Title: Managing the Financial Crisis: Argentina 2002
1Managing the Financial Crisis Argentina (2002)
- Mario I. Blejer
- Director
- Centre for Central Banking Studies
- Bank of England
2(No Transcript)
3Managing the crisis
- Assess the Nature and the Root Causes of the
Crisis - Define the Tradeoffs
- Define and Operational Strategy
- Persevere in the Implementation
- Learn some Lessons
4The Nature of the Argentina Crisis
- The Argentine crisis was both a CURRENCY and a
BANK crisis Inter-related but caused by a
combination of different factors. Analytically,
better to distinguish between them in an explicit
manner. - The third crisis, the DEBT crisis embodied in
the larger sovereign DEFAULT in history is
closely related to the other two.
5THE CURRENCY CRISIS
- The Currency Crisis reached its peak with the
January 2002 devaluation. It is usually analyzed
in the context of the ARGENTINE CURRENCY BOARD
SYSTEM, established in 1991 as an
anti-inflationary devise. - The question to be analyzed is
What were the
weaknesses and the main causes for the demise of
the convertibility regime?
6- THREE APPROACHES
- 1. The loss of competitiveness of the Argentine
economy - 2. Macroeconomic policy inconsistencies
- 3. The Sudden Stop argument
7(No Transcript)
8(No Transcript)
9The Trade Account (in current prices)
10The Trade Account (in current prices)
11Fiscal DeficitsArgentina 1975-2001
Convertibility Period
12The Use of Privatization Receipts to Reduce the
Deficit
Privatization Revenue
Total Deficit
13(No Transcript)
14(No Transcript)
15(No Transcript)
16Capital Flow s and Economic Activity
(Accumulated 4 quarters - USm. GDP Cyclical
Component)
Capital Flows Private Sector
8
15.000
10.000
6
5.000
4
0
2
-5.000
0
-10.000
-2
-15.000
-4
-20.000
Russian Crisis
GDP Growth
-6
-25.000
-8
-30.000
-10
-35.000
IV 94
IV 95
IV 96
IV 98
IV 01
IV 97
IV. 99
IV. 00
17Sudden Stops in Argentina and Chile (Private
Capital Flows, Percentage of GDP
4
8
7
3
6
2
5
Argentina
4
Argentina
Chile
1
3
0
2
1
-1
Chile
0
-2
-1
1998-I
1999-I
2000-I
2001-I
1998-II
1999-II
2000-II
2001-II
1998-III
1999-III
2000-III
1999-V
1998-IV
2000-IV
18Economic Activity GDP and Investments (1998.II10
0)
GDP
Investment
105
107
100
105
95
Chile
Chile
103
90
101
85
80
99
75
97
70
Argentina
Argentina
95
65
60
93
1999.I
2000.I
1998.II
1999.II
2000.II
2001.II
1998.II
1999.II
2000.II
2001. I
2001.II
1998.IV
1999.IV
2000.IV
1998.III
1998.IV
1999.III
1999.IV
2000.III
2000.IV
2001.III
19Financial Vulnerabilities to Capital Flows
Reversals
Brasil
Chile
Argentina
Public Debt ( of GDP)
Public Sector External Unhedged Exposure
Private Sector External Unhedged Exposure
Banking Sector Exposure To the Public Sector
High Vulnerability
Medium Vulnerability
Low Vulnerability
20- THE BANKING CRISIS
- While the problems of convertibility and the
consequent exchange rate uncertainty played a
role, the banking crisis was largely caused by
the government abuse of the banking sector,
given its inability to to adjust the budget
deficit -
-
21(No Transcript)
22Credit to Private Sector
23- The main cause for the banking crisis was the
fear was that banks would be rendered insolvent
by government policy and that deposits would be
confiscated. - An important reason behind this fear was the fact
that private sector assets were being displaced
by public sector assets in banks balance sheets.
24(No Transcript)
25- The increasing banking exposure to the public
sector was accompanied by
- 1. a rapid decrease in deposits and
- 2. a sharp increase in country risk
-
-
26EMBI Index Public Sector Loans / Net Worth ()
Private Deposists - Index Dec 00 100
(2nd axis)
27- November 2001withdrawal restrictions on bank
deposits (corralito). - December 2001 Riots the De la Rua and Cavallo
government. - First two weeks of January 2002
--public debt default
--currency board is abandoned and the currency
devalued
--bank assets and
liabilities are pesified asymmetrically - i.e.
at different rates
28The abandonment of the currency board was
traumatic
- -- Complete loss of confidence in the banks, the
currency, and the government - -- Continuous bank run
- -- A run on the peso that pressured strongly the
exchange rate - -- No money market or debt instruments for open
market operations
29The Tradeoffs and The dilemma for the central bank
- Having regained the LOLR function the CB could
provide the liquidity needed to finance the bank
run. Pesos would fly to the exchange market
risk of hyperdevaluation and hyperinflation. - OR
30- The CB could restrain the rediscount facility and
let banks deal with the deposit run. May prevent
hyperinflation, at the risk of the total collapse
of the banking sector.
31- Only feasible intermediate solution
-
- slow the pace of the bank run
- and, at the same time, try to avoid excessive
liquidity expansion.
-
32The Strategy Followed
- -- Provide liquidity support to banks to prevent
massive bank closures. - -- Develop sterilization instruments at the
Central Bank --the LEBAC-- to mop up liquidity
and to compete with the US. - -- Utilize part of CB reserves to intervene in
the foreign exchange market to slow the pace of
depreciation and to avoid chaotic conditions.
33- Choice of Foreign Exchange Market Strategy
-
- high interest rates
- vs.
- FE market intervention
- substitutes or complements?
34- persevere to the point where
- greed gt panic
354. Implementation
36The central bank provided rediscounts to illiquid
banks and financed about 1/3 of the deposit drop
37- The market for Central Bank ST Bills (LEBAC) was
actively developed, initially with 7 days
maturities and then with 14 and 28 days, in Pesos
and US. Interest rates reached 140 initially.
38- Intervention in the foreign exchange market
prevented disorderly behavior but did not peg the
rate, that devalued from 1 to 3.6 Pesos per
Dollar. Intervention in the first five months was
about US 2 bn.
39Initially deposit withdrawals continued
40However, the trend reversed after four months
41(No Transcript)
42- The need for the provision of liquidity from the
Central Bank where largely reduced
43(No Transcript)
44- The demand for LEBACs grew strongly.
- -- LEBACs with up to one year maturities were
introduced successfully. - -- By October interest rate has fallen to 8-45
range, according to maturities.
45Decrease of average cost and duration of LEBACs
46- The exchange rate stabilized and started to
appreciate. The CB has stopped selling and is
actively buying reserves to prevent a large
appreciation in the exchange rate. - In total the CB has regained, in a few months,
all the initial stock of intervention
47(No Transcript)
48The stabilization of the exchange rate has also
resulted in a sharp decline in level of inflation
49 Total GDPQuarterly Seasonally Adjusted
50Labor Demand
51Consumers and Business CONFIDENCE
52- Indeed, as always,
greed gt panic
53- 5. Lessons from the Crisis
-
54- The Potential Fragility of Financial Institutions
- Experience indicate that solid and solvent
financial structures could deteriorate quickly. - This is particularly true in the face of
inadequate interventions, distorted incentives
and misguided policies. -
55- The fact is that weak financial sectors are not
necessarily crisis prone. Financial crises have
been generated, in many instances, by
inconsistent policies and by an unstable
macroeconomic environment. - In this context one need to rethink the emphasis
put on the enforcement of conventional
standards and codes vis-Ã -vis inappropriate
policy actions. -
-
56- 2. Financing the Public Sector and the Crowding
Out Effect
57The Financial System needs restructuring
Financial statements situation - Dec2001/Dec2002
180
160
Loans to Private Sector
140
120
100
45
17
80
60
54
21
40
20
0
Dec 01
Dec 02
Loans to
the Public Sector
58- 3. The Importance of Proper Liquidity Management
- Availability of liquidity is a crucial element in
the prevention and the management of financial
crises - LOLR does not guarantee stability but its
absence accelerates the erosion of confidence
59- 4. The Role of Foreign Banks
- -- Do they reduce financial vulnerability?
- -- Can they provide, implicitly, LOLR function?
60- The Currency Problem
- Financial vulnerability arises from the publics
reticence to use domestic currency as a store of
value
61- -- Trade-off between shallow financial
intermediation and financial dollarization and
the risks of balance sheet mismatches - -- The original sin is not such but just a
corollary of the currency problem
62- If full dollarization is not an option, the
policy question to reduce vulnerabilities is how
to solve the currency problem - -- Macroeconomic and Institutional credibility
and in the transition Indexation - -- Pesification a la Argentina
63- 6. Capital Controls
- Does capital account integration reduce financial
vulnerability? - Long run desirability vs. short run,
transitional, risks - Capital controls and crisis management