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121 Cards in this Set

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