The Importance of International Finance Management

International finance is an important part of today’s society. Growing countries need to be able to learn other currencies and trade options when trying to negotiate competitive terms with other countries. If a country can learn an efficient and cheap way to trade with other countries then they will prosper. Gaining that skill of trade and knowledge of other countries will keep international trade flowing strong. Although sometimes market pressures are high and currencies are hit hard depreciating their value, countries need to know their policies and how to bounce back if a financial crisis does break out resulting in an unsuccessful economic crash not only hurting them but affecting other countries that do business with them. Many countries have experienced a financial crisis at one point in time. A financial crisis that comes to mind would be the Asian Financial Crisis of 1997. During this time a majority of East Asia was hit with these difficulties. Part of the crisis they faced was decreasing the value of their dollar along with reducing the value of their equity and property markets. A shortage of foreign exchange played a large part in the crisis that not only affected the US but all over the world.

During the market pressures other countries that were affected, their currencies fell as well. In later months foreign investments drastically reduced and the overall development and wellness of these countries were going downhill. Not only did these East Asia countries get hit with this recession but others including banks felt investment rates drop. Not only were there huge problems in the banking and financial sectors but there was also currencies issue. In order to try to fix the currency issue the government decided to raise interest rates and sell foreign exchange reserves. But this only made matters worse. At this time agreements with other countries were being broken as they could not live up to the initial agreements made. The world was shocked to hear that some of the largest and most successful economics were in this financial crisis as their GDP sales were often very high and promising to all. Over the years we learned that there were multiple reasons that these economies went into a crisis or a recession. Some of the reasons were high volumes of domestic credit growth and nobody checking that built up leverage and doubt. External debt was built up as a result and overusing real estate markets marked risks.

These risks that were associated with the crisis and recessions brought doubt to investors and distracted them from investing within Thailand. This worsened the banking sector even more. Now foreign creditors were even hesitant and pulled away as seeing all the financial vulnerabilities unveil. With all that was happening Thailand, South Korea and Indonesia, among others were suffering and the entire world knew. Nobody wanted to invest or loan money to part of these countries as they were seen to be weak and vulnerable of economic and financial situations. Luckily the international community stepped in with loans of 118 billion for the affected countries. This money was loaned to the countries to get them back on their feet and stabilize the communities. The idea behind the financial support that stepped in was restore confidence within the communities and rebuild the reserves money. The International Monetary Fund also helped by supplying support packages for Thailand, South Korea, and Indonesia. The support packages came with funds that had specific conditions that were required to acquire additional loans. The money was given with policy reforms. The policies were different for each country but mainly included stabilizing the community and improving the markets while working on the competitiveness of the economy. The Federal Reserve also played a crucial role in supporting and enforcing policy responses. They analyzed the matter in a timely way and noticed risks associated with. They helped arrange a loan for Thailand and worked with other banks in the US to coordinate policies.

Probably the biggest role the Federal Reserve played was encouraging banks to help South Korea in avoiding other risks associated with short term loans. With the help of strong policies implemented and external support from the international community, they were able to control the crisis so it did not expand and negatively affect anybody else. Attempts to fix the issues associated with the crisis were led by the IMF. Since the financial markets are interlinked, the Asian financial crisis of 1997 affected everybody especially the US markets. The Asian financial Crisis affected the value of the US dollar as well as the capital flows. Therefore when one country suffers, all countries will feel somewhat of the effect. Another devastating crisis that occurred was the Mexican Peso Crisis of 1994 also known as the “Tequila Effect.” The fiscal and monetary policies that the government pursued were not consistent with the exchange rate rule. This lead to the investors being mad since this caused them a huge loss in the books. Another reason this effect occurred and impacted the South American economy was due to the sudden devaluation of the peso. This also affected the Southern Cone and Brazil.

In 1994 the Mexican peso devalued between 13 to 15 percent. The banks also choose to raise the interest rates to try to limit flight of capital, however, that with interest rates rising to 32 percent that put a risk on the economic stability. The government soon realized and did not mess with the peso for a couple days but then the peso ended up depreciating almost half of its value within the months to follow. The peso kept getting worse despite the help. Once again like the Asian Financial crisis the Mexican Peso Crisis also suffered a rapid currency depreciation along with a loss of its reserves. Foreign capital fled and this kept coming down harder on emerging markets. Once again the US comes to the rescues to provide the Mexican government with bailout money. Money was spent for swap facilities, securities and other assistances provided by the international monetary funds. It is nice that the international monetary funds is able to step in to provide aid to much needed countries in their time of need. The US and Mexico had many agreements made, and with Mexico’s dollar depreciation it hurt the US just as much. After the US analyzed the situation Bill Clinton who was president at the time agreed to aid them with some funds to stabilize the economy and get them back up again. With this dollar amount the US graciously agreed to loan Mexico, there were some qualifications that Mexico must meet in order to keep the funds coming.

Some of the terms the Mexican government had to agree to in order to get their bailout money were to analyze and implement new fiscal and monetary policies. These policies must take in consideration the effects that were happening at the time and ways to avoid them from devaluating their peso again. Through this crisis Mexico suffered from a rough, long recession and hyperinflation in the years following. The country also suffered from high levels of poverty for a few years following the crisis as many of the citizens were in poverty for years after the recession was officially over. This crisis ended up being a bit cheaper than the Asain Financial Crisis of 1997 at about 50 billion dollar bailout package deal. The international monetary funds administered this package in order to help stabilize the community and get it back up to be the competitive market that it was. It is nice that the international monetary funds is able to step in to provide aid to much needed countries in their time of need. One of the worst financial and economic crisis to date would have to be the Great Recession of 2008. Some of the causes of this terrible crisis would have been that banks were allowing home owners to take out loans for houses they could not afford. The banks didn’t look at the home owner’s credit and were just signing away houses. Salesman were not checking to see if the homeowner had proof of job or income or said assets, rather they kept selling houses to anybody that wanted them not seeing a problem.

Soon investors were selling their mortgages onward. The bankers would bundle the mortgages and other securities into an investment and sell these to rich investors who believed in the strong consistent housing market since 1930s. The homeowners would just believe what their agencies told them of the houses and have no doubts about the cost, securities or anything put into the mortgage bundle. The feds had to jump in and bail the banks out at a whopping $30 billion. This action proved that banks can not regulate themselves and need government help and intervention at times. Congress passed laws to prevent banks from accepting to much risk when reselling loans or just handing out home mortgages. I think this was a good idea considering all the damage the banks caused the economy to go through. The last but most important financial crisis would be The Great Depression. It lasted over 10 years although some say it lasted until the end of the war. The Great Depression is not caused by one single factor, rather there were multiple factors that lead to it. First off unemployment rates were high. Consumers were unable to find jobs to make money. Once the markets crashed nobody believed in the US financial system and people began withdrawing their money from banks. This hurt banks greatly and banks all over were collapsing. Also along with unemployment there were not good jobs or good wages. With the dust bowl many farmers lost crops during this. Also the stock market was doing very good and our output was more profitibale than ever. There were also high tarrifss imposed and ongoing war debts. With such record highs you have to come down at one point. And when we came down we crashed. After over 10 years in the terrible times of the Great Depression prosperity was restored. People were spending less and unemployment declined at the end of World War

Finanlly people were able to find more jobs and make better pay and not have to worry about funding an ongoing war. Many say world war 2 got them out of the Great Depression. I’ve learned a lot about the importance of international financial management and how one devaluating currency can have a rippling effect on several other countries that do business within that country or have ties there. I also learned that many times the government or IMF has to come to the rescues to bail out these countries from the debt they’ve consumed of the currency they have devalued. I found the Asian Financial Crisis of 1997 to be the most interesting as I learned a lot from reading scholarly articles about it. It is interesting to hear that when one country is hit many other countries are affected. I learned a lot from gathering my information for this report and am happy I can take away the importance of International Financial management from this paper.