Post on 31-Dec-2015
description
11
Managing the Financial Managing the Financial Crisis: Argentina (2002) Crisis: Argentina (2002)
Mario I. BlejerMario I. Blejer
22
Managing the crisis:Managing 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
33
The Nature of the Argentina CrisisThe Nature of the Argentina Crisis
The Argentine crisis is The Argentine crisis is bothboth a a CURRENCYCURRENCY and a and a BANKBANK crisis – Inter- crisis – Inter-related but caused by a number and related but caused by a number and combination of different factorscombination of different factors
Analytically, better to distinguish Analytically, better to distinguish between them in an explicit mannerbetween them in an explicit manner
44
THE CURRENCY CRISISTHE 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, ARGENTINE CURRENCY BOARD SYSTEM, established in 1991 as an anti-inflationary devise.
The question to be analyzed is: The question to be analyzed is: What were the weaknesses and the main causes for the demise of the convertibility regime?
55
THREE APPROACHES:THREE APPROACHES:
1. The loss of competitiveness of 1. The loss of competitiveness of the Argentine economythe Argentine economy
2. Macroeconomic policy 2. Macroeconomic policy inconsistencies inconsistencies
3. The 3. The “Sudden Stop”“Sudden Stop” argument argument
66
Tradables/non tradables (WPI/CPI)
Convertibility average101
224220
148
70
90
110
130
150
170
190
210
230
25019
80
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Ene
-02
Mar
-02
May
-02
Jul-
02
Sep
-02
Nov
-02
Ene
-03
ind
ex 2
001=
100
77
-4,0%
-3,0%
-2,0%
-1,0%
As percentage of GDP
0,0%
1,0%
2,0%
3,0%
1993 1994 1995 1996 1997 1998 1999 2000 2001
0%
10%
20%
30%
40%
50%
60%
Overall Result Primary Surplus
Total Debt (2° axis) EMBI Spread (2° axis)
Fiscal misalignement turned the burden of Fiscal misalignement turned the burden of the debt unsusutainablethe debt unsusutainable
88
-4,0%
-3,0%
-2,0%
-1,0%
As percentage of GDP
0,0%
1,0%
2,0%
3,0%
1993 1994 1995 1996 1997 1998 1999 2000 2001
0%
10%
20%
30%
40%
50%
60%
Overall Result Primary Surplus
Total Debt (2° axis) EMBI Spread (2° axis)
Fiscal misalignement turned the burden of Fiscal misalignement turned the burden of the debt unsusutainablethe debt unsusutainable
Public Debt
99
-4,0%
-3,0%
-2,0%
-1,0%
As percentage of GDP
0,0%
1,0%
2,0%
3,0%
1993 1994 1995 1996 1997 1998 1999 2000 2001
0%
10%
20%
30%
40%
50%
60%
Overall Result Primary Surplus
Total Debt (2° axis) EMBI Spread (2° axis)
Fiscal misalignement turned the burden of Fiscal misalignement turned the burden of the debt unsusutainablethe debt unsusutainable
CountryRisk
1010
Primary Expenditures as % of GDP(cumulative 12 months)
17,0%
17,5%
18,0%
18,5%
19,0%
19,5%
Dic
-97
Ma
r-9
8
Ju
n-9
8
Se
p-9
8
Dic
-98
Ma
r-9
9
Ju
n-9
9
Se
p-9
9
Dic
-99
Ma
r-0
0
Ju
n-0
0
Se
p-0
0
Dic
-00
Ma
r-0
1
Ju
n-0
1
Se
p-0
1
Dic
-01
Ma
r-0
2
Ju
n-0
2
Se
p-0
2
Dic
-02
1111
Primary Expenditures as % of GDP(cumulative 12 months)
17,0%
17,5%
18,0%
18,5%
19,0%
19,5%
Dic
-97
Ma
r-9
8
Ju
n-9
8
Se
p-9
8
Dic
-98
Ma
r-9
9
Ju
n-9
9
Se
p-9
9
Dic
-99
Ma
r-0
0
Ju
n-0
0
Se
p-0
0
Dic
-00
Ma
r-0
1
Ju
n-0
1
Se
p-0
1
Dic
-01
Ma
r-0
2
Ju
n-0
2
Se
p-0
2
Dic
-02
1212
Monthly Gross Domestic Productseasonally adjusted (Jan 98 = 100)
98,3Dec 00
82.2Nov 02
94,6Jul 99
99,0Dec 99
102,3Jun 98
75.0
80.0
85.0
90.0
95.0
100.0
105.0
Jan-
98
Mar
-98
May
-98
Jul-9
8
Sep
-98
Nov
-98
Jan-
99
Mar
-99
May
-99
Jul-9
9
Sep
-99
Nov
-99
Jan-
00
Mar
-00
May
-00
Jul-0
0
Sep
-00
Nov
-00
Jan-
01
Mar
-01
May
-01
Jul-0
1
Sep
-01
Nov
-01
Jan-
02
Mar
-02
May
-02
Jul-0
2
Sep
-02
Nov
-02
Source: CEA-UCEMA en base a datos del INDEC.
1313
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
IV 9
4
IV 9
5
IV 9
6
IV 9
7
IV 9
8
IV.
99
IV.
00
IV 0
1
-35.000
-30.000
-25.000
-20.000
-15.000
-10.000
-5.000
0
5.000
10.000
15.000
Capital Flow s and Economic Activity Capital Flow s and Economic Activity (Accumulated 4 quarters - U$Sm. GDP Cyclical Component)(Accumulated 4 quarters - U$Sm. GDP Cyclical Component)
Capital Flows Private Sector
GDP Growth Russian Crisis
1414
-2%
-1%
0%
1%
2%
3%
4%
1998
-I
1998
-II
1998
-III
1998
-IV
1999
-I
1999
-II
1999
-III
1999
-V
2000
-I
2000
-II
2000
-III
2000
-IV
2001
-I
2001
-II
Arg
entin
a
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Chile
Argentina
Chile
Sudden Stops in Argentina and Chile(Private Capital Flows, Percentage of GDP
1515
THE BANKING CRISISTHE BANKING CRISIS
While the problems of convertibility and the While the problems of convertibility and the
consequent exchange rate uncertainty consequent exchange rate uncertainty
played a role, the played a role, the bankingbanking crisis was crisis was
largely caused by the largely caused by the government government
“abuse” of the banking sector“abuse” of the banking sector, given , given
its inability its inability to to adjust the budget deficitto adjust the budget deficit
1616
50
55
60
65
70
75
80
Sep 00 Dec 00 Mar 01 Jun 01 Ago 01 Nov 01 Feb 02 Apr 02 Jul 02
Finance Minister
Resignation
"
“Corralito”
Interest
rate
ceilings
Devaluation
Private Sector Deposits (in bn Arg. Private Sector Deposits (in bn Arg. Pesos)Pesos)
1717
Credit to Private SectorCredit to Private Sector
Loans to Private Sector Evolution
20
25
30
35
40
45
50
1-Feb-02 15-Mar-02 8-May-02 20-Jun-02 2-Aug-02 16-Sep-02 29-Oct-0211-Dec-02 24-Jan-03 7-Mar-03
Billion ARG $
Nominal Stock Real Stock
1818
The main cause for the banking crisis The main cause for the banking crisis was the fear was that banks would be was the fear was that banks would be rendered insolvent by government rendered insolvent by government policy and that deposits would be policy and that deposits would be confiscated.confiscated.
An important reason behind this fear was the fact that privateprivate sector assets sector assets were being displaced by were being displaced by public public sector assets in bank’s balance sector assets in bank’s balance sheets.sheets.
1919
0%
20%
40%
60%
80%
100%
Dec-99 May-00 Oct-00 Mar-01 Aug-01 Jan-02 Jun-02
Public Sector Private Sector
Private Sector assets have been displaced by Private Sector assets have been displaced by Public Sector assets in bank’s balance sheetsPublic Sector assets in bank’s balance sheets
$ 76 MM
$ 43 MM
2020
The increasing banking exposure to the public The increasing banking exposure to the public sector was accompanied bysector was accompanied by
1. a 1. a rapid decrease in depositsrapid decrease in deposits and and
2. a 2. a sharp increase in country risksharp increase in country risk
2121
Exposición del Sistema Financiero al Riesgo del Sector Público
71
151
104
216
80
100
60
100
140
180
220
dic-98 jun-99 dic-99 jun-00 dic-00 jun-01 dic-01
70
80
90
100
110
Indice EMBI Argentina
Crédito al Sector Público / Patrimonio Neto (en %)
Depósitos Sector Privado - Base dic2000 = 100 (2º eje)
EMBI Index
Public Sector Loans / Net Worth (%) Private Deposists - Index Dec 00 = 100 (2nd axis)
2222
November 2001:withdrawal restrictions November 2001:withdrawal restrictions on bank deposits on bank deposits (“corralito”). (“corralito”).
December 2001: Riots the De la Rua December 2001: Riots the De la Rua and Cavallo government.and Cavallo government.
First two weeks of January 2002: First two weeks of January 2002: --public debt default --public debt default --currency board is abandoned and --currency board is abandoned and the currency devalued the currency devalued --bank assets and liabilities are --bank assets and liabilities are pesifiedpesified asymmetrically - i.e. asymmetrically - i.e. at at different ratesdifferent rates
2323
The abandonment of the currency The abandonment of the currency board was traumatic:board was traumatic:
-- Complete -- Complete loss of confidenceloss of confidence in the banks, the in the banks, the currency, and the governmentcurrency, and the government
-- Continuous -- Continuous bank runbank run
-- A -- A run on the pesorun on the peso that pressured strongly the that pressured strongly the exchange rateexchange rate
-- -- No money market or debt instrumentsNo money market or debt instruments for for open market operationsopen market operations
2424
The Tradeoffs and The dilemma for The Tradeoffs and The dilemma for the central bankthe central bank
Having regained the LOLR function Having regained the LOLR function the CB could provide the liquidity the CB could provide the liquidity needed to finance the bank run. needed to finance the bank run. Pesos would fly to the exchange Pesos would fly to the exchange market – risk of hyperdevaluation market – risk of hyperdevaluation and and hyperinflationhyperinflation..
OROR
2525
The CB could restrain the rediscount The CB could restrain the rediscount facility and let banks deal with the facility and let banks deal with the deposit run. May prevent deposit run. May prevent hyperinflation, at the risk of the hyperinflation, at the risk of the total total collapse of the banking sector.collapse of the banking sector.
2626
Only feasible intermediate Only feasible intermediate solution:solution:
slow the pace of the bank run slow the pace of the bank run
and, at the same time, try to and, at the same time, try to avoid excessive liquidity avoid excessive liquidity expansion. expansion.
2727
The Strategy FollowedThe Strategy Followed
-- -- Provide liquidity support to banks to prevent massive bank closures.
-- Develop -- Develop sterilization instrumentssterilization instruments at the at the Central Bank --the Central Bank --the LEBACLEBAC-- to mop up -- to mop up liquidity and to compete with the U$S.liquidity and to compete with the U$S.
-- -- Utilize part of CB reserves to intervene in the foreign exchange market to slow the pace of depreciation and to avoid chaotic conditions.
2828
Choice of Foreign Exchange Market Choice of Foreign Exchange Market Strategy:Strategy:
high interest rates high interest rates
vs.vs.
FE market intervention:FE market intervention:
substitutes or complements?substitutes or complements?
3030
Accumulated evolution (31-Jan-02 al 24-Jul-02)
-In billion of pesos-
0
5
10
15
20
25
31-Ene 17-Feb 6-Mar 23-Mar 9-Abr 26-Abr 13-May 30-May 16-Jun 3-Jul 20-Jul
Loans Assistance Bank Reserves fall Deposits fall
The central bank provided rediscounts to The central bank provided rediscounts to illiquid banks and financed about 1/3 of the illiquid banks and financed about 1/3 of the
deposit dropdeposit drop
3131
The market for The market for Central Bank Central Bank
ST BillsST Bills (LEBAC) was actively (LEBAC) was actively
developed, initially with 7 developed, initially with 7
days maturities and then with days maturities and then with
14 and 28 days, in Pesos and 14 and 28 days, in Pesos and
U$S. Interest rates reached U$S. Interest rates reached
140% initially.140% initially.
3232
Intervention in the foreign Intervention in the foreign exchange market prevented exchange market prevented disorderly behavior but did disorderly behavior but did not peg the rate, that not peg the rate, that devalued from 1 to 3.6 Pesos devalued from 1 to 3.6 Pesos per Dollar. Intervention in the per Dollar. Intervention in the first five months was about first five months was about U$S 2 bn.U$S 2 bn.
3333
Initially deposit withdrawals Initially deposit withdrawals continuedcontinued
Private Sector Deposits - Year 2002
-2609
-4335 -4378 -4526
-998
160
-235 -340
-823 -810-1274 -1230
-5000
-4000
-3000
-2000
-1000
0
1000
Feb Mar Abr May Jun JulIn million of pesos
Deposits minus preventive measures Preventive measures
3434
However, the trend reversed after However, the trend reversed after four monthsfour months
Private Sector Deposits - Year 2002
-2609
-4335 -4378 -4526
-998
160
-235 -340
-823 -810-1274 -1230
-5000
-4000
-3000
-2000
-1000
0
1000
Feb Mar Abr May Jun JulIn million of pesos
Deposits minus preventive measures Preventive measures
3535
Private Sector Deposits(in billion pesos)
40
45
50
55
60
65
70
75
80
01-Oct-01 27-Nov-01 23-Jan-02 21-Mar-02 17-May-02 13-Jul-02 18-Oct-02 04-Nov-02 31-Dec-02
Devaluation
Withdrawal
Restrictions
"Corralito"
Recovery
Reprogramming
Pesification
3636
The need for the provision The need for the provision of liquidity from the of liquidity from the Central Bank where largely Central Bank where largely reducedreduced
3737
Flujos Mensuales de Asistencia del BCRA
29%29%
61%52%
31%29%
-500
0
500
1,000
1,500
Ene Feb Mar Abr May Jun Jul Ago Sep Oct Nov
Millones de Pesos
-30%
0%
30%
60%
90%
Asistencia Neta Mensual Asistencia/Salida de Depósitos
3838
The demand for LEBACs grew strongly. The demand for LEBACs grew strongly.
-- LEBACs with up to one year maturities -- LEBACs with up to one year maturities were introduced successfully.were introduced successfully.
-- By October interest rate has fallen to -- By October interest rate has fallen to 8-45% range, according to maturities. 8-45% range, according to maturities.
3939
Average duration and cost of LEBACs in pesos
0
20
40
60
80
100
120
140
15-mar 14-apr 14-may 13-jun 13-jul 12-aug 11-sep 11-oct 10-nov 10-dec 9-jan
Days
0
20
40
60
80
100
120
140
ANR 14d %
Average Cost
AverageDuration
Decrease of average cost and duration of LEBACs
4040
The exchange rate stabilized and started to The exchange rate stabilized and started to appreciate. The CB has stopped selling appreciate. The CB has stopped selling and is actively buying reserves to prevent and is actively buying reserves to prevent a large appreciation in the exchange rate.a large appreciation in the exchange rate.
In total the CB has regained more than the In total the CB has regained more than the initial stock of interventioninitial stock of intervention
4141
Accumulated intervention and exchange rate evolution
-2500
-2000
-1500
-1000
-500
0
500
1000
4-Mar 23-Apr 12-Jun 1-Aug 20-Sep 9-Nov 29-Dec
Millions of USD
2.0
2.5
3.0
3.5
4.0
$/USD
Net accumulated intervention - since Mar 4 Exchange rate
4242
0%
3%
6%
9%
12%
Jn Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
CPI Nominal Exchange Rate – monthly average (2° axis)
The stabilization of the exchange rate has also resulted in a sharp decline
in level of inflation
4444
The Financial System needs restructuringThe Financial System needs restructuringFinancial statements situation - Dec2001/Dec2002
Loans to the Public Sector
21% 54%
17% 45%
0
20
40
60
80
100
120
140
160
180
Dec 01
Dec 02
Loans to Private Sector
4545
LESSONSLESSONS
1. The Potential Fragility of 1. The Potential Fragility of Financial InstitutionsFinancial Institutions
Solid and solvent financial structures could Solid and solvent financial structures could deteriorate quickly in the face of deteriorate quickly in the face of inadequate interventions and policies.inadequate interventions and policies.
The fact is that weak financial sectors are The fact is that weak financial sectors are not necessarily crisis prone. Crises are not necessarily crisis prone. Crises are generated by inconsistent policies and an generated by inconsistent policies and an unstable macroeconomic environmentunstable macroeconomic environment
4646
2. Financing the Public 2. Financing the Public Sector and the Sector and the
“Crowding Out” Effect“Crowding Out” Effect
4747
3. The Importance of 3. The Importance of Proper Liquidity Proper Liquidity
ManagementManagement
Availability of liquidity is a crucial Availability of liquidity is a crucial element in the prevention and the element in the prevention and the management of financial crisesmanagement of financial crises
LOLR does not guarantee stability LOLR does not guarantee stability but its absence accelerates the but its absence accelerates the erosion of confidenceerosion of confidence
4848
4. The Role of Foreign Banks
-- Do they reduce financial -- Do they reduce financial vulnerability?vulnerability?
-- Can they provide, implicitly, -- Can they provide, implicitly, LOLR function? LOLR function?
4949
5. 5. Capital ControlsCapital Controls
Does capital account integration Does capital account integration reduce financial vulnerability?reduce financial vulnerability?
Long run desirability vs. short run, Long run desirability vs. short run, transitional, riskstransitional, risks
Capital controls and crisis Capital controls and crisis managementmanagement