Trading in the bond market. Unit 8. Financial markets

A. TEXT

UNIT 8. FINANCIAL MARKETS. THE BOND MARKET

B) Reread the article to find the sentence describing the present-day relations between the IMF and the World Bank.

Ex. 19. a) Read the article below quickly to find the major points of criticism towards the IMF.

It was not only Brazil that ran up the white flag last week when it halted the defence of its currency on the world foreign exchanges. The defeat of Brazil was also a defeat for the International Monetary Fund, the Group of Seven and the ill-conceived set of policy recommendations which have ensured that a problem in South-East Asia has the potential to turn into a full-scale global crisis.

The orthodox approach insisted on by the IMF in country after country has proved a disaster. If it were a private firm, the IMF's board would have been sacked long ago.

There will doubtless be those who will say that there is no reason to reassess the policies which underpin the free market – deflation, austerity, high interest rates, privatization and capital liberalization.

But last week's events are a crushing blow to that orthodox approach. Their analysis of the crisis has been wrong from the start, and they have not the first idea of what to do now, apart from more of the same.

The IMF has a bankers' mentality. It deals with central banks and thinks of itself as a central bank. It is secretive, lacks transparency and has a fixation with narrowly defined indicators. The IMF's obsession with budget deficits, curbing inflation and financial liberalization has engendered a damaging short-termism that has held back long-term development.

Reducing budget deficits through public-spending cuts while simultaneously freeing up domestic capital markets has simply had the effect of raising debt-servicing costs, thereby crowding out investment in health and education.

There have been signs during the last 18 months of a growing fissure between the IMF's thinking and that of its sister organization – the World Bank. The bank's report on the Asian crisis concludes that insistence on pushing up interest rates was a crucial blunder that worsened the situation, and that it would have been better to have let currencies fall and keep interest rates low in order to keep economies moving forward.

Words you may need:

to run up the white flag выбросить белый флаг

halt v остановить

disaster n бедствие

deflation n дефляция

austerity n строгая экономия

fissure n трещина

People and organisations wanting to borrow money are brought together with those having surplus funds in the financial markets.

There are a great many different financial markets, each one consisting of many institutions, dealing with different instruments in terms of the instrument maturity' and the assets backing it, and serving different types of customers.

Generally, financial markets are classified as money or capital markets and primary or secondary markets.

Money markets deal in short-term securities having maturities of one year or less. Capital markets deal in long-term securities having maturities greater than one year. An investor who purchases new securities is participating in a primary financial market. An investor who resells existing securities is participating in a secondary financial market.

So, when businesses, units of government or individuals cannot satisfy their needs for funds by revenue from sales of goods and services, they can turn to either debt financing (any process by which the firm gets cash or some other assets in return for a promise to pay an agreed upon sum plus interest) or equity financing (any process by which a firm raises funds in return for a share in its ownership and management).

Some sources of funds available to businesses (like issuing stock) are not available to governments. When revenues fall short of expenditures² governments go into debt³ – they borrow short- and long-term funds by issuing bonds.

A bond is an instrument in which the issuer (debtor/borrower) promises to repay to the lender/investor the amount borrowed plus interest over some specified period of time. It should be stressed that one of the most important characteristics of a bond is the nature of its issuer. Issuers include federal (central) governments and their agencies, supranational (such as the World Bank, the Asian Development Bank), municipal governments, and nonfmancial and financial corporations.

By far the largest issuers are central governments.

There is no uniform system for classifying the global bond markets. Quite a number of financiers consider it appropriate to use the following classification. From the perspective of a given country, the global bond market can be classified into two markets: an internal bond market and an external bond market. The internal bond market is also called the national bond market. It can be decomposed into two parts: the domestic bond market and the foreign bond market.

The domestic bond market is where issuers domiciled in the country issue bonds and where those bonds are subsequently traded. The foreign bond market of a country is where bonds of issuers not domiciled in the country are issued and traded.

Bonds traded in the US foreign bond market are nicknamed Yankee bonds. In Japan, foreign bonds issued by non-Japanese entities are nicknamed Samurai bonds. Foreign bonds in the United Kingdom are nicknamed bulldog bonds, in the Netherlands – Rembrandt bonds and in Spain – matador bonds.

The external bond market, also called the international bond market, includes bonds with several distinguishing features: 1) they are underwritten by an international syndicate, 2) at issue they are offered simultaneously to investors in a number of countries, 3) they are issued outside the jurisdiction of any single country, and 4) they are in unregistered form. The external bond market is commonly referred to as the offshore bond market, or more popularly, the Eurobond Market. The Eurobond Market is divided into different submarkets depending on the currency in which the issue is denominated.

Computerization in bond markets has reduced costs of trading bonds and made them more convenient to hold and transfer: they are not issued in certificate form – they are only computer entries.

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