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121 Cards in this Set
- Front
- Back
Emerging Markets def.
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Becoming part of the world financial system
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Developing markets def
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lower per capital income and contextually social norms
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Transition Economies def
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Planned to Market Economies, Authoritarian in the past
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Financial crisis def.
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Currency crisis develops into a financial crisis as a result of a exogeneous shock
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Currency Crisis def.
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Implies the decline or collapse of the value of a currency
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The east asian currencies
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Thai baht, South Korean won, Indonesian rupiah, Malaysian ringgit, Philippine peso.
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EA currency arrangements
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linked to the dollar
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What was the exegeouns shock for EA EM?
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the US dolar went up in terms of the Japanese yen starting 1995. EA currencies were linked to the dollar, so they appreciated in real terms against the yen and lost competative advantage against Japanese goods
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The first country to experience pressure was
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Thailand in early 1997. The trade balance and therefore the baht came under pressure.
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What happened after the first problem
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Common creditors started pulling their investments from the region as a whole
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Why was the withdrawal such a problem
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Foreign borrowing binge through short term capital inflows in EM.
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Why were the arrangement like that?
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Pressure from Wall Street, US Treasury, International Financial Institutions and IMF to open up their financial markets
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Why was the opening of the markets a problem
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Emerging markets were not prepared in terms of their institutional and regulatory environments to safely absorb the capital
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The double mismatch
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Short-term borrowing and long-term lending. Borrowing in foreign currency and lending in domestic
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Unhedged debts.
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Interplay between structural versus fundamantal issues
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fundamentals were strong - great growth and budgets
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Macroeconomic fundamentals were
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strong
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The relationship between the current account and the exchange rate
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pp107-109
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Crisis prone
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crisis immune
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crisis safe
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EA crisis
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crisis of overinvestment or premature short-term cap flow? Pp 117-118
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Crisis chronology and recovery
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Sharp decline in GDP growth, GDP per cap, EX index and cap inflows in crisis prone
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Emerging and Dev markets relationship
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Peripheral and central economies
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Why should EM be opened to spec. capital so sudden
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They are not environmentally equipped with a policy trinity of 1. floating ex rate 2. free cap. Markets 3. central bank authonomy
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The US model
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it works - the binge in 1990s - recovery was smooth
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The EU model
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Preforming less efficiently. No complete polivy trinity. Structural constrains (inflexible labor markets, high pension, low adoption of technology) policy straightjacket of Maastricht. No counter-cyclical fiscal policies
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Japan
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problems of the 90s. Borrowing in 1998 massive non-preforming loans of the banking sector. Failure of strict regulatory environment. Problems with banking cleanup and persistent deflation
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RUSSIA
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Inflation control via monetary policy and fragile budgetary management
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Inflation control.
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Steady improvement. Down to 1% in Sep.1997
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Inflation policy
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Controlling the growth rate of money
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Fragile fiscal man. - budget
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Budget def. hovering around 7% of GDP 1995-97.
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Fragile fiscal man - revenues
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from 12 to 10% of GDP from dec. 1997 to Aug. 1998
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Monthly payment
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rose to 51% of GDP in July 1998 from 23% in Jan. 1998
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Structure of Gov. borrowing
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borrowed abroad to finance ST treasury bills GKOs
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Domestic banks
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borrowed FX to buy GKOs
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The external shock
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The price of oil declines from $23 in mid 1997 to $11 in mid-1998, falling prices of nonferrous metals, soaring interest costs of Fdebt
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As a result of the external shock
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the CA balancle turned negative in first half of 1998
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Available FX falling due by end of 1998
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$10 bn
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Liabilities
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$6bn government + $16bn commercial banks
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The way out
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Gov. defaulted on debt + 90 day moratorium + Ruble devaluated from 6 to 16 rubles per dollar
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Could devaluation have been adopted at the end of 1997
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Not a feasible option
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They should have…
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restructured debt
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Their biggest mistake
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Premature capital account convertibility
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Legal outflows
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Citizens could convert rubles into dollars(no dep in f banks), licensed banks could conduct transactions after notifying the central bank
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Illegal outflows
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Underinvoicing exports, underinvoicing imports to avoid paying duties
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BRAZIL
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The real was…
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introduced in 1994
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By the end of 1997
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nervous investors pulled out of real-denominated assets
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As a response to Bdeficit
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the central bank raised the lending rate to 43.5% slashed BD by 2.5%
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The investors were nervous because of the…
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collapse of the ruble in August 1998
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The cap. Outflow
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$1 bn per day
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The CB reserves
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declined from $70.2 at the end of july 1998 to $39bn at the end of the year
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The gov.
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Cardoso turned to the IMF
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IMF policy
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The real was allowed to float in Jan. 1990. it declined from 1.32 to 2.14 per dollar. The IMF prescribed a strict fiscal targets in the midst of a declining economy
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The principle problem
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The CA was persistently negative from -0.21 (1994) to -4.70 in 2001 because of BD
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Budget deficit
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from -4.80 (1995) to -7.40 in 1998
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Budget includes
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all gov + SS + admin + public enterprises
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Pre-real and post-real habitual problems
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nominal revenues were indexed fully and exp. Were indexed partially to rising inflation. No efforts were made to raise revenues and slash expenditures
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Why nothing could be done
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Federal gov lacked control over state and local gov. Fed. Gov was also running deficits
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Why was the real vulneralble
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Financing the deficits requiered foreign inflows - vulnerable to panic drives
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Debt structure
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It was not exceedingly short-term like in EA EM . ST debt was 17 to 21 % ot total debt, and 59 to 82 % of Fxreserves
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ARGENTINA
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by the end of 2000 unrelated to each other and EA
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Currency arrangements
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in march 1991 the peso was linked to the dollar => Peso circulation in the economy was tied to dollar earnings.
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Civil FX regulations
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citizens could exchange pesos for dollars in state controlled banks
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The structure
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resembled a currency board, but did not impose discipline to fed and provincial gov., but deprived policy makers of discretionary monetary policy
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Fundamentals
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negative growth rates 1999, 2000, 2001
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At the same time the policy was
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disenflationary because of the monetary discipline
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main reason
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like with strong dollar made the peso overvalued with regard to other Latin Am currencies esp after the devaluation of the real in 1999. The peso lost competative advantage
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discretionary policy
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lacking. When the economy was growing at 7% it needed a hike, in 1999 to 2001 it needed a cutback
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S&I
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low savings(15%) and investment (19%) , the gap was reflected in CA deficit (4-5% in 90s)
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Foreign borrowing
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up from 28% in 1993 to 55% in 2001
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Debt structure
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ST debt was as high as 110% in 2000 and reached 300% of FX reserves
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The end of the story
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Peso came under pressure in 2000 , IMF (because of investors) extended a credit to the amount of $40 bn.
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TURKEY
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hihhik
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Fundamentals
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weak from 1993 to 2000
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growth
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both + and -
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Inflation
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double and triple digits (40% in 2000)
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BD
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rose from 2% of GDP to 15% in 2000
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Foreign borrowing
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to finance the deficit from 28% of GDP in 1980 to over 80% in 2001
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CA
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def. of 5% put pressure on the lira
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banking system
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several banks who borrowed heavily abroad collapsed
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Political situation
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the pres accused the prime minister of soft pedaling on banking reform
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Investors
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grew panicky and withdrew investments and I shot to 7500% in Nov.2000 because of unprecedented liquidilty crunch
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IMF
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required the lira to float and it dropped 30% in a day.
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CONTAGION MODELS
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The two main models are
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trade-related versus financial
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The oil shock in 1973
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created a recession in the US which led to reduced exports of peripheral economies and decline in their growth rates
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The EA contagion
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financial. There were common lenders with withdrew funds from the original trouble stop and then all around.
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Argentine contagion
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not there. Investors had become very selective and adjusted their balance sheets so the turbulence was resisted
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IMF in EA - diagnosis
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a. Massive flow of ST funds because of stable FX and high interest rates b. unhedged debts c. double mismatch because of structural problems
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IMF in EA - strategy
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Instrusive agenda - a. monetary tightening b.fiscal tightening c. FX let the currencies float
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IMF in EA - debates a
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premature capital account liberalization and IMF's excessively intrusive role
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IMF in EA -debates b
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Misguided fiscal policy - violated Keynesian wisdom for expansionary fiscal with downturn
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IMF in EA argument against fisc.
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financing a high budget def via domestic private savings will crowd out savings available to private investors
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IMF in Russia
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Overall strategy of limited support via international financial institutions made sense
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Macroeconomic stabilization
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made sense but the speed was not ffeasible
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Managed by
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monetary control rather than budget trimming
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ST capital flow
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Opening up of ST cap to finance budget was a huge mistake
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fiscal management problems
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political intransigence and turbulence
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The $4.8 bn
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where did they go? Anyways the amount was too small in relation to requirement
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IMF and Fimaco
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Brazil's main problem
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government deficit
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The IMF in Brazil
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primary budget surplus and fiscal discipline
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Reforms?
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extensive reforms plannned but progress is slow
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Debt service ratio
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0.59 of GDP in 1990 to 8.20 in 2001
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total debt burden
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appr $250
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Argentina - imf action
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$40 bn multilateral support of Dec 2000
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additionnal action
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$8 in 2001 to support peso-dollar peg
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it should have
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tied budget targets and a floating peso to debt rescheduling
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instead it
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kept the dollar-peso peg + monetary control and fiscal austerity
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Debt rescheduling problems
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sovereign debt, foreign creditors had to accept loses
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Turkey's main problem
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unsustainable budget def. => large current account deficit
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As a result
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the lira came into pressure in Nov.2000
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Lira allowed to float
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Feb. 2001
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Results by Sep. 2001
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inflation of 60%, interest rate 90 to 100 economy contracted by 8%
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The big picture
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no progress even though the IMF has been there since 1958
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Can the IMF be lender of last resort
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no, cannot have more resources, the US is too powerful
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it policies are
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unrealistic macroeconomic targeting… fails to distinguish between feasible and desirable inflation control
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Cap. Account controls
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controls on outflows can work if the country has institutional underpinning, yet the capital must flow even if they are not ready. Sees the need for market based control, but will not allow countries to revoke CA liberalization.
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