What Is an International Financial Environment?

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  • Written By: Geri Terzo
  • Edited By: PJP Schroeder
  • Last Modified Date: 21 May 2020
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Sometimes, macroeconomic events occur that cause a ripple effect throughout the international financial environment. Even if a condition or event unfolds in a single country, the influence of that country's economy has the potential to move the markets around the world. This could be due to the fact that other countries are creditors of the nation where an event, positive or negative, has occurred or is likely to unfold. The influence of a major global economy or an emerging market has the potential to cause a stir in the financial environment, which could impact borrowing costs, cross-border deals, and profit opportunities.

An international financial environment represents the conditions for activity in the economy or in the financial markets around the world. It can be influenced by something major, such as the credit worthiness of one country's debt. Governments, corporations, and other investors around the world participate in purchasing the debt of other nations as profit opportunities arise. A downgrade of a country's debt by a rating's agency could damage the value of that country's debt and suggest that a default might be imminent. These conditions have the potential to trigger a sell-off, which is when there are more sellers than buyers of risky debt in the markets.

Just as an international financial environment can be influenced in a negative way, it can also be impacted in a positive fashion. An attractive international financial environment is one where investment and economic growth are ripe or already happening. When an economy is growing, it leads to greater infrastructure development and often a greater number of available jobs. Subsequently, international investors might recognize an opportunity to allocate capital to these growth initiatives in an attempt to profit, while corporations could develop partnerships or create new locations in the overseas markets. All of this activity is likely to create a good financial environment.

It's not unusual for the international financial environment surrounding the stock markets around the world to be a result of one country responding to another. With all of the various time zones around the world, trading sessions occur at different periods of the day globally. When one country's stock market is under extreme selling pressure during the session, this sentiment has the potential to impact the direction of trading in another country when that market begins trading. This can be referred to as market contagion when the influence of one market's behavior adversely impacts activity internationally.

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