Dealing with the international financial crisis from a SOE: emerging issues.

1
Dealing with the international financial crisis
from a SOE emerging issues.

• Gerardo Licandro
• Conference Quantitative Approaches to Monetary
  Policy in Open Economies.

2
Structure of the presentation

• Financial Crisis a view from the periphery
• Some background facts on the uruguayan economy
• Three stages in crisis administration
• Until Lehman
• From Lehman until early 2009
• Recent events
• emerging issues for the international financial
  system
• Some questions for the long run

3
Background notes on Uruguay

• SOE. Oil importing, agriculture accounts for more
  than 50 of gross production value
• High exposure to the region on goods imports and
  service exports
• Record liability dollarization (decreasing)
• Financial crisis in 2002 legacy
• More than 80 of deposits are short term
• Low levels of banking credit
• Recent macro performance
• Average growth 2003-2007 above 6
• Inflation ranged between 3-10
• Debt /GDP halved
• Structural fiscal result close to equilibrium.
  Steady reduction in spending/GDP
• Unemployment in lowest recorded level (7)

4
The crisis until Lehman

• Strong capital inflows from late 2007 til the
  first semester of 2008
• Soaring commodity prices
• Domestic impact
• Booming investment
• Rising prices of food
• Strong pressures in the exchange market
• Rapidly growing fiscal revenue
• Policy response
• Monetary policy Reserve accumulation through
  sterilized intervention
• Spike in reserve requirements
• Asset management flight from housing assets
• Response of prudential regulation control on
  asset composition of banks
• Debt. Allow change in portfolio of private sector
  through debt exchanges

5
The answer to financial panic

• Financial panic resulted in a change in the
  currency composition of the portfolio of the
  private sector. Two conflicting forces led to
  this result
• World deleveraging led to the cancellation of
  positions on domestic currency
• Deleveraging in Argentina brought dollar deposits
  to Uruguay.
• Plummeting commodity prices reduced inflation
• The priority in this environment turned to
  avoiding contagion. Policymakers decided to let
  interest rates go to minimize the use of
  reserves, while reducing excess volatility on the
  exchange rate. Uncertainty about the lenght,
  depht and severity of the crisis was key.
• Debt policy debt exchanges, for limited amounts
  to allow portfolio change and reduce pressure on
  the exchange rate market. Sign contingent lines
  with IIFs
• Prudential response preserve the assets of the
  banking sector. Run on banks in trouble.
• Fiscal policy. Limited space due to prior
  spending commitments.

6
Lessons?

• Lack of international financial safety net might
  lead to coordination failures in the response to
  the panic.
• Idiosincratic prudential response deepens
  financial panic.
• International reserve allocation followed a
  similar pattern.
• Renewed influence of commodity prices leave the
  question of its sustainability. Should we have
  stabilization funds?

7
The long term questions

• More regulation and less financial
  intermediation?
• How do we solve the debt overhang in developed
  countries?.gt
• Are emerging markets going to pay through
  inflation?
• Is there going to be an adjustment of
  consumption?
• Effects of Contractionary environment
• Competitive monetary policies?
• Competitive trade policies?
• Closing capital accounts?
• Reduction in long run growth?
• loss of confidence on the US currency?.

8
Is USs debt sustainable?
9
Dealing with the international financial crisis
from a SOE emerging issues.

• Gerardo Licandro
• Conference Quantitative Approaches to Monetary
  Policy in Open Economies.

10
Bye bye fear of floating?
Argentina 1981 Indice ene 80100
Brasil 1999 Indice ene 98100
Var ene/jun 99
Var mar/set 81
Argentina 2001 Indice ene 01100
Subprime crisis2008 Indice ene 07100
Var. ene/jun 02
Var mar09/ago 08
Fuente. BCRA, IPEA, INE y Pacific Exchange Rate.