Mario I. Blejer Director, Centre for Central Banking Studies Bank of … · 2006. 7. 21. · Some...
Transcript of Mario I. Blejer Director, Centre for Central Banking Studies Bank of … · 2006. 7. 21. · Some...
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Some Lessons From the Recent Financial Crisis in Argentina (2001/2)
Mario I. BlejerMario I. BlejerDirector, Centre for Central Banking StudiesDirector, Centre for Central Banking Studies
Bank of EnglandBank of EnglandSeminar on Crisis Prevention in Emerging MarketsSeminar on Crisis Prevention in Emerging Markets
Singapore, July 11, 2006Singapore, July 11, [email protected] © Bank of England
The Bank of England does not accept any liability for misleading or inaccurate information or omissions in the information provided.
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1.1. Financial Fragility and the Role Financial Fragility and the Role of Standardsof Standards
2.2. The Consequences of Excessive The Consequences of Excessive Government InterventionGovernment Intervention
3.3. The Importance of Proper The Importance of Proper Liquidity ManagementLiquidity Management
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4.4. The Role of Foreign BanksThe Role of Foreign Banks
5.5. The The ““CurrencyCurrency”” ProblemProblem
6.6. Capital ControlsCapital Controls
7.7. Other Issues Other Issues
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Real GDP Real GDP (base 1993)(base 1993)
-20%
-15%
-10%
-5%
0%
5%
10%
15%
I-98
III-98
I-99
III-99
I-00
III-00
I-01
III-01
I-02
III-02
I-03
III-03
I-04
III-04
I-05
230
240
250
260
270
280
290
300
var. a/aPBI real
3
55
Poverty and Extreme PovertyIn percentage of the Population
0
10
20
30
40
50
60
Poverty
Extreme Poverty
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1.1. The Nature of the Argentina CrisisThe Nature of the Argentina Crisis
The Argentine crisis was The Argentine crisis was bothboth a a CURRENCYCURRENCYand a and a BANKBANK crisis crisis –– InterInter--related but related but caused by a number and combination of caused by a number and combination of different factorsdifferent factors
Analytically, better to distinguish between Analytically, better to distinguish between them in an explicit mannerthem in an explicit manner
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THE CURRENCY CRISISTHE CURRENCY CRISIS
The Currency Crisis reached its peak with The Currency Crisis reached its peak with the January 2002 devaluation. It is usually the January 2002 devaluation. It is usually analyzed in the context of the analyzed in the context of the ARGENTINE CURRENCY BOARD ARGENTINE CURRENCY BOARD SYSTEMSYSTEM,, established in 1991 as an antiestablished in 1991 as an anti--inflationary devise. inflationary devise.
The question to be analyzed is: The question to be analyzed is: What were the main causes for the What were the main causes for the demise of the convertibility regime?demise of the convertibility regime?
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THREE APPROACHES:THREE APPROACHES:
1. The loss of competitiveness of the 1. The loss of competitiveness of the Argentine economyArgentine economy
2. Macroeconomic policy inconsistencies 2. Macroeconomic policy inconsistencies
3. The 3. The ““Sudden StopSudden Stop”” argumentargument
5
99
Tradables/non tradables (WPI/CPI)
Convertibility average101
224220
148
70
90
110
130
150
170
190
210
230
250
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Ene-
02
Mar
-02
May
-02
Jul-0
2
Sep-
02
Nov
-02
Ene-
03
inde
x 20
01=1
00
1010
-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 Fiscal misalignementmisalignement turnedturned thethe burdenburden ofof thethe debtdebtunsusutainableunsusutainable
Public Debt
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1111
-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 Fiscal misalignementmisalignement turnedturned thethe burdenburden ofof thethe debtdebtunsusutainableunsusutainable
CountryRisk
1212
Interest Payments/GDP
0
5
10
15
20
1993 1994 1995 1996 1997 1998 1999 2000 2001
7
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. 9
9
IV. 0
0
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 (Accumulated 4 quarters -- U$Sm. GDP Cyclical Component)U$Sm. GDP Cyclical Component)
Capital FlowsPrivate Sector
GDP GrowthRussian 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
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1515
Financial Vulnerabilities to Capital Flows Reversals
Brasil ChileArgentina
Private Sector ExternalUnhedged Exposure
= HighVulnerability
Public Sector ExternalUnhedged Exposure
Public Debt (% of GDP)
Banking Sector ExposureTo the Public Sector
= MediumVulnerability
=LowVulnerability
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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
““abuseabuse”” of the banking sectorof the banking sector, given , given
its inability to to adjust the budget deficitits inability to to adjust the budget deficit
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1.1. The Fragility of Financial InstitutionsThe Fragility of Financial Institutions
The Argentine experience indicates that solid solid
and solvent financial structuresand solvent financial structures—that
comply well with international standards—
could deteriorate quickly in the face of could deteriorate quickly in the face of
inadequate interventionsinadequate interventions, distorted
incentives and misguided policies.
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The Argentine Bank RunThe Argentine Bank Run
BetweenBetween MarchMarch 2001 and 2001 and JulyJuly 2002, 2002, DepositsDeposits fellfell fromfrom U$SU$S 85b. 85b. toto U$SU$S 15b. 15b.
DomesticDomestic CreditCredit toto thethe privateprivate sector sector fellfellfromfrom U$SU$S 54b. 54b. toto U$SU$S 14b. and 14b. and continuedcontinuedtoto fallfall untiluntil thethe endend ofof 2003.2003.
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The Argentine Bank Run: The Evolution The Argentine Bank Run: The Evolution of Private Deposits (2001of Private Deposits (2001--02)02)
50
55
60
65
70
75
80
30-Sep 21-Dec 13-Mar 3-Jun 24-Ago 14-Nov 4-Feb 27-Apr 18-Jul
“Corralito”
Devaluationand
Pesification
2020
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
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The fact is that weak financial sectors are The fact is that weak financial sectors are not necessarily crisis prone. Financial not necessarily crisis prone. Financial crises have been generated, in many crises have been generated, in many instances, by inconsistent policies and by instances, by inconsistent policies and by an unstable macroeconomic an unstable macroeconomic environment.environment.
In this context one need to rethink the In this context one need to rethink the emphasis put on the emphasis put on the ““enforcementenforcement”” of of conventional standards and codes (and conventional standards and codes (and the cost/benefit ratio of the exercise) the cost/benefit ratio of the exercise)
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Comments on StandardsComments on StandardsCurrent policy paradigm is dominated by the effort to converge to international standards. It is misguided to equalize financial stability and financial and financial development development with convergence to standards.
Standards based on industrial countries institutional settings may have unexpected negative impact in emerging markets (e.g., Basel II and SMEs)
International standards may be largely unrelated to the financial sector challenges of emerging markets (efficiency, completeness, deepness, etc.)
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2. The Negative Consequences of 2. The Negative Consequences of Excessive Government InterventionExcessive Government Intervention
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The main cause for the Argentine banking crisis was The main cause for the Argentine banking crisis was the Government appropriation of banking resources the Government appropriation of banking resources to finance its deficit.to finance its deficit.
This resulted in generalized fear that banks would be This resulted in generalized fear that banks would be rendered insolvent by government policy and that rendered insolvent by government policy and that deposits would be confiscated. deposits would be confiscated.
An important reason behind this fear was the fact An important reason behind this fear was the fact that that privateprivate sector sector assetsassets werewere beingbeingdisplaced by displaced by publicpublic sector sector assetsassets in in bankbank’’ssbalance sheets.balance sheets.
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2525
0%
20%
40%
60%
80%
100%
Dec-99 May-00 Oct-00 Mar-01 Aug-01 Jan-02 Jun-02
Public Sector Private Sector
ARGENTINA: Private Sector assets are displaced by Public Sector assets in bank’s
balance sheets
$ 76 MM
$ 43 MM
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TheThe increasingincreasing bankingbanking exposureexposure totothethe publicpublic sector sector waswas accompaniedaccompanied
by:by:
1. a 1. a rapidrapid decreasedecrease in in depositsdeposits and and
2. a 2. a sharpsharp increaseincrease in country in country riskrisk
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2727
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 ArgentinaCrédito al Sector Público / Patrimonio Neto (en %)Depósitos Sector Privado - Base dic2000 = 100 (2º eje)
Public Sector Loans (%)
EMBI Index
Deposits
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TheThe DeteriorationDeterioration in in thethe BankBank’’s Balance Sheets Balance SheetDecember 2001– December 2002
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
15
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3.3. The Importance of Proper The Importance of Proper Liquidity ManagementLiquidity Management
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 but LOLR does not guarantee stability but its absence accelerates the erosion its absence accelerates the erosion of confidenceof confidence
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Accumulated evolut ion (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 illiquid The central bank provided rediscounts to illiquid banks and financed about 1/3 of the deposit dropbanks and financed about 1/3 of the deposit drop
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Initially deposit withdrawals continuedInitially deposit withdrawals continued
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
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However, the trend reversed after four However, the trend reversed after four monthsmonths
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
17
3333
Private Sector Deposits
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
Recovery
Pesification
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j
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
Central Bank Net LiquidityCentral Bank Net LiquidityAssistance Assistance -- MonthlyMonthly
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Fuente:IndecFuente:Indec
Total GDPTotal GDPQuarterlyQuarterly –– SeasonallySeasonally AdjustedAdjusted
220
230
240
250
260
270
280
290
300
I98 II98 III98 IV98 I99 II99 III99 IV99 I00 II00 III00 IV00 I01 II01 III01 IV01 I02 II02 III02 IV02 I03 II03 III03 IV03
Fuente: Universidad Di TellaFuente: Universidad Di Tella
ConsumersConsumers andand BusinessBusiness CONFIDENCE CONFIDENCE
25.0
30.0
35.0
40.0
45.0
50.0
55.0
Dic '99 M ar '00 Jun '00 Sep '00 Dic '00 M ar '01 Jun '01 Sep '01 Dic '01 M ar '02 Jun '02 Sep '02 Dic '02 M ar '03 Jun '03
CONSUMERS
BUSINESS
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4.4. The Role of Foreign BanksThe Role of Foreign Banks
---- Do they reduce financial Do they reduce financial vulnerability?vulnerability?
---- Can they provide, implicitly, LOLR Can they provide, implicitly, LOLR function? function?
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5.5. The The ““CurrencyCurrency”” ProblemProblem
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Financial vulnerability arises from the Financial vulnerability arises from the publicpublic’’s reticence to use domestic s reticence to use domestic currency as a store of valuecurrency as a store of value
---- TradeTrade--off between shallow financial off between shallow financial intermediation and financial intermediation and financial dollarizationdollarization and the risks of and the risks of balance balance sheet mismatchessheet mismatches
---- The The ““original sinoriginal sin”” is not such but just is not such but just a corollary of the currency problem a corollary of the currency problem
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If full If full dollarizationdollarization is ruled out, the is ruled out, the policy question to reduce policy question to reduce vulnerabilities is how to solve the vulnerabilities is how to solve the ““currencycurrency”” problem.problem.
---- ““PesificationPesification”” a laa la ArgentinaArgentina
---- Macroeconomic and Institutional Macroeconomic and Institutional Credibility and Credibility and –– in the transition: in the transition: IndexationIndexation
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If FX deposits are significant, then central If FX deposits are significant, then central bank should hold large international bank should hold large international reserves (as a share of FX deposits) reserves (as a share of FX deposits) and/or banksand/or banks’’ reserve requirements reserve requirements should be high.should be high.A complementary strategy is to give A complementary strategy is to give incentives for banks to increase local incentives for banks to increase local currency deposits by, for example, currency deposits by, for example, lowering their reserve requirements lowering their reserve requirements relative to FX deposits.relative to FX deposits.
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6.6. Capital ControlsCapital Controls
Does capital account integration reduce Does capital account integration reduce financial vulnerability?financial vulnerability?
Long run desirability vs. short run, Long run desirability vs. short run, transitional, riskstransitional, risks
Capital controls and crisis managementCapital controls and crisis management
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Other Issues
The Role Public Sector BankingThe Role Public Sector Banking
The Location and Structure of the The Location and Structure of the Prudential Supervision AuthoritiesPrudential Supervision Authorities
Central Bank IndependenceCentral Bank Independence