Payments Imbalances and Financial Intermediation

It is frequently observed that the Euro-markets have come to play an indispensable role in the recycling of the oil-exporting countries’ financial surplus. The willingness of private banks to intermediate between countries in balance-of-payments surplus and those in deficit has important implications for the world economy and for the process by which countries adjust their domestic economies to external payments deficits and surpluses. If international capital markets functioned perfectly, countries might even be able to avoid the need to adjust their external payments positions, as they would be able to attract finance, or lend funds, relatively easily. Section 6.1 reviews the role of the banking system in providing international balance-of-payments finance. Section 6.2 considers a somewhat different question: the role of payments imbalances run by the reserve currency country — the USA — in Euro-market expansion.