The Volatility Machine: Emerging Economics and the Threat of Financial Collapse
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...
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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.
IntroductionPt. IThe Structure of Financial Crises1Capital Structure and Policy Collapse: The Financial Crisis of the Late 1990s32Market Structure Issues24Pt. IIGlobal Liquidity and Capital Flows3Why Does Rich-Country Capital Flow to Poor Countries?354180 Years of Liquidity Expansion and International Lending515The Contraction of International Lending72Pt. IIIThe Corporate Finance of Crises6The Theory of Capital Structure and Financial Risk917The Capital Structure Trap1248Toward a Theory of Sovereign Capital Structure Management1469Debt Restructurings within a Corporate Finance Framework172Pt. IVConclusion10Conclusion: The New Financial Architecture189AppThe Option Characteristics of Sovereign Debt201Bibliography217Index229
