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Money Flows Around the World in Unexpected Ways

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As the saying goes, money makes the world go around. But where exactly is it going? The answer to this question may be found in statistics that have been published by the Department of Treasury and the International Monetary Fund which traces equity-investments and debts flowing across borders.

It would be simpler if the accounts of corporations were cataloged according to national boundaries. Brazilian oil giants Petrobras would be able to sell its bonds directly to investors from America and Europe. Numerous organizations raise capital through subsidiaries overseas that were established for that purpose. Petrobras raises debts through Petrobras Global Finance, a subsidiary based in the Netherlands.

This type of distortion obscures the view of economists on global investments. When cash moves from a subsidiary to the parent company, this can appear as a foreign direct investment. A collaborative study between Danish Central Bank, the IMF and the University of Copenhagen estimate that about 40% of FDIs are in fact “ghost” through shell companies.

Another study conducted by Antonio, Matteo, Brent and Jesse of Harvard University, Stanford University, University of Chicago and Columbia University respectively have also estimated how much distortion is there in the official figures. They are motivated by the sharp rise of cross-border investments between 2007 and 2017 from approximately 40-55% for debts and equity capital 10-50%.

The authors catalog seven data sets, this includes investor portfolio information and their association with parent companies and their subsidiaries. Debt and equity investments channeled through tax havens are distributed to the parent company. What is officially considered as a US credit to Petrobras Global Finance located in Holland, analysts reconfigure it as a credit to Petrobras in Brazil.

The most dramatic revision in American equity holdings in China, official statements put it at around $160 billion in 2017. This reasonably low figure indicates the fact that the Chinese government limits holding in key sectors. Nut it does not indicate the real stake being held by America. After adjustments by the authors, the real stakes being held by Americans in China skyrockets to $700 billion.

This goes to show that rules result in financial contradictions. The findings also indicate risks. Some large emerging markets are prone to a depreciation of their currency against the US Dollar something that official data does not show. In case of a crisis, the government will be required to settle loans owed by local companies but are being held outside their control.

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