Transcript 2° axis

Managing the Financial
Crisis: Argentina (2002)
Mario I. Blejer
1
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
2
The Nature of the Argentina Crisis
The Argentine crisis is both a CURRENCY
and a BANK crisis – Inter-related but
caused by a number and combination of
different factors
Analytically, better to distinguish between
them in an explicit manner
3
THE 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?
4
THREE APPROACHES:
1. The loss of competitiveness of the
Argentine economy
2. Macroeconomic policy inconsistencies
3. The “Sudden Stop” argument
5
Ene-03
Nov-02
Sep-02
Jul-02
May-02
Mar-02
Ene-02
2000
1998
1996
1994
1992
224
1990
1988
1986
1984
1982
1980
index 2001=100
Tradables/non tradables (WPI/CPI)
250
230
220
210
190
170
148
150
130
Convertibility average
101
110
90
70
6
Fiscal misalignement turned the burden of the debt
unsusutainable
As percentage of GDP
3,0%
60%
2,0%
50%
1,0%
40%
0,0%
30%
-1,0%
20%
-2,0%
-3,0%
10%
-4,0%
0%
1993
1994
1995
1996
1997
1998
1999
2000
Overall Result
Primary Surplus
Total Debt (2° axis)
EMBI Spread (2° axis)
2001
7
Fiscal misalignement turned the burden of the debt
unsusutainable
Public
Debt
As percentage of GDP
3,0%
60%
2,0%
50%
1,0%
40%
0,0%
30%
-1,0%
20%
-2,0%
-3,0%
10%
-4,0%
0%
1993
1994
1995
1996
1997
1998
1999
2000
Overall Result
Primary Surplus
Total Debt (2° axis)
EMBI Spread (2° axis)
2001
8
Fiscal misalignement turned the burden of the debt
unsusutainable
As percentage of GDP
3,0%
60%
2,0%
50%
1,0%
40%
0,0%
30%
-1,0%
20%
-2,0%
Country
Risk
-3,0%
10%
-4,0%
0%
1993
1994
1995
1996
1997
1998
1999
2000
Overall Result
Primary Surplus
Total Debt (2° axis)
EMBI Spread (2° axis)
2001
9
Dic-02
Sep-02
Jun-02
Mar-02
Dic-01
Sep-01
Jun-01
Mar-01
Dic-00
Sep-00
Jun-00
Mar-00
Dic-99
Sep-99
Jun-99
Mar-99
Dic-98
Sep-98
Jun-98
Mar-98
Dic-97
Primary Expenditures as % of GDP
(cumulative 12 months)
19,5%
19,0%
18,5%
18,0%
17,5%
17,0%
10
Dic-02
Sep-02
Jun-02
Mar-02
Dic-01
Sep-01
Jun-01
Mar-01
Dic-00
Sep-00
Jun-00
Mar-00
Dic-99
Sep-99
Jun-99
Mar-99
Dic-98
Sep-98
Jun-98
Mar-98
Dic-97
Primary Expenditures as % of GDP
(cumulative 12 months)
19,5%
19,0%
18,5%
18,0%
17,5%
17,0%
11
Monthly Gross Domestic Product
seasonally adjusted (Jan 98 = 100)
105.0
99,0
Dec 99
100.0
98,3
Dec 00
102,3
Jun 98
95.0
94,6
Jul 99
90.0
82.2
Nov 02
85.0
80.0
Source: CEA-UCEMA en base a datos del INDEC.
Nov-02
Sep-02
Jul-02
May-02
Mar-02
Jan-02
Nov-01
Sep-01
Jul-01
May-01
Mar-01
Jan-01
Nov-00
Sep-00
Jul-00
May-00
Mar-00
Jan-00
Nov-99
Sep-99
Jul-99
May-99
Mar-99
Jan-99
Nov-98
Sep-98
Jul-98
May-98
Mar-98
Jan-98
75.0
12
Capital Flow s and Economic Activity
(Accumulated 4 quarters - U$Sm. GDP Cyclical Component)
Capital Flows
Private Sector
8%
15.000
6%
10.000
4%
5.000
0
2%
-5.000
0%
-10.000
-2%
-15.000
-4%
GDP Growth
-6%
-20.000
Russian Crisis
-25.000
IV 01
IV. 00
IV. 99
IV 98
IV 97
-35.000
IV 96
-10%
IV 95
-30.000
IV 94
-8%
13
Sudden Stops in Argentina and Chile
(Private Capital Flows, Percentage of GDP
4%
8%
7%
6%
2%
5%
4%
Argentina
1%
3%
0%
2%
1%
-1%
0%
Chile
2001-II
2001-I
2000-IV
2000-III
2000-II
2000-I
1999-V
1999-III
1999-II
1999-I
1998-IV
1998-III
1998-II
-1%
1998-I
-2%
14
Chile
Argentina
3%
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
15
Private Sector Deposits (in bn Arg. Pesos)
Finance Minister
80
Resignation
“Corralito”
75
70
65
Devaluation
Interest
60
rate
ceilings
55
"
50
Sep 00
Dec 00
Mar 01
Jun 01 Ago 01 Nov 01
Feb 02 Apr 02
Jul 02
16
Credit to Private Sector
Billion ARG $
50
Loans to Private Sector Evolution
45
40
35
30
25
20
1-Feb-02 15-Mar-02 8-May-02 20-Jun-02 2-Aug-02 16-Sep-02 29-Oct-02 11-Dec-02 24-Jan-03 7-Mar-03
Nominal Stock
Real Stock
17
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 bank’s balance sheets.
18
Private Sector assets have been displaced by Public Sector
assets in bank’s balance sheets
100%
80%
$ 76 MM
60%
40%
$ 43 MM
20%
0%
Dec-99
May-00
Oct-00
Mar-01
Public Sector
Aug-01
Jan-02
Jun-02
Private Sector
19
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
20
220
110
216
100
180
100
151
140
100
90
80
104
80
71
60
70
dic-98
jun-99
dic-99
jun-00
EMBI Index
Indice EMBI Argentina
dic-00
jun-01
dic-01
Public Sector Loans / Net Worth (%)
Crédito al Sector Público / Patrimonio Neto (en %)
Private Deposists - Index Dec 00 = 100 (2nd axis)
Depósitos Sector Privado - Base dic2000 = 100 (2º eje)
21



November 2001:withdrawal 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
22
The 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
23
The 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
24

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.
25
Only feasible intermediate solution:
slow the pace of the bank run
and, at the same time, try to avoid
excessive liquidity expansion.
26
The 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 U$S.
-- Utilize part of CB reserves to intervene in the
foreign exchange market to slow the pace of
depreciation and to avoid chaotic conditions.
27
Choice of Foreign Exchange Market
Strategy:
high interest rates
vs.
FE market intervention:
substitutes or complements?
28
persevere to the point where
greed > panic
29
The central bank provided rediscounts to illiquid
banks and financed about 1/3 of the deposit drop
Accumulated evolution (31-Jan-02 al 24-Jul-02)
-In billion of pesos-
25
20
15
10
5
0
31-Ene 17-Feb
Loans
6-Mar
23-Mar 9-Abr
Assistance
26-Abr 13-May 30-May 16-Jun
Bank Reserves fall
3-Jul
20-Jul
Deposits fall
30
The market for Central Bank ST
Bills (LEBAC) was actively
developed, initially with 7 days
maturities and then with 14 and
28 days, in Pesos and U$S.
Interest rates reached 140%
initially.
31
 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 U$S 2 bn.
32
Initially deposit withdrawals continued
Private Sector Deposits - Year 2002
In million of pesos Feb
1000
Mar
Abr
May
Jun
Jul
160
0
-235
-1000
-340
-823
-810
-2000
-3000
-998
-1274
-1230
-2609
-4000
-5000
-4335
-4378
-4526
Deposits minus preventive measures
Preventive measures
33
However, the trend reversed after four
months
Private Sector Deposits - Year 2002
In million of pesos Feb
1000
Mar
Abr
May
Jun
Jul
160
0
-235
-1000
-340
-823
-810
-2000
-3000
-998
-1274
-1230
-2609
-4000
-5000
-4335
-4378
-4526
Deposits minus preventive measures
Preventive measures
34
Private Sector Deposits
(in billion pesos)
Withdrawal
Restrictions
80
"Corralito"
Reprogramming
Pesification
75
70
65
60
Devaluation
55
50
45
Recovery
40
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
35
The need for the provision of
liquidity from the Central Bank
where largely reduced
36
Millones de Pesos
1,500
90%
61%
1,000
60%
52%
500
29%
31%
29%
30%
29%
0
0%
-500
-30%
Ene
Feb
Mar
Abr
May
Asistencia Neta Mensual
Jun
Jul
Ago
Sep
Oct
Nov
Asistencia/Salida de Depósitos
37
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.
38
Decrease of average cost and duration of LEBACs
Average duration and cost of LEBACs in pesos
Days
ANR 14d %
140
120
140
Average
Cost
120
100
100
80
80
60
60
Average
Duration
40
40
20
20
0
15-mar
0
14-apr
14-may
13-jun
13-jul
12-aug
11-sep
11-oct
10-nov
10-dec
9-jan
39
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 more
than the initial stock of intervention
40
Accumulated intervention and exchange rate evolution
Millions of USD
4-Mar
$/USD
23-Apr
12-Jun
1-Aug
20-Sep
9-Nov
29-Dec
1000
4.0
500
3.5
0
-500
3.0
-1000
-1500
2.5
-2000
-2500
2.0
Net accumulated intervention - since Mar 4
Exchange rate
41
The stabilization of the exchange rate
has also resulted in a sharp decline
in level of inflation
12%
4,0
3,5
9%
3,0
2,5
6%
2,0
1,5
3%
1,0
0,5
0%
0,0
Jn
Feb
Mar
CPI
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Nominal Exchange Rate – monthly average (2° axis)
42
Indeed, as always,
greed > panic
43
The Financial System needs restructuring
Financial statements situation - Dec2001/Dec2002
180
160
Loans to Private Sector
140
120
100
45%
80
17%
60
40
21%
54%
20
0
Dec 01
Dec 02
Loans to the Public Sector
44
LESSONS
1. The Potential Fragility of
Financial Institutions
Solid and solvent financial structures could
deteriorate quickly in the face of
inadequate interventions and policies.
The fact is that weak financial sectors are
not necessarily crisis prone. Crises are
generated by inconsistent policies and an
unstable macroeconomic environment 45
2. Financing the Public
Sector and the “Crowding
Out” Effect
46
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
47
4. The Role of Foreign Banks
-- Do they reduce financial
vulnerability?
-- Can they provide, implicitly, LOLR
function?
48
5. Capital Controls
Does capital account integration reduce
financial vulnerability?
Long run desirability vs. short run,
transitional, risks
Capital controls and crisis management
49