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ARGENTINA: CRISIS AND RECOVERY

ARGENTINA: CRISIS AND RECOVERY. Mario I. Blejer. WHAT CAUSED THE CRISIS ?. HOW THE RECOVERY WAS MANAGED. Real GDP (base 1993). CAUSES OF THE CRISIS. THREE APPROACHES : 1. The loss of competitiveness of the Argentine economy 2. The “Sudden Stop” argument

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ARGENTINA: CRISIS AND RECOVERY

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  1. ARGENTINA: CRISIS AND RECOVERY Mario I. Blejer

  2. WHAT CAUSED THE CRISIS?

  3. HOW THE RECOVERY WAS MANAGED

  4. Real GDP (base 1993)

  5. CAUSES OF THE CRISIS THREE APPROACHES: 1. The loss of competitiveness of the Argentine economy 2. The “Sudden Stop” argument 3. Macroeconomic policy inconsistencies

  6. Loss of Competitiveness under the Fixed (Convertibility) Exchange Rate Regime

  7. million of USD 20.000 15.000 10.000 5.000 0 -5.000 -10.000 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 The Trade Account (in current prices)

  8. Capital Flows and Economic Activity (Accumulated 4 quarters - U$Sm. GDP Cyclical Component) Capital Flows Private Sector 8% 15.000 10.000 6% 5.000 4% 0 2% -5.000 0% -10.000 -2% -15.000 -4% -20.000 Russian Crisis GDP Growth -6% -25.000 -8% -30.000 -10% -35.000 IV 98 IV 94 IV 96 IV 95 IV 01 IV 97 IV. 00 IV. 99

  9. Fiscal DeficitsArgentina 1975-2001 Convertibility Period

  10. The Use of Privatization Receipts to Reduce the Deficit Privatization Revenue Total Deficit

  11. First Symptom: The Banking Crisis While the problems of convertibility and the consequent exchange rate uncertainty played a role, thebankingcrisis was largely caused by the government “abuse” of the banking sector, given its inability to to adjust the budget deficit

  12. Private Sector Deposits (in bn Arg. Pesos) “Corralito” 80 75 70 65 Devaluation 60 " 55 50 Sep 00 Dec 00 Mar 01 Jun 01 Ago 01 Nov 01 Feb 02 Apr 02 Jul 02

  13. 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 thatprivatesector assets were being displaced bypublicsector assets in bank’s balance sheets.

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

  15. 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

  16. EMBI Index Public SectorLoans / Net Worth (%) Private Deposists - IndexDec 00 =100 (2nd axis)

  17. November 2001:withdrawal restrictions on bank deposits (“corralito”). December 2001: Riots and the De la Rua and Cavallo government falls. First two weeks of January 2002: --currency board is abandoned and the currency devalued --bank assets and liabilities are pesifiedasymmetrically - i.e. at different rates

  18. 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 andhyperinflation. OR

  19. 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.

  20. The Strategy Followed • Default on the Sovereign Debt • 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.

  21. On the Fiscal Side • Cut significantly fiscal expenditures, mainly through the non-adjustment of wages in the face of 40% inflation. • Increase Export Taxes on Agricultural and Natural Resources

  22. Monetary and Fiscal Measures, plus regaining competitiveness, helped to achieve twin balance in the Fiscal and External Accounts. • External (and crucial factor): Major improvement in terms of trade

  23. Soybean Prices - Index January 2001 – March 2011 130%

  24. Initially deposit withdrawals continued

  25. However, the trend reversed after four months

  26. International Reserves In U$S millions

  27. Total GDPQuarterly – Seasonally Adjusted Fuente:Indec

  28. Labor Demand Fuente: Universidad Di Tella

  29. Consumers and Business CONFIDENCE Fuente: Universidad Di Tella

  30. In 2005 the Debt in Default was Exchanged for new debt with an average 75% haircut.

  31. Real GDP (base 1993) Debt Exchange

  32. A second exchange took place 5 years later. • There is today around 10% holdouts • The Debt to the IMF was fully repaid • Debt with the Paris Club is being negotiated .

  33. COMPARATIVE DEBT ARGENTINA and RUSSIA (then) AND EUROPE (now)

  34. THANK YOU!

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