Managing the Financial Crisis: Argentina (2002)

Transcription

1 Managing the Financial Crisis: Argentina (2002) Mario I. Blejer Director Centre for Central Banking Studies Bank of England

2 Monthly Gross Domestic Product seasonally adjusted (Jan 98 = 100) ,3 Jun 98 99,0 Dec 99 98,3 Dec ,6 Jul Nov Source: CEA-UCEMA en base a datos del INDEC. Jan-98 Mar-98 May-98 Jul-98 Sep-98 Nov-98 Jan-99 Mar-99 May-99 Jul-99 Sep-99 Nov-99 Jan-00 Mar-00 May-00 Jul-00 Sep-00 Nov-00 Jan-01 Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02

3 Real GDP (base 1993) 15% 10% 5% var. a/a PBI real % 270-5% % % % 230 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

4 Poverty and Extreme Poverty In percentage of the Population Poverty Extreme Poverty 10 0

5 Poverty and Extreme Poverty In percentage of the Population Poverty Extreme Poverty 10 0

6 Managing the crisis: 1. Assess the Nature and the Root Causes of the Crisis 2. Define the Tradeoffs 3. Define and Operational Strategy 4. Persevere in the Implementation 5. Learn some Lessons

7 1. The Nature of the Argentina Crisis The Argentine crisis was both a CURRENCY and a BANK crisis Inter-related but caused by a combination of different factors. Analytically, better to distinguish between them in an explicit manner. The third crisis, the DEBT crisis embodied in the larger sovereign DEFAULT in history is closely related to the other two.

8 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?

9 THREE APPROACHES: 1. The loss of competitiveness of the Argentine economy 2. Macroeconomic policy inconsistencies 3. The Sudden Stop argument

10 Tradables/non tradables (WPI/CPI) index 2001= Convertibility average Ene-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Ene-03

11 200 Real Bilateral Exchange Rate: Major T rade Partners July 95 = Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Euro Zone Brazil USA

12 The Trade Account (in current prices) million of USD

13 The Trade Account (in current prices) million of USD

14 Fiscal Deficits Argentina Convertibility Period

15 The Use of Privatization Receipts to Reduce the Deficit 2 1 Privatization Revenue Total Deficit

16 Interest Payments/GDP

17 Primary Expenditures as % of GDP (cumulative 12 months) 19,5% 19,0% 18,5% 18,0% 17,5% 17,0% Dic-97 Mar-98 Jun-98 Sep-98 Dic-98 Mar-99 Jun-99 Sep-99 Dic-99 Mar-00 Jun-00 Sep-00 Dic-00 Mar-01 Jun-01 Sep-01 Dic-01 Mar-02 Jun-02 Sep-02 Dic-02

18 Primary Expenditures as % of GDP (cumulative 12 months) 19,5% 19,0% 18,5% 18,0% 17,5% 17,0% Dic-97 Mar-98 Jun-98 Sep-98 Dic-98 Mar-99 Jun-99 Sep-99 Dic-99 Mar-00 Jun-00 Sep-00 Dic-00 Mar-01 Jun-01 Sep-01 Dic-01 Mar-02 Jun-02 Sep-02 Dic-02

19 Capital Flow s and Economic Activity (Accumulated 4 quarters - U$Sm. GDP Cyclical Component) 8% Capital Flows Private Sector % % 2% 0% -2% -4% -6% GDP Growth Russian Crisis % % IV 94 IV 95 IV 96 IV 97 IV 98 IV. 99 IV. 00 IV 01

20 Sudden Stops in Argentina and Chile (Private Capital Flows, Percentage of GDP Argentina 4% 3% 2% 1% 0% -1% -2% 1998-I 1998-II 1998-III 1998-IV 1999-I Chile 1999-II 1999-III 1999-V 8% 7% 6% 5% Argentina 4% 3% 2000-I 2000-II 2000-III 2000-IV 2001-I 2001-II 2% 1% 0% -1% Chile

21 Economic Activity: GDP and Investments (1998.II=100) GDP Investment Chile Chile Argentina Argentina II 1998.III 1998.IV 1999.I 1999.II 1999.III 1999.IV 2000.I 2000.II 2000.III 2000.IV I 2001.II 2001.III II 1998.IV 1999.II 1999.IV 2000.II 2000.IV 2001.II

22 Financial Vulnerabilities to Capital Flows Reversals Argentina Brasil Chile Public Debt (% of GDP) Public Sector External Unhedged Exposure Private Sector External Unhedged Exposure Banking Sector Exposure To the Public Sector = High Vulnerability = Medium Vulnerability =Low Vulnerability

23 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

24 Private Sector Deposits (in bn Arg.. Pesos) Finance Minister Resignation Corralito Interest rate ceilings " Devaluation 50 Sep 00 Dec 00 Mar 01 Jun 01 Ago 01 Nov 01 Feb 02 Apr 02 Jul 02

25 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.

26 Private Sector assets have been displaced by Public Sector assets in bank s s balance sheets 100% 80% 60% $ 76 MM 40% 20% $ 43 MM 0% Dec-99 May-00 Oct-00 Mar-01 Aug-01 Jan-02 Jun-02 Public Sector Private Sector

27 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

28 dic-98 jun-99 dic-99 jun-00 dic-00 jun-01 dic-01 EMBI Indice Index EMBI Argentina 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)

29 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

30 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

31 2. 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

32 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.

33 Only feasible intermediate solution: slow the pace of the bank run and, at the same time, try to avoid excessive liquidity expansion.

34 3. 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.

35 Choice of Foreign Exchange Market Strategy: high interest rates vs. FE market intervention: substitutes or complements?

36 persevere to the point where greed > panic

37 4. Implementation

38 The central bank provided rediscounts to illiquid banks and financed about 1/3 of the deposit drop 25 Accumulated evolution (31-Jan-02 al 24-Jul-02) -In billion of pesos 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

39 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.

40 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.

41 Initially deposit withdrawals continued Private Sector Deposits - Year 2002 In million of pesos 1000 Feb Mar Abr May Jun Jul Deposits minus preventive measures Preventive measures

42 However, the trend reversed after four months Private Sector Deposits - Year 2002 In million of pesos 1000 Feb Mar Abr May Jun Jul Deposits minus preventive measures Preventive measures

43 Private Sector Deposits (in billion pesos) W ithdrawal Restrictions 80 "Corralito" Reprogramming Pesification Devaluation Recovery Oct Nov Jan Mar May Jul Oct Nov Dec-02

44 The need for the provision of liquidity from the Central Bank where largely reduced

45 Flujos Mensuales de Asistencia del BCRA Millones de Pesos 1,500 90% 1,000 61% 52% 60% % 31% 29% 29% 30% 0 0% % Ene Feb Mar Abr May Jun Jul Ago Sep Oct Nov Asistencia Neta Mensual Asistencia/Salida de Depósitos

46 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.

47 Decrease of average cost and duration of LEBACs Days 140 Average duration and cost of LEBACs in pesos ANR 14d % Average Cost Average Duration mario.blejer@bankofengland.co.uk 15-mar 14-apr 14-may Title of seminar, DATE 13-jun 13-jul 12-aug 11-sep 11-oct 10-nov Bank of England 10-dec 9-jan

48 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, in a few months, all the initial stock of intervention

49 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 Apr May Jun Jul Aug Sep Oct Nov Dec CPI Nominal Exchange Rate monthly average (2 axis)

50 International Reserves In U$S millions

51 Total GDP Quarterly Seasonally Adjusted 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:Indec

52 Real GDP (base 1993) 15% 10% 5% var. a/a PBI real % 270-5% % % % 230 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

53 Labor Demand Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Fuente: Universidad Di Tella

54 Consumers and Business CONFIDENCE CONSUMERS BUSINESS Dic '99 Mar '00 Jun '00 Sep '00 Dic '00 Mar '01 Jun '01 Sep '01 Dic '01 Mar '02 Jun '02 Sep '02 Dic '02 Mar '03 Jun '03 Fuente: Universidad Di Tella

55 Indeed, as always, greed > panic

56 5. Lessons from the Crisis

57 1. The Potential Fragility of Financial Institutions Experience indicate that solid and solvent financial structures could deteriorate quickly. This is particularly true in the face of inadequate interventions, distorted incentives and misguided policies.

58 The fact is that weak financial sectors are not necessarily crisis prone. Financial crises have been generated, in many instances, by inconsistent policies and by an unstable macroeconomic environment. In this context one need to rethink the emphasis put on the enforcement of conventional standards and codes vis-à-vis inappropriate policy actions.

59 2. Financing the Public Sector and the Crowding Out Effect

60 The Financial System needs restructuring Financial statements situation - Dec2001/Dec Loans to Private Sector % 17% 40 21% 54% 20 0 Dec 01 Dec 02 Loans to the Public Sector

61 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

62 4. The Role of Foreign Banks -- Do they reduce financial vulnerability? -- Can they provide, implicitly, LOLR function?

63 5. Capital Controls Does capital account integration reduce financial vulnerability? Long run desirability vs. short run, transitional, risks Capital controls and crisis management