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International Financial Markets
Finance & Accounting
Pages 9 (2259 words)
International Financial Markets Question 1: (a) Issues that have affected the international bond markets since the start of the global financial crisis. Sovereign debt, otherwise known as public debt, is borrowing incurred by governments. This figure has risen significantly and become unsustainable for at least three Eurozone countries, namely Greece, Ireland, and Portugal, which have all turned to the International Monetary Fund (IMF) and other Eurozone member states for financial assistance…
Reasons for this trend are the fiscal stimulus packages, nationalization of private-sector debt, and reduction in tax revenues (Nelson, 2012). While government securities are considered close to risk-free, there have however been worries in 2010 that U.S. municipal bonds may default because of lack of liquidity, a fear which proved unfounded (MeritWealth, 2011). When the government requires high levels of borrowing, it tends to raise the yield on its bonds in order to attract investors. In a low interest environment, high-yield bonds become attractive to investors because the present value of high-yielding bonds makes the bonds more valuable when traded in the open market. However, by increasing the yield on its bonds the government crowds out private business and credit tends to become more costly – that is, added risk premiums increase interest rates over that offered by the government, discouraging private borrowers from resorting to bond financing because of the higher default risk involved. The result is a credit crunch that reduces funding to business and slows down productive activity, eventually causing downsizing, lay-offs and company closures. ...
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