The Volatility Machine Emerging Economics and the Threat of Financial Collapse

by Pettis, Michael

• ISBN13: 9780195143300
• ISBN10: 0195143302
• Format: Hardcover
• Copyright: 2001-05-17
• Publisher: Oxford University Press

Summary

This book presents a radically different argument for what has caused, and likely will continue to cause, the collapse of emerging market economies. Pettis combines the insights of economic history, economic theory, and finance theory into a comprehensive model for understanding sovereign liability management and the causes of financial crises. He examines recent financial crises in emerging market countries along with the history of international lending since the 1820s to argue that the process of international lending is driven primarily by external events and not by local politics and/or economic policies. He draws out the corporate finance implications of this approach to argue that most of the current analyses of the recent financial crises suffered by Latin America, Asia, and Russia have largely missed the point. He then develops a sovereign finance model, analogous to corporate finance, to understand the capital structure needs of emerging market countries. Using this model, he finally puts into perspective the recent crises, a new sovereign liability management theory, the implications of the model for sovereign debt restructurings, and the new financial architecture. Bridging the gap between finance specialists and traders, on the one hand, and economists and policy-makers on the other, The Volatility Machine is critical reading for anyone interested in where the international economy is going over the next several years.

Author Biography

Michael Pettis is a Managing Director at Bear Stearns, a New York investment bank and an adjunct professor at Columbia University where he teaches courses in international finance. He has been involved in emerging markets, both as an investment banker and as a sovereign adviser, since 1987. In addition, he has written extensively on the subject, on specialized financial topics, and on policy.

Table of Contents

Introduction	xi
Part I The Structure of Financial Crises
Capital Structure and Policy Collapse: The Financial Crisis of the Late 1990s	3	(21)
Market Structure Issues	24	(11)
Part II Global Liquidity and Capital Flows
Why Does Rich-Country Capital Flow to Poor Countries?	35	(16)
180 Years of Liquidity Expansion and International Lending	51	(21)
The Contraction of International Lending	72	(19)
Part III The Corporate Finance of Crises
The Theory of Capital Structure and Financial Risk	91	(33)
The Capital Structure Trap	124	(22)
Toward a Theory of Sovereign Capital Structure Management	146	(26)
Debt Restructurings within a Corporate Finance Framework	172	(17)
Part IV Conclusion
Conclusion: The New Financial Architecture	189	(12)
Appendix: The Option Characteristics of Sovereign Debt	201	(16)
Bibliography	217	(12)
Index	229