After years of relative calm, in recent months several emerging economies have found the cost of attracting foreign funding is going up. Faced with a halt of external financing, Argentina obtained a three-year financing deal worth $50 billion from the IMF, while funds also appear to be flowing out of Brazil, Turkey, and elsewhere. And, recent bond market turbulence in Italy suggests the possibility that political risks are triggering outflows there.
In this post, we explain balance-of-payments (BoP) crises—the sudden stops or capital flow reversals—that compel countries to restore their external balance between exports and imports or, in the case of capital flight, shift to export surpluses. In addition to describing common features of BoP crises, and characterizing sources of vulnerability that make them more likely, we examine one emerging-market example—the Asian crisis of 1997-98—and one advanced-economy episode—the crisis of the euro-area periphery from 2010 to 2012…. Read More
When most people think of investment, what comes to mind is the purchase of new equipment and structures. A restaurant might start with construction, and then fill its new building with tables, chairs, stoves, and the like. This is the world of tangible capital.
We still need buildings and machines (and restaurants). But, over the past few decades, the nature of business capital has changed. Much of what firms invest in today—especially the biggest and fastest growing ones—is intangible. This includes software, data, market analysis, scientific research and development (R&D), employee training, organizational design, development of intellectual and entertainment products, mineral exploration, and the like.
In this post, we discuss the implications of this shift for the structure of finance. Tangible capital can serve as collateral, providing lenders with some protection against default. As a result, firms with an abundance of physical assets can finance themselves readily by issuing debt. By contrast, a company that focuses on software development, employee training, or improving the efficiency of its organization, will find it more difficult and costly to borrow because the resulting assets cannot easily be re-sold. That means relying more on retained earnings or the issuance of equity.... Read More