Beyond the Bipolar View: The Rise and Fall of Argentina s Currency Crisis. Augusto de la Torre Eduardo Levy Yeyati Sergio Schmukler

Transcription

1 Beyond the Bipolar View: The Rise and Fall of Argentina s Currency Crisis Augusto de la Torre Eduardo Levy Yeyati Sergio Schmukler October 2002

2 Outline: From particular to general Organizing motif: the link between money (as a store of value) and financial intermediation The rise and fall of Argentina s currency board i. Good times: financial deepening, increased financial dollarization, and RER exposure ii. Bad times: a currency-growth-debt (CGD) trap iii. The meltdown: anatomy of a currency run in a financially dollarized country A reappraisal of hard pegs (no discipline, quite reversible, prudential concerns, exit strategies) Refocus the exchange rate debate to the currency problem 2

3 Good times: Financial deepening Money as a store of value Credit/GDP Deposits/GDP Financial Deepening 40% 35% 30% 25% 20% Credit/GDP Deposits/GDP 15% 10% 5% 0% Credit includes loans to private sector, loans to public sector, loans to residents abroad, and private and public securities held by the financial system. Deposits include demand deposits, savings deposits, time deposits and other deposits, by private sector, public sector, and residents abroad. Figures correspond to end-of-year values. Sources: Central Bank of Argentina and The World Bank 3

4 Banking sector consolidation: Accelerated after the Tequila effect Consolidation and Internationalization of the Banking System Number of total banks Foreign banks Number of banks Number of branches 391 1,535 1,863 Share of total assets (%) Number of public banks Figures correspond to end-of-year values. Source: Central Bank of Argentina 4

5 Banking sector strengthening: Well capitalized, well provisioned, highly liquid Selected Banking System Indicators Net Worth/Assets Capital / Risk Weighted Assets Non-Performing Loans/Total Loans (a) Provisions/Total Loans Provisions/Non-Performing Loans (a) Systemic Core Liquidity (b) Return on Equity before Provisions Return on Equity after Provisions Return on Assets after Provisions Leverage Ratio (not in precent) (a) Non-performing loans are defined as the sum of loans with problems, loans with high risk, and non-recoverable loans. (b) Defined as the ratio of international reserves of the central bank in foreign currency and other liquidity requirements held abroad by banks to total deposits. Figures are in percent and correspond to end-of-year values. Source: Central Bank of Argentina 5

6 The peso as a store of value? Increased financial dollarization Credit in US Dollars over Total Credit 100% 80% 60% 40% 20% Loan Dollarization and Currency Premium Credit to public sector (Left scale) Credit to private sector (Left scale) Currency premium (Right scale) Basis Points 1,200 1, % Apr- 91 Feb- 92 Dec- 92 Oct- 93 Aug- 94 Jun- 95 Apr- 96 The currency premium is measured by the differential between peso and dollar interbank deposit rates, using daily one-month interest rate premium. Credit to public and private sector correspond to end-of-period-values and currency premium is monthly average. Sources: Bloomberg and Central Bank of Argentina 6 Feb- 97 Dec- 97 Oct- 98 Aug- 99 Jun- 00 Apr- 01 0

7 Increased dollarization: Irrespective of RER exposure Credit in US Dollars over Total Credit 100% Private Sector Dollarization 80% Mortgage loans 60% 40% 20% 0% Jan- 94 Sep- 94 May- 95 Jan- 96 Sep- 96 May- 97 Jan- 98 Sep- 98 May- 99 Jan- 00 Sep- 00 May- 01 Source: Central Bank of Argentina 7

8 Increased dollarization: Across tradables and non-tradables Average Share of US Dollar Debt across Firms Firm's Balance Sheet Dollarization 83% 79% 60% 67% Tradable sector Non-tradable sector Source: Buenos Aires Stock Exchange 8

9 Increased dollarization: Factors behind it Public: Borrowing costs (e.g., pension funds) Signaling problem (e.g., tariff dollarization) Credibility derived not from the easily circumventable Law but from exit costs Private: Borrowing costs Bailout perception (a sammaritan s dilemma ultimately validated) Signaling problem Currency-blind regulation Reserve requirements, liquidity requirements, deposit insurance, credit bureau Interest rate factor 9

10 Interest rate factor: Computation Risk indicators Date Annual interest rate (%) Annual interest rate (%) Risk 7/1/1993 Peso financing Foreign-currency financing up to 24 up to more than 24 to 27 more than 18 to more than 27 to 30 more than 21 to more than 30 to 33 more than 24 to more than 33 to 36 more than 27 to more than 36 to 39 more than 30 to /1/1996 Peso financing Foreign-currency financing up to 18 up to more than 18 to 21 more than 14 to more than 21 to 24 more than 17 to more than 24 to 27 more than 20 to more than 27 to 30 more than 23 to more than 30 to 33 more than 26 to Risk indicator is used in the calculation of the risk value of loans and other financing (excluding credit to financial institutions), which is then used to determine the capital requirements for credit risk. For higher interest rates other risk indicators apply. The period covered is July 1993-December Source: Central Bank of Argentina 10

11 Interest rate factor: How did it work? Peso-Dollar Interest Rate and Risk Spreads by Type of Loan Interest Rate Spread (Basis Points) 2,000 1,600 1, Risk Indicator Spread Overdrafts on current account Bills up to a 89- day term Pledge lending up to a 1-year term Pledge lending over 1-year term Personal loans up to a 180-day term The period covered is July 1993-December Mortgage loans are excluded because only few banks in the system granted mortgage loans in pesos during this period. Source: Central Bank of Argentina 11

12 Bad times: A CGD trap The currency became substantially overvalued Growth became stagnant The public debt was hard to service Increasing the financial exposure to the fiscal sector Raising doubts about its sustainability (particularly if correctly measured) Inducing capital flight 12

13 Bad times: Increasingly desperate attempts Impuestazo (tax hike, January 2000) Labor market reform (early 2000) senate scandal and resignation of vice-president Blindaje : December 2000 IMF bailout package (misleadingly advertised as US$40 billion package) Cavallo Switch to a currency basket peg (anticipated through a fiscal devaluation) Reduction of RRs (and violation of CB s autonomy) Voluntary debt exchange Numerous sector-based tax incentives never implemented Not so voluntary swap (domestically held paper only) Zero deficit law + temporary 13% wage cut for federal employees) Did not improve growth, but rather worsened the debt and currency components of CGD trap 13

14 The meltdown: Anatomy of the run Why is a closer look important? The countervailing role of foreign banks Fiscal contagion vs. currency risk The view that the corralito as a coarse measure to save a few banks suffering large deposit withdrawals The need to asses the causes to better address the what if section 14

15 Our basic storyline: Depositors fled the peso, then the banking system Index of Deposits (=100 in December 2000) 110 Evolution of Private Deposits Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Source: Central Bank of Argentina 15

16 A bird s s eye look: Was the run bank-specific? Cumulative Change 20% 21 Change in Private Deposits for 50 Largest Banks (December 2000 November 2001) Sample of 50 banks: 98% of private deposits (Dec 2000) 10% 0% -10% -20% -30% -40% Local private Foreign private Public -50 Sample: Average Deposit Change (%) Banking System: Total Local private Foreign private Public Total Deposit Change (%) Source: Central Bank of Argentina 16

17 Anatomy of the run: Behavior of deposits Response of Peso and Dollar Deposits to Bank Risk Characteristics Pre-Crisis Period Growth of Growth of Peso Deposits Dollar Deposits Growth of Peso Deposits Crisis Period Growth of Dollar Deposits Capital/Total Assets (t-3) * Non-Performing Loans/Total ** * Loans (t-3) Cash/Total Assets (t-3) ** Public Exposure (t-3) Dummy Public Bank Dummy Private Local Bank The table reports regressions of growth of deposits on bank fundamentals including time dummies. Public exposure is calculated as public bonds and loans to the public sector over total assets. * significant at 10%; ** significant at 5%; *** significant at 1% 17

18 Anatomy of the run: Importance of systemic factors Percentage of Variance Explained by Bank Risk Characteristics Pre-Crisis Period Crisis Period Growth of Peso Deposits Growth of Dollar Deposits 19.2% 3.6% [0.05] [0.07] 10.3% 1.2% [0.08] [0.15] The figures indicate the percentage of the overall R-squared explained by bank fundamentals, as a proportion of all the time varying variables. Overall R-squared are in brackets. 18

19 Anatomy of the run: What systemic factors? Private Deposit Withdrawal by Currency and Type December 2000 November 2001 Growth of Peso Demand and Savings Deposits (1) (2) Growth of Peso Time Deposits (1) (2) Currency Risk *** *** *** *** Country Risk Country Risk*Public Exposure Overall R-squared The table reports regressions of growth of deposits on bank fundamentals and country and currency risks. Although included in the regressions, bank fundamentals are not reported in the table. Figures correspond to end-of-period values. * significant at 10%; ** significant at 5%; *** significant at 1%. 19

20 Anatomy of the run: What systemic factors? Private Deposit Withdrawal by Currency and Type December 2000 November 2001 Growth of Dollar Demand and Savings Deposits Growth of Dollar Time Deposits (1) (2) (1) (2) Currency Risk *** Country Risk ** Country Risk*Public Exposure Overall R-squared The table reports regressions of growth of deposits on bank fundamentals and country and currency risks. Although included in the regressions, bank fundamentals are not reported in the table. Figures correspond to end-of-period values. * significant at 10%; ** significant at 5%; *** significant at 1%. 20

21 Living or dying with hard pegs: Lessons from Argentina The benefits of hard pegs have been largely overstated Provide deeper financial markets, but at the cost of deeper financial dollarization (weakening of the peso as store of value) Do not induce fiscal and monetary discipline Difficult to circumvent nominal rigidities critical when pegs do not satisfy OCA criteria Prudential regulation should be adapted The exit problem: searching for a sweet death 21

22 No fiscal or monetary discipline: Burdened domestic markets Millions of Dollars 25,000 Financing Sources of the Federal Government 20,000 15,000 10,000 5, Privatizations and other capital income International financial institutions International market, voluntary debt Domestic market, voluntary debt Lecop Source: Central Bank of Argentina 22

23 Also at the provincial level Millions of Dollars 3,500 3,000 2,500 2,000 1,500 1, Financing Sources of the Province of Buenos Aires Privatizations International financial institutions International market, voluntary debt Domestic market, voluntary debt* Patacones (I and II) *Includes bank debt and national government financing Source: Central Bank of Argentina 23

24 Increasing fiscal exposure (while the supply of loanable funds dwindled) Total Assets (Millions of Dollars) Financial System: Exposure to Public Sector 130, , , , ,069 82,528 91, ,776 10% 15% 16% 14% 15% 17% 16% 22% Claims on the public sector Liquid assets and claims on the private sector Figures correspond to end-of-year values. Source: Central Bank of Argentina 24

25 Only to relax the money rule through the back door Quasi-Monies in Circulation (Millions of Argentine Pesos) Denomination December 2001 March 2002 a. Federal government Lecop 1,039 2,543 b. Provincial "own" securities 1,627 2, Buenos Aires Patacon 822 1, Buenos Aires, City Porteno Catamarca Ley Chaco Quebracho Cordoba Lecor Corrientes Cecaror Entre Rios Bonfe Formosa Bocanfor Jujuy Patacon Mendoza Petrom La Rioja Bono de Cancelacio Tucuman Bocade Total quasi-monies (a+b) 2,666 5,134 Total quasi-monies (As percentage of pesos in circulation) Source: Ministry of Economy, Argentina 25

26 Living or dying with hard pegs: Prudential lessons General liquidity buffers do not fully protect the payment system from a run earmarked liquidity; stop-loss clauses for time deposits Need to limit the exposure of the banking system to government default cap or outright ban on public exposure; mark-to-market of government bonds (including for liquidity requirements or assistance) Need to address the link between debtor capacity to pay and the deflationary adjustment to a more depreciated RER Under a pure peg, through tighter prudential norms for lending to producers of non-tradables Under a pure float, through tighter prudential norms for dollar lending to producers on non-tradables In practice, (not fully credible) hard pegs are in between 26

27 Living or dying with hard pegs: Exit strategies Float Float BS effects Currency run Dollarize CGD trap Fix Pesify Transfers the BS problem to creditors through violation of contracts Deepens the currency run Dollarization of financial contracts + Float (pesification at the margin) BS effects 27

28 Dollarization of financial contracts: May have prevented the deposit run Ecuador: Bank Deposits and Dollarization Index of Total Deposits (=100 in January 2000) Government announces dollarization Dollarization is implemented Sucre Deposits Dollar Deposits 20 0 Jan- 98 May- 98 Sep- 98 Jan- 99 May- 99 Sep- 99 Jan- 00 May- 00 Sep- 00 Jan- 01 May- 01 Sep- 01 Jan- 02 May- 02 Source: Central Bank of Ecuador 28

29 Margin for pesification at the margin: Dollarization as an asset substitution phenomenon Dollar Deposits over Total Deposits 100% Dollarization by Type of Deposit 80% Time deposits 60% 40% Savings deposits 20% Demand deposits 0% Apr- 91 Dec- 91 Aug- 92 Apr- 93 Dec- 93 Aug- 94 Apr- 95 Dec- 95 Aug- 96 Apr- 97 Dec- 97 Aug- 98 Apr- 99 Dec- 99 Aug- 00 Apr- 01 Dec- 01 Sources: Central Bank of Argentina 29

30 Margin for pesification at the margin: Reflected also on the liabilities side Credit in US Dollars over Total Credit 100% Private Sector Dollarization by Type of Credit 80% Mortgage loans 60% 40% 20% Overdrafts 0% Jan- 94 Sep- 94 May- 95 Jan- 96 Sep- 96 May- 97 Jan- 98 Sep- 98 May- 99 Jan- 00 Sep- 00 May- 01 Source: Central Bank of Argentina 30

31 Margin for pesification at the margin: Demand for money stable even after devaluation Real Cash and Quasi-Monies in Circulation Real cash in circulation (Left scale) Real cash and quasi-monies in circulation (Left scale) Nominal exchange rate (Right scale) Jan-01 Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul Quasi-monies only include Patacones and Lecop. Cash and quasi-monies in circulation are scaled by CPI. Figures are monthly averages. Sources: Central Bank of Argentina and International Financial Statistics 31

32 Beyond the bipolar view: Solving the weak currency problem The pure (super) fix vs. float view of exchange rate regimes is inadequate Developing countries have weak currencies: not accepted as store of value either by non-residents (related to original sin) and at home (related to financial dollarization) Currency or maturity mismatches are inevitable, as markets for longduration, domestic-currency assets are non-existent Procyclicality of capital flows is a natural consequence of the procyclicality of the capacity to pay of a weak currency economy The problem can be traced back to a number of factors (poor institutional track record, wrong incentives of short-sighted monetary authorities, moral hazard, etc.) that deserve a more rigorous analysis How to graduate from weak currency problems should be leading the research in this area 32