well as perspective directions of reforming world financial architecture.
In the third chapter the main attention is given to investigation of a role played by international financial organizations in development of Czech Republic as well as to problems of accelerated transformation of national economy on the basis of modern model of state economic policy adaptation to the forms of financial globalization development, general approaches to improve regulation of financial market in terms of its liberalization are offered.
In the conclusion are shortly summarized the results of research concluding, that crisis phenomena can be overcome by means of system risks elimination by creating new synergic architecture of world finances. Multimedia presentation in short visualizes important details of carried research, key tables and diagrams as well as main conclusions of the Master’s Thesis.
1. International financial institutions in world economic development 1.1 Finances and their role in structural transformations of a world economy
It is known that finances as economic category represent the system of monetary relations in process of GDP redistribution. World financial relations appeared in 15-16th century in terms of demand, raised in independent states to develop trade as a result of Great geographic discoveries. At the same time the world market started to form, actively developing during 17-18 centuries, in era of primary capital accumulation. During this period there were formed classic theories of international trade: mercantilism, theory of absolute advantages (A. Smith) as well as theory of relative advantages (David Ricardo).
At the beginning of the 20th century in connection with an actual occurrence of the world economy, international financial relations have come to a brand new level that has demanded international accommodation of accumulated to that time various conceptions and mechanisms of formalization balances of payment, current currency exchange rates, techniques of alignment unstable balances of payment in terms of different monetary systems [2, 7]. Thus, international finances appeared as a result of objective spreading of financial relations on world - economic ties. Being a part of a world economy, world finances represent a set of financial resources of all countries worldwide [3, 65], international organizations and world financial centers, all business structures and entire population.
In the scientific literature there exists no integrated definition of world financial market (IMF). Some authors [4, 17] represent world finances structure as a set of international financial markets, international banking, finances of international organizations and international portfolio investments, investigating five most interrelated fields of the world financial infrastructure: world finances environment (namely in terms of world monetary system), world financial markets (including currency market, international currency market and international stock market), international banking, finances of international corporations and international portfolios management. However the author represents more wide interpretation of world finances and they are defined as resources, used in international economic relations, i.e. relations between residents and non-residents.
In its economic essence world financial market represents a system of distinctive mechanisms of accumulation and redistribution on a competitive basis of financial resources among states, regions, branches, and institutional units. From the functional point of view world financial market should be defined as set of national and international
markets that provide the direction, accumulation, and redistribution of monetary capital among market subjects by means of financial institutions aiming to reproduce and achieve rational parity between offer and demand for the capital. Functions of international financial market in their essence are close the functions of credit: they are capital redistribution and flow, saving distribution costs acceleration of capital concentration and centralization, intertime trade that reduces expenses of business cycles by means of advanced actual consumption at the expense of loan or credit provision, assistance to the process of continuous reproduction [3, 102].
The most essential influence finances render to the structural transformations of the world economy: support of competitive branches and industries, gradual reduction of morally and technologically outdated enterprises; priority development of national and international infrastructure; encouragement of capital flow from unprofitable branches into so-called ―points of growth‖, allocating investment support to development of backward regions; creation of conditions for steady economic growth on the basis of best accessible technologies application; accelerated growth of scientific and technical complex together with application of newest ecological standards; priority development of alternative power;
structural reforming of a social sphere; support of a small business, growth of private and group property.
Below there will be considered in details the structure and toolkit of international finance market, which allows world finances and their institutions to influence substantially on a world economic ties.
It is known that economic theory divides world financial market into the monetary and capital markets. The imprest means reception of costs by debtor for support of current liquidity and covering credit liabilities deficit payable within one year. Capital loan means reception of costs by the borrower
for the long-term period. From this point of view economic structure of the world financial market can be represented as follows (fig. 1) [5, 10].
Fig. 1. Economic structure of international financial resources [5, 10].
Short-term instruments Long-term instruments
Credit market
Monetary market Capital market Stock market
Instruments in trade Instruments out of trade
World finances unlike public finances are represented by variety of subjects. It means that there is no single international fund of monetary resources concentrated in a concrete place and being a property of a concrete world economy subject. World financial resources are mainly in manipulation, forming the world financial market. The functional structure of world financial resources can be represented as follows (fig. 2) [6, 191].
Fig. 2. Functional structure of international financial resources [6, 191].
It is obvious that not all elements of world financial resources are concentrated in a world financial market. Financial help is given taking into account the position of its recipient on a market, however not according to the law of supply and demand, but observing by recipients certain economic conditions. As to the capitalized reserves, they were concentrated on a world financial market occasionally, only when it was demanded by especially difficult financial position of their owners [7, 31].
As a part of world finances it is possible to distinguish public and private finances.
The subject of the first mentioned are recognized as those according to the norms of international law sovereign states, nations and peoples, struggling for creation of an independent state, interstate organizations state establishments (for example Vatican) as well as liberal cities. The main subjects of international financial market are both national
International finances
International financial help
International finance market
(capital market) Capitalized reserves
Derivative
market Credit market Private reserves
Debt and equity securities market
Bank loans market Interstate credits
and grants Currency
spot-market Insurance market Official reserves
Credits and grants of international organizations
and international physical and legal bodies as well as organizations established by them [8, 345-432].
World financial market can be considered from the point of view of its functions as well as in terms of turnover of financial assets. Functionally it is divided into currency market, derivative market, and market of insurance services, loan, and equity market. In its turn there can be allocated different segments within these markets: for example reinsurance at the insurance services market, segments of debt securities and bank loans at credit market, etc.
In terms of assets turnover time frames there are allocated following segments of international financial market: currency (short term) market and capita market (long term).
There are also financial assets aimed to be allocated in the market only in order to get the maximum profit, particularly at the expense of purposeful speculative operations. Such assets are often called ―hot money‖. Borders between different financial market segments are pretty relative and transition of a definite part of world finances from one segment into another is quite possible. Under this it is determined interdependency between currency exchange rates, bank rates, and stock market rates. It leads to globalization of world financial assets, to the fact that financial troubles in separate regions provoke financial shocks of the entire world financial economy.
The variety of types, forms, and kinds of world financial market participants determines its extensive classification according to the following main features: character of participation in operations, aims, and purposes of participation, types of emitters, types of investors and debtors, country of subject’s origin [9, 25].
Considering character of participation in operations market participants are divided into direct (immediate) and indirect (mediated). Direct participants are those who conclude transactions at their own expense (or) at the expense and by order of the clients, i.e.
indirect participants, who do not conclude independent transactions.
In terms of aims and purposes of participation in a market there are distinguished hedgers and speculators, traders and arbitragers. Hedgers conduct so called hedging transactions aimed to protect currency profit and currency rate risks. For these purposes they use instruments of derivative market in order to insure transfer risks, own assets or concrete transactions in a short term market (i.e. spot market, where transactions are concluded within two bank days). Speculators conclude transactions exclusively with the aim to earn on favorable price range that’s why they don’t intend to insure operations.
contracts and, as a matter of fact, is contrary to hedgers’ activity. Arbitragers carry out financial operations at one market with simultaneous carrying out opposite operations at the other one with a purpose to get a profit on a rates difference on different markets and in different periods of time. Arbitragers run risks less then speculators.
According to the types of emitters and their characteristics the following gradation of international financial market participants is offered: (1) international and international agencies, (2) national governments and sovereign debtors, (3) provincial and regional governments (local administration), (4) municipal governments (municipalities), (5) quasi- governmental emitters, (6) corporations, banks and other organizations [9, 29].
Among international agencies are World Bank, International bank of reconstruction and development, European bank of reconstruction and development and other. Among elements of sub national level are defined land governments of federative land in Germany, provinces in Canada states in Australia, cities in New-York, Moscow, and St.-Petersburg and other. Depending on origin states participants of international financial market are subdivided into different developing countries, international institutions (that don’t have concrete national identity) and off-shore zones. Among the last are territories where tax, currency and other privileges are functioning for those non-residents, who found their accounts and firms on these territories but carry out financial activity exclusively with other countries.
Among international financial market participants akin to investor’s type are defined two main groups – private and institutional. First are individuals (sometimes they are called final or retail investors). As a rule they seek to diversification of their savings or increase in the percentage profit by means of acquisition different financial assets.
Institutional investors are professional participants of financial market (or financial intermediaries of principals).
The market position of the last is observed in terms of two tendencies. On the one hand world financial market is more and more institutionalized in connection with in quantity and improvement of liquidity of functioning within it financial instruments as well as considerable growth of its volume and number of participants. On the other hand it is observed the phenomenon of ―disintermediation‖ i. e. depletion of intermediaries, their exception from transaction between seller and a buyer. Disintermediation being a consequence of deregulation and financial technologies development, allows final buyers and sellers (principals) to cut expenses, having refused to pay commission and other dues.
As an example of intermediaries dismissing is debt securitization, when various bank assets are transformed into liquid securities, used to finance new active operations.
To the institutional investors operating at world financial market and influencing the structural transformations of world economic ties refer: banks (central, investment, commercial), public institutions and international financial institutions, pension funds, insurance funds and companies (including off-shore ones), mutual (share) investment funds, investment managers (managing the investments), transnational corporations.
Insurance companies have 35% of all institutional investments, investment companies – 23%, pension funds – 25% and all other investors – 17% [9, 43]. In role of investment managers often act bank trust departments. Generally their clients are private investors.
Therefore, analysis of international finances structure allows us to choose for the further study the most significant ways, instruments and interstate bodies, which help to conduct payment transactions in terms of world economy and in order to structurally transform the world economy. The further analysis of finances role in terms of structural transformations of the world economy will be devoted to evolution of their main segments, reflecting objective development processes of capital internationalization and necessity to create coordinated adequate conditions of international monetary sphere functioning in terms of globalization.
1.2 Capital markets and their functions in terms of deepening world economic ties So world financial market is a part of the world market of loan capital, a set of supply and demand on the both creditors’ and borrowers’ capital from different countries.
Capital market segments are: currency market, derivatives market, insurance market, credit and equity market (fig. 3).
Fig. 3. Functional structure of the world capital markets [6, 191].
World capital markets (world financial market)
Derivatives market
Credit market
Debt and equity security market
Bank loans market Currency
spot-market
Insurance market
Capital functioning in a world market is shown through the realization of financial assets, which include funds and all kinds of investment values. Financial assets are the object of financial investments, i.e. their flow is accompanied by a certain financial operation.
Financial operations in terms of target orientation can be subdivided into:
remittance transactions, investment, speculative transactions, and operations on capital remaining ability to return high interest. Remittance transactions include all forms and types of calculations (exchange operations ―money-goods‖) and transfer (one way cash drive). Investment financial transactions mean capital movements with a purpose of its increase. Investment operations are linked with and intermediate and long term capital investment. They include credit, leasing, trust, rent, franchise, tolling, market fronting, and other operations. Speculative operations are short term operations aiming to return interest in a form of difference in prices (rates) of purchasing and selling, difference in percentage of credit interest and passed loans, etc. Operations on capital remaining ability to return high interest represent actions directed on capital management in conditions of existing risks and uncertainty of economic situation. First and foremost these are insurance operations, including hedging; pledge operations, including mortgage (real estate pledge), diversification, and other. In realization of international financial operations, as a rule, take part two or more subjects – residents of different states. Classification of financial operations is presented in fig. 4.
Fig. 4. Classification of financial operations (in author’s edition).
currency securities
precious transfer lease swapping insurance
metals letter of leasing currency arbitrage hedging
natural credit tolling pledge
precious collection of market fronting percentage mortgage
stones payments arbitrage
profitable credit franchising etc. currency diversification
real estate bank transfer speculations etc. etc.
etc.
debts of an enterprise
Deepening of international division of labor as well as a world market formation inevitably lead to the fact, that currency relations develop into a certain
system, in other words world currency market is formed. In the currency market takes place exchange one to another monetary units of different states. Currency values have different forms of turnover. Traditionally takes place purchase and sale of cheques, bills, and cash banknotes. Thanks to scientific and technical achievements wide circulation was received by transactions with funds on bank accounts, changing owners with a help of telephone, teletype and telex communication. And the leading role is played by own currency transactions of commercial banks instead of operations in provision services to industrial and trading companies. For example, in the early eighties of the 20th century approximately 97% of a total turnover at US currency markets fell to interbank transactions, carried out under the initiative and at the expense of banks themselves.
Financial operations
Financial assets (objects of operations)
Activity direction
Cash transfer
Investment
operations Speculative operations
Capital remaining ability to return interest
It is typical for currency markets presence of broker firms and separate brokers, connected with banking business. If commercial banks fulfill intermediary functions with respect to companies, brokers mediate between banks. Thus it is important to admit that brokers’ services are much cheaper then searching for a partner by bank itself. State influence on a currency markets is as usual carried out by a Central bank. Central bank sets certain rules at a currency market. For example by means of defining the contingent of currency sellers and buyers, setting the list of authorized exchange operations as well as limits of exchange rate fluctuation.
Important role in currency trade, except the main world currency markets in New York, Tokyo, London, and Frankfurt is played also by Paris, Zurich, Bahrain, Hong Kong, and Singapore. Linked by means of newest telecommunication systems, currency centers form round-the-world and round-the-clock network. Any client can buy or sell currency at any time, independent from transaction participants’ location center. Because of the problem with double count and great volumes of transactions it is impossible to calculate a total turnover of the world currency trade. Currency transactions unlike the commodity and equity market are not concentrated in a certain building or premise. They are conducted by a huge amount of banks, mainly concentrated in state capitals or other financial centers.
What is usually understood under the currency market in its nature is a network of telecommunications between leading banks of the world main trading countries.
There are three categories of currency market participants depending on the aim of purchase and sale of currency units. Accordingly there are three main types of currency market: clearing, hedging and currency speculation. Clearing (spot market). At this market currency is purchased and sold for foreign trade purposes only. As a matter of fact it means clearing services, helping each party to finish the transaction with the most preferable currency. Although transactions, connected with a foreign trade make up the greatest part of a currency market, they appear to be a unique type of transactions generating supply and demand for currency. For example many citizens buy foreign currency and accordingly create a demand for it in order to make money transfers to relatives in other countries.
Insurance of currency risks (hedging). Insurance of currency risks (as well as speculation) occur in an urgent currency market. Unlike the spot market purchase and sale of a currency in an urgent market happens on the basis of forthcoming fluctuations of exchange rate.
Currency speculation. Speculation means undertaking currency obligations, future
both speculators and assets insurants. Practically there are no criteria according to which the market would separate these two groups of participants. Urgent market also provides additional possibilities to speculators.
Crisis of financial markets, taking place during the end of 80s – begin of 90s of the 20th century has shown the necessity to create mechanisms of breaking the chain of financial transactions in case of violation the processes of a normal capital flow or when occurs the threat to both world economy and financial system stability. Variability of financial conditions demanded new approaches to increase competitiveness and developing brand new measures to minimalize market risks. Within a new approach derivatives or derivative financial instruments have widely spread. In their nature lay other, more simplified financial instruments – shares, bounds, currency. The most widespread types of derivatives are warrant certificates (options) (they allow its owner to sell or purchase necessary shares), swaps (agreements on an exchange monetary payments during the certain period of time), futures (contracts on a future delivery, including currency, but the price is specified in the contract). A sign of derivativeness is that the instrument price is defined on the ground of basic assets prices (goods, currency, securities).
Derivative market is closely connected with a currency market and, first of all, on the basis of exchanges one currency for another or securities in one currency for the other.
The derivative market volume for the last 15 years according to exchange trade statistics has increased in 19 times (from 618,8 bln. US dollars to 12,2 bln. US dollars per year), the number of options, carrying trade activity at bourses has reached 1,2 bln. of contracts [9, 88], and taking into account non-exchange trading systems - 50 trillion. US dollars [6, 197]. Currency futures and swops make the main part of this market, they are mainly short- term. Leading stock exchange on derivative financial instruments is Chicago commodity exchange. Together with Chicago Chamber of Commerce and London international stock exchange of financial futures – they make up almost a half of entire stock exchange market of derivative financial instruments [9, 98]. The subjects of international economic turnover are exporters and importers; as usual they do not conduct direct operations with each other.
Payments on transactions undertake banking institutions. Exactly system of foreign and local commercial banks forms a core of both regional currency markets and world currency trade.
Credit market covers international credit operations, i.e. transactions with a loan capital. Nowadays loan capital of developed countries has become an integrated part of
state and state. After introduction by all developed countries full convertible currency, private international credit took the main place in international credit relations. Main sources of this kind of credit are deposits and attraction of resources by means of issuing resource certificates. The majority of these deposits and resources are short-term, i.e. their turnover term is less than a year. Long – term resources as a rule are attracted by means of bounds issuing. Bounds resources can be carried out in form of issuing foreign bounds as well as in form of international bounded loans.
The loan capital represents monetary funds provided by its owner to another person on loan or in form of credit. The rights to issue a loan possess only banks or other credit institutions. The loan capital flow on an international financial market exists in form of international loan, given to a borrower on terms of collectability, urgency and playability.
Many factors influence international credit: balance of payments, percent rate, currency types, currency exchange rates, credit operations profitability level and other. Except general features (collectability, urgency and playability) international credit possess definite specific features, caused by international financial mechanism functioning (possible discrepancy of loan currency and currency of loan repayment, currency risks, losses, caused by change of exchange rate etc.). International credit provides redistribution of loan capital among countries reinforces the process of capital concentration in terms of world economy, accelerates the realization process of goods (works, services) on a world scale.
International credits have different types and forms of existence as well as different variants of crediting. In order to choose optimum alternative of crediting are used indicators of credit efficiency comparison under various conditions, With a purpose to avoid aggravation of competitiveness in field of export financing and ―credit war‖ in a year 1976 OECD member states have signed international agreement on export crediting with an official support, which extends on export credits with a payback period more than three years, enjoying the state support in form of state funding, refinancing, subsidization and insurance [10, 257].
In international banking, with a purpose of insurance is widely spread the practice of provision syndicated credits. Syndicated credits are credits, provided by two or more creditors, i.e. bank syndicates to a one borrower. In order to issue a loan banks pool their temporary free monetary funds for a certain period of time. Therefore syndicated credits are also called consolidated credits.
There are distinguished following types of international credits: (1) ordinary credit, which is aimed to overcome temporary difficulties with a balance of payment within a year. If necessary it can be prolonged up to five years. A restrictive condition of a size of this credit is that country – borrower possesses a definite amount of national currency at a world financial market, and this amount doesn’t exceed 25% of a credit quote within a year. An annual percent rate under the credit is determined on the basis of incomes estimation as well as expenses and net profit; (2) compensatory credit, which is aimed to compensate the reduction of export gain due to the reason not dependent on the country- borrower. Term of this credit – 3 to 5 years; (3) ―buffer‖ or stabilizing credit, aimed to finance stocks of extracted raw materials in connection with unfavorable conjuncture in the international market. Term of this credit – 3 to 5 years; (4) funds for extended financing, aimed to conduct structural reorganization of external payments. In case of severe breach of the balance of payment this type of credit is provided in addition to ordinary credits for the period up to 3 years if there is correspondent quote and on the assumption of repayment within 4-10 years.
International Monetary Fund (IMF) plays a leading part in creation of specific funds by force of borrowing financial resources, acts as intermediary between countries- creditors and countries-borrowers. Certain influences on the formation of loan capital market have different international and regional financial institutions, interested in structural changes of the world economy. Such institutions are Bank of international payments, World Bank, European bank of reconstruction and development, European investment bank, etc.
Bank credit for export and import financing promotes the process of capital turnover acceleration and its transformation from commodity into a monetary form. There are following kinds of bank credits.
Acceptance credit is a credit provided by bank in form of acceptance of the bill of exchange, issued by exporter to the bank of importer. Bank accepts these bills, guaranteeing their payment by debtor in a specified period of time. When selling goods in credit exporters are interested in acceptance these bills by a big bank. Such kind of bill can always be considered or sold. In case of acceptance credit, formally the credit is given to an exporter, but acceptor of the bill issued is a bank. Providing the acceptance, bank doesn’t give a credit and doesn’t invest its funds in transaction as well as doesn’t undertake to pay off the bill of exchange when maturing. When exporter demands payment y cash
refinancing operations are carried out. Value of acceptance credit consists of two elements:
acceptance commission and discount rate.
Reimbursement credit is a variation of acceptance credit. Reimbursement in terms of international trade means payments of bought goods by means of bank in form of acceptance by bank of the importer bill of exchange, issued by exporter. The term reimbursement credit is applied as usual when banks accept bills of exchange issued by international commercial banks. These banks play auxiliary role and undertake responsibility towards banks – acceptors for timely currency transfer (reimbursement) to their accounts, needed for payment acceptance bills.
Factoring represents itself trade-commission operation, connected with crediting of operating assets. Factoring is a variety of short-term crediting and intermediary activity and means collection of debts receivable. Factoring includes collection of buyers’ debts receivable, provision to the seller short-term credit, and deliverance of buyer from credit risks. The main objective of factoring is timely reception by the seller of money, immediately or in time, defined by the contract. For this purpose at the clients instance bank concludes the agreement on payment by all payment documents, issued for a certain buyer. Thus bills are paid in a certain percent to the amount of these bills; the rest after deduction of bank margin is paid after receipt of funds from buyer.
Long-term credits under compensatory transactions are based on mutual deliveries of goods to equal cost. In this case country-borrower in the name of any large company having received a credit for the period of 15-20 years for purchase of cars, equipment for establishment and reconstruction of an enterprise or reclamation of natural resources, repays this credit by oncoming flows of goods, issued by established or reconstructed enterprises. The main features of compensatory agreements are their large-scale size and long-term character as well as mutual conditionality of export-import transactions.
Opening by bank of credit lines for foreign borrowers to pay foreign trade transactions, including revolving (renewed) credit lines allows in a simplified form to receive credit within a certain limit under delivery of concrete kinds of outputs and services.
At the turn of 20 21 centuries world economy has closely approached virtual economy [11, 67]. In is connected with a rapid acceleration of constantly untwisting of innovation spiral as well as with development of internet network and mobile communication of the third age. This caused activization at international financial market of such operations as leasing, franchise, tolling, market fronting and investment. All these
financial operations are connected with minimization of financial costs, are in their nature aggressive operations, they toughen a competition and lead to the capture of markets.
The volumes of equity market are indirectly testified by sizes of daily trades by American Exchequer Stocks - 300 bln. US dollars and less than 10 bln. US dollars - in the American equity market [12, 1], therefore it is impossible to count equity market volumes in the world. According to one of estimations at the end of 1997 it made almost 53 trillion, in 1998 - about 60 trillion, 1999 - 72 trillion, 2000 - 68 trillion, 2001 - 66 trillion US dollars [13, 1]. Here as well as in other markets dominate developed countries. At the same time not in all countries the emittance of shares is the main source of funds mobilization at financial markets. For example, in Germany, France and Italy firms usually prefer to use bank credits in these purposes.
World market of insurance services is estimates in 2,5 trillion US dollars – the estimation is performed considering the sizes or annual insurance premiums, as only they can be used in the capacity of financial resources by world financial market participants. A large amount of insurance companies act at the world market. Only in Western Europe countries there are about 5,5 thousand of them, and in the USA - more than 9,1 thousand [14, 25].
1.3 Financial assistance and capitalized reserves in system of transformation processes
It is known that almost s half of world population lives for less the 2 dollars per day, among them more than 1 billion – for less the 1 dollar per day. 14% of the world population don’t receive a necessary minimum of products and almost 0,5 billion persons chronically undereat, 1,3 billion persons have no sources of pure potable water, 2 billion live in insanitary conditions and 2 billion – without an electricity [15, 1]. Remaining instability of a world economy, suspense of global problems appears to be the main troubles of all countries. It is possible to solve them only by means of joint efforts of the governments and the international financial organizations as experience of last decades raises serious doubts in ability of the international private capital markets to provide financing of the development consisting in escalating of the industrial, social and human capital. Means of the international financial organizations are official, and it substantially raises their role in struggle against poverty.
The financial help to the needing countries render both international organizations, and developed states. It occurs in form of transfer of public funds (grants or loans) by one state to another (bilateral help to development) or through the international non- governmental structures and agencies (help to development on a multilateral basis).
An official help with a purpose of development is provided in form of grants, credits and other transfers in monetary or natural form (goods or services) to partner states and international multilateral institutions. Grant represents a transfer in the monetary or natural form, that doesn’t lead to formation of debt liability at the receiver. To the grants given to developing countries, equate sums of forgiven debt, grants provided to non- - governmental organizations, some kinds of expenses for implementation programs of help as well as flows similar to grants.
To differentiate financial help from commercial loans, credits and loans apply concept of "grant-element". Distinctive feature of an official help with a purpose of development is its orientation on assistance to social and economic development of developing countries and its preferential character which is characterized by a presence of a grant-element in the amount not less than 25% (at calculation under the fixed rate of discounting in 10 %).
Grant-element is an indicator of credit preferenciability provided as an official help with a purpose of development. Mathematically it is calculated as a difference ratio between nominal costs of credit (loan) and caused by cost of services debt (the sum of the discounted future payments on debt servicing),calculated under the rate of discounting of 10 % to the size of nominal cost of the loan. Factors [16, 56], that define the size of grant- element are: term of debt payment, preferential period of crediting (period from the moment of signing credit agreement to the first payment of the principal amount of debt), quantity of payments on grant repayment per year, period of loan disbursement, discounting rate, interest rate during grace period, interest rate during the period of loan disbursement and total amount of payments. The general formula of grant-element calculation under the conditions of equal payments of a principal debt amounts and equal rates of interest both for grace period and forthcoming period of debt disbursement looks the following way:
R – rate of interest in the period of preferential loan disbursement, equal to the rate of interest during the subsequent period of payment;
A – quantity of payments per year;
D – discounting rate during the payment period: = ((1+) • ( )) – 1;
INT - an interval between date of the accepted obligation and date of the first payment after deduction of interval between two payments, or I = G-;
M - term of loan disbursement;
I - discounting rate.
Formula 1. Calculation of grand element in terms of equal payments of the main debt and even interest rates for both grace period and following period of debt redemption [16, 66].
Let’s assume that country A provides a credit to a country B in the amount of 1000 units for the period of 10 years under 2,5% of annual interest at the fixed rate of discounting of 10% with a grace period of two years and under the condition of annual equal payments of the principal loan amount and remaining equal interest rate both for grace period and for the subsequent period of loan disbursement.
In terms of conditions of equal payments on credit, size of payment of a principal amount for each year after expiration of a grace period will make up 125 units. Let’s calculate the amounts of a principal debt amount rest for each year deducting 125 units from remaining annual debt amount. Amount paid in the form of percents in terms of preservation of interest rate, invariable after expiration of a grace period will annually decrease, as the amount for disbursement of a principal debt will reduce each year. Let us find out the cost of debt service, having put together payments on disbursement of principal amount of debt and accrued interest. For each year we will calculate factor of discounting which allows to lead the amount of payments in a future period to its cost in the current period of time.
The factor of discounting for each year is calculated according to the following formula: , where k – discounting rate, n – number of years. For example for the first year factor of discounting is equal: Discounted payments on debt service for each year are calculated by multiplying factor of discounting to service of the credit costs this year. Having summed up discounted payments on debt service for each year will
find out the total amount of discounted payments for 10 years period of time, it will make up 639,7 units (tab. 1). Let’s calculate grant-element size
using the following formula: where C (credit) – credit size, ∑ DP - the sum of discounted payments.
Tab. 1. Calculation of a grant-element on the assumption of annual equal payments of the basic sum of credit, and preservation of equal rate of interest with a crediting grace period (author’s calculations).
Period 2011- 2012 2012-
2013 2013-
2014 2014-
2015 2015-
2016 2016-
2017 2017-
2018 2018-
2019 2019-
2020 2020-
2021 Disbursement of a
principal debt amount
under the loan terms 125 125 125 125 125 125 125 125
Size of a principal debt amount in the current year
1000 875 750 625 500 375 250 125
Payment of interest 20 20 20 17,5 15 12,5 10 7,5 5 2,5
Debt service cost
20 20 145 142,5 140 137,5 135 132,5 130 127,5
Discount factor 0,91 0,83 0,75 0,68 0,62 0,56 0,51 0,47 0,42 0,39
Discounted debt
service payments 18,2 16,6 108,75 96,9 86,8 77 68,85 62,275 54,6 49,725 Amount of discounted
payments for 10 years
period 639,7
There are few ways of debt payment: payment of in advance stipulated sums in different payment periods, payment of equal sums in all periods of payment and loan repayment at the end of crediting period. It’s obvious that the most favorable terms of payment for developing countries are loan repayments in a total amount (principal loan and interests) at the end of crediting period, as rate of interest is calculated to the amount of debt only once at the end of crediting period. The help is provided in two main forms: first one is bilateral help for development which includes: (1) direct transfer of funds by donor to the country; (2) transfer of funds by donor to both national and international non- governmental organizations; (3) internal expenses of donor to the help for development, subsidies for interest payments etc.; (4) help provided by international non-governmental organizations in form of financing specific projects; (5) contributions into international organizations, when donor remains the right to control the expenses. The second form of help provision is carried out on a multilateral basis. These are contributions into international organizations, established by governments of different states and whose activity is connected with provision of help for development. Thus payments from participants become a part of financial assets of these organizations.
There are distinguished also few kinds of aid: tied aid – credits and grants, provision of which is determined by conditions of both formal and informal agreements;
non-tied aid – credits and grants which can be freely and fully used by the recipient for financial purchases of goods and services in any country of the world. Partly non-tied aid – credits and grants provided for financial purchases of goods and services in a certain list of countries includes all developing countries and a country – donor. In mechanism of granting financial help an important role plays grace period of crediting, that reflects financial conditions of accepted obligations on sphere of assistance the development, rate of interest, terms of payments. Not less important category is also a level of credit preferenciability – the extend of ―softening‖ terms of credit granting that reflects advantages of credit for the borrower at comparison with market interest rate. Level of preferenciability is defined by comparison of a current cost of credit to the cost of credit at the same amount but profitably on commercial conditions and is expressed in percents of the current cost of credit. Thus grant has a level of preferenciability 100% and fully commercial credit – 0%.
Let’s consider an example of a credit given by International Association of development for 40 years with a grace period of 10 years, one payment per year and rate of interest 0, 75%. Payments under the soft loan are compared to payments under the similar credit, given for the same period of time and on the same commercial terms. Having used the formula of grand-element calculation we will see that the level of preferenciability makes up 80,5%. According to calculations made by International association of development, increase of grace period under own credits given for 5 years leads to increase of credit preferenciability for 4 percentage points to 68%; increase of credit repayment period for 10 years – for 5 percentage points (up to 69%), decrease of debt service costs from 0, 75 % to 0, 5 % - on 6 percentage points (up to 79 %) [17, 2]. Level of preferenciability by granting bilateral or tied aid is calculated in the similar way, but instead of notional amount of debt is used notional amount considering already paid and still not paid funds.
Basic mechanism of granting and service of financial help are also following categories of financial obligations, connected with crediting and indebtedness. Credit (loan) is a transaction on resources transfer in natural or monetary form resulted in occurrence of debt obligation in a borrower. Under the help for development borrower is provided by credits (loans). Export credit – borrowed funds provided with an aim to
borrowed funds can be extended by means of both state and private sector actions. At increase of export credit volumes at the expense of private funds, private source can enlist state guarantees. Debt represents unpaid financial obligations, occurred as a result of non- redemption of previous loan. Debt can be attributed to the external or internal creditor. Its financing/reimbursement is usually carried out in form of credits or debt obligation. Thus a debtor/obligator can be both state and private subject of economic activity. Debt remission represents an agreement concluded between creditors on simplification of debt burden of countries – debtors, or through revision of interest payments schedule and reduction of the amount of paid debt, often on concessional basis or by means of partial or full cancellation of payments on account of service of a debt during precisely determined period of time.
Reorganization (re-structuring) of a debt - result of the bilateral agreement between the creditor and the borrower per which change the conditions of service of a debt.
In 1997 the financial help in the world has made more than 57 bln. US dollars, including loans and grants on a bilateral basis (interstate) - about 40 bln. US dollars, and the rest - aid provided by international organizations, first of all IMF and IBRD [6, 213].
For the least developed countries the financial help became one of the main sources of their financial resources for realization of structural transformations of economy. If in 1980 it made 4% in relation to gross national product of these countries in the mid-nineties - more than 12 %, providing a considerable part of capital investments and the state expenditures, and in some of them becoming the main part of these expenses. The majority of other countries receive less external help though there are many exceptions: if for Azerbaijan, Albania, Armenia, Georgia, Kirghizia the external help in the mid-nineties meant a supplement to their gross national product in the amount of 4-10 %, for Mongolia it made up 28 %. For such developing countries as India, China and Russia, the external help usually makes up less than 1-2 % of their gross national product – for them external loans and flow of foreign direct and portfolio investments mean much more.
Provision of aid is usually connected with fulfillment of different conditions. So, countries that receive financial help from IMF and IBRD should coordinate their economic policy with recommendations of these organizations. Nevertheless, despite criticism of the international financial organizations at a present time there exists no alternative to them.
Not a single state possess so powerful financial resources which can be used for maintenance of the international financial stability and means of help to developing countries and countries with transition economy. Not casually international financial
independent subject of the world economy, which directly influences direction and intensity of the world economy development, as well as coordinated liquidation of its misbalance in consequence of global natural accidents for example such as earthquake and a tsunami in Japan in March, 2011.
Traditionally an important role in acceleration of modern transformation processes play international capitalized reserves (ICR), which represent highly liquid financial assets, intended to maintain solvency of the countries under the international financial obligations, first of all in terms of monetary payments. ICR consist of monetary gold, foreign currency, special rights of advance, and IMF funds. More than 60 % of ICR, total amount of which exceeds 10 bln. US dollars, are concentrated in Central Banks in only 20 countries (tab. 2 [18,1]).
Tab. 2. States with the greatest world capitalized reserves
Place Country Capitalized reserves, in
US dollars
Date of information supply
1 China 2 648 000 000,0 December 2010
2 Japan 1 041 690 000,0 November 2010
3 Russia 482 000 000,0 January 2011
4 Saudi Arabia 410 300 000,0 December 2010
5 Taiwan 382 010 000,0 December 2010
6 Brazil 299 184 000,0 February 2011
7 India 299 172 000,0 February 2011
8 South Korea 291 600 000,0 December 2010
9 Hong Kong 268 700 000,0 December 2010
10 Singapore 206 300 000,0 December 2010
11 Thailand 174 094 000,0 January 2011
12 Algeria 157 000 000,0 September 2010
13 France 154 562 000,0 September 2010
14 Italy 144 840 000,0 August 2010
15 Mexico 116 573 000,0 January 2011
16 Malaysia 113 100 000,0 January 2011
17 Iran 101 000 000,0 October 2010
18 Poland 99 722 000,0 October 2010
19 Great Britain 96 968 000,0 June 2010
20 Indonesia 96 238 000,0 December 2010
It’s worth to stress, that gold monetary reserves of Czech Republic as at February 2011 are estimated in 42 050 000,0 US dollars [18,1].
Basic purpose of these official international reserves is reduction of national monetary units’ volatility, connected with of international financial speculators activity and inequality of foreign trade activities. Main objective of ICR management is achievement of comprehensible values of liquidity and profitableness indicators, therefore capitalized reserves of separate state urged to carry out following functions: financing of balance deficiency of current transactions; service of international payments, first of all state external debt; realization of currency investments under rates policy; formation of liquidity stock; deriving of profit. Nowadays there exist few main approaches to definition of optimum level of ICR. According to the approach recommended by IMF, the volume of these stocks should make up volume of quarterly country import. According to the second approach, country reserves should be equal to volumes of quarterly country import plus payments on external state and all corporate debts of the country. The third approach proceeds from «a rule of Gvidotti» [19, 1]: reserves should cover annual volume of external debt, and the fourth approach consists that the capitalized stocks should be not less than 8 % of a gross national product, and should allow to perform the activity without external loans within one year and to be sufficient for the prevention of sharp devaluations and revaluations of national currency.
On fig. 5 ICR are presented in a geographical cut [20, 1 and 21, 1].
Fig. 5. The world capitalized reserves, bln. US dollars.[20, 1 and 21, 1].
It is known that the first state reserves were created in gold, but according to the results of the conference in Bretton Woods in 1944 the United States of America have
converting of both US dollars and gold. In the process of transition from the Gold standard to free converting, US dollar along with gold became one of world money types.
Subsequently, after crash of Bretton Woods system in 1971, the USA have refused from conversion of US dollar in gold, but taking into account that the share of US dollar in international payments remains the main reserve currency, and most central banks keep remaining great volumes of international reserves in US dollars. Change of international reserves currency structure in the world shows that at the turn of the 20-21 centuries the USA and England have most strengthened their currencies. Only by introducing euro leading continental countries of Europe could resist tendency of such an excessive strengthening.
It is known that gold – historically the first component of ICR. In terms of an economic crisis interest in gold, which is included in the mechanism of currency relations, has essentially increased. Monetary gold (ingots and plates of the standard sample with cleanliness of metal not less than 995/1000) as a component official ICR is at the disposal of state structures of monetary and credit regulation, representing financial authorities:
central banks (in the European countries), xchequers (in USA), etc. Size of gold reserves covers important criteria in estimation of economic potential of the country. According to IMF data world monetary reserves make about 830 million troy ounces [22, 1]. To the share of the largest holders (10 countries, 8 % of owners) falls 82 % of the centralized gold that exceeds stocks of all other countries almost in 5 times. Such a high level of concentration is explained by the fact that the same group of the countries disposes half of world trade turnover and currencies with reserve functions. The absolute sizes of monetary gold that is at the disposal of the first-rate holders in 2010 are presented in tab. 3.
Tab. 3. States with the greatest stocks of monetary gold [23, 776 and 24, 1].
Two recent crisis years have shown that financial authorities seek to increase insurance stocks of gold even on a growing price wave. ―World Gold Council‖ mentions that unique features of this resource, such as economic and physical safety, profitableness, possibility of diversification and utilization for unforeseen needs will strengthen adherence
Countries Tones ratio in %
2010 to1995 Countries Tones ratio in % 2010 to1995
USA 8,133.5 100 Switzerland 1,040.1 40
Germany 3,402.5 115 Japan 765.2 102
Italy 2,451.8 118 Russia 726.0 226
France 2,435.4 96 the Netherlands 612.5 57
China 1,054.1 267 India 557.7 140
