Managing The Financial Crisis: Argentina (2002)

Managing the Financial Crisis:
Argentina (2002)
Mario I. Blejer
Director
Centre for Central Banking Studies
Bank of England
mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England
The Bank of England does not accept any liability for misleading or inaccurate information or omissions in the information provided.
Monthly Gross Domestic Product
seasonally adjusted (Jan 98 = 100)
105.0
99,0
Dec 99 98,3
100.0
Dec 00
102,3
Jun 98
95.0
94,6
Jul 99
90.0
82.2
Nov 02
85.0
80.0
Source: CEA-UCEMA en base a datos del INDEC.
75.0
Mar-98
May-98
Sep-98
Nov-98
Mar-99
May-99
Sep-99
Nov-99
Mar-00
May-00
Sep-00
Nov-00
Mar-01
May-01
Sep-01
Nov-01
Mar-02
May-02
Sep-02
Nov-02
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Real GDP
(base 1993)
15% 300
var. a/a
10% 290
PBI real
5% 280
0% 270
-5% 260
-10% 250
-15% 240
-20% 230
I- III- I- III- I- III- I- III- I- III- I- III- I- III- I-
98 98 99 99 00 00 01 01 02 02 03 03 04 04 05
Poverty and Extreme Poverty
In percentage of the Population
60
50
40
Poverty
30
20
Extreme Poverty
10
Poverty and Extreme Poverty
In percentage of the Population
60
50
40
Poverty
30
20
Extreme Poverty
10
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

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.
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?
THREE APPROACHES:
1. The loss of competitiveness of the

Argentine economy
2. Macroeconomic policy inconsistencies
3. The “Sudden Stop” argument
Tradables/non tradables (WPI/CPI)
250
230
224
220
210
190
index 2001=100
170
148
150
130
Convertibility average
101
110
90
70
May-02
Mar-02
Ene-02
Sep-02
Ene-03
Nov-02
Jul-02
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Real Bilat eral Exchange Rat e: Major T rade Part ners
July 95 = 100
200
180
160
140
120
100
80
60
40
20
Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02
Euro Zone Brazil USA

The Trade Account
(in current prices)
million of USD
20.000
15.000
10.000
5.000
-5.000
-10.000
1980
1981
1982
1983
1984
1986
1988
1989
1990
1991
1992
1993
1998
1999
2000
2001
2002
1979
1985
1987
1997
1970
1971
1972
1973
1974
1976
1994
1969
1975
1977
1978
1995
1996
The Trade Account
(in current prices)
million of USD
20.000
15.000
10.000
5.000
-5.000
-10.000
1980
1981
1982
1983
1984
1986
1988
1989
1990
1991
1992
1993
1998
1999
2000
2001
2002
1979
1985
1987
1997
1970
1971
1972
1973
1974
1976
1994
1969
1975
1977
1978
1995
1996
Fiscal Deficits
Argentina 1975-2001
2
-2
-4
Convertibility Period
-6
-8
-10
-12
-14
75
77
79
81
83
85
87
89
91
93
95
97
99
01
19
19
19
19
19
19
19
19
19
19
19
19
19
20
The Use of Privatization Receipts to Reduce the
Deficit
2
Privatization
1 Revenue
-1
-2
-3
-4
Total Deficit
-5
-6
-7
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Interest Payments/GDP
20
15
10
0
1993 1994 1995 1996 1997 1998 1999 2000 2001
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
Dic-98
Dic-99
Sep-98
Mar-99
Jun-99
Sep-99
Mar-00
Jun-00
Dic-00
Sep-00
Mar-01
Jun-01
Dic-01
Sep-01
Mar-02
Jun-02
Dic-02
Sep-02
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
Dic-98
Dic-99
Sep-98
Mar-99
Jun-99
Sep-99
Mar-00
Jun-00
Dic-00
Sep-00
Mar-01
Jun-01
Dic-01
Sep-01
Mar-02
Jun-02
Dic-02
Sep-02
Capital Flow s and Economic Activity
(Accumulated 4 quarters - U$Sm. GDP Cyclical Component)
Capital Flows
8% Private Sector 15.000
6% 10.000
4% 5.000
0
2%
-5.000
0%
-10.000
-2%
-15.000
-4%
-20.000
Russian Crisis
-6% GDP Growth -25.000
-8% -30.000
-10% -35.000
IV. 99
IV. 00
IV 98
IV 94
IV 96
IV 95
IV 01
IV 97
Sudden Stops in Argentina and Chile
(Private Capital Flows, Percentage of GDP
4% 8%
7%
3%
6%
2% 5%
Argentina
Chile
Argentina 4%
1%
3%
0% 2%
1%
-1%
Chile 0%
-2% -1%
1998-III
1999-III
2000-III
2001-II
1998-IV
2000-IV
1999-II
2000-II
1998-II
1999-V
2001-I
1998-I
1999-I
2000-I
Economic Activity: GDP and Investments
(1998.II=100)
GDP Investment
107 105
100
105
95
103
Chile Chile
90
101 85
99 80
75
97
70
95
Argentina Argentina
65
93 60
2000.IV
1998.IV
1999.IV
1998.II
1999.II
2000.II
2001.II
2000.IV
1998.IV
1999.IV
2001. I
2001.II
2001.III
1998.II
1999.II
2000.II
1998.III
1999.III
2000.III
1999.I
2000.I
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 = Medium =Low

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

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
220 216 110
100
180 100
151
140 90
80
104
100 80
71
60 70
dic-98 jun-99 dic-99 jun-00 dic-00 jun-01 dic-01
EMBI
IndiceIndex
EMBI Argentina
Public Sector Loans / Net Worth (%)
Crédito alTitle
mario.blejer@bankofengland.co.uk
Sector Público / Patrimonio Neto (en %) © Bank of England
of seminar, DATE
Private Deposists - Index Dec 00 = 100 (2nd axis)
The Bank of England doesDepósitos Sector
not accept any liability Privadoor inaccurate
for misleading - Base dic2000
information or= 100 (2º
omissions in theeje)
information provided.
• 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
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
2. The Tradeoffs and The dilemma for
the central bank
¾Having 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
¾The 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.
Only feasible intermediate solution:
slow the pace of the bank run

and, at the same time, try to avoid excessive
liquidity expansion.
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.
Choice of Foreign Exchange Market
Strategy:
high interest rates

vs.
FE market intervention:
substitutes or complements?
persevere to the point where
greed > panic
4. Implementation
The central bank provided rediscounts to illiquid banks
and financed about 1/3 of the deposit drop
A ccumulat ed evolut ion (31-Jan-02 al 24-Jul-02)

-In billion of pesos-
25
20
15
10
0
31-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
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$S. Interest rates reached 140%
initially.
• Intervention in the foreign exchange
market prevented disorderly behavior
but did not peg the rate, that devalued
from 1 to 3.6 Pesos per Dollar.
Intervention in the first five months
was about U$S 2 bn.
Initially deposit withdrawals continued
Private Sector Deposits - Year 2002
In million of pesos Feb Mar Abr May Jun Jul

1000
160
0
-235 -340
-1000
-823 -810
-998
-1274 -1230
-2000
-3000 -2609
-4000
-4335 -4378
-5000 -4526

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

1000
160
0
-235 -340
-1000
-823 -810
-998
-1274 -1230
-2000
-3000 -2609
-4000
-4335 -4378
-5000 -4526
Deposits minus preventive measures Preventive measures
Private Sector Deposits
(in billion pesos)
W ithdrawal
Reprogramming
Restrictions
80 Pesification
"Corralito"
75
70
65
60 Devaluation
55
50
45
Recovery
40
01-Oct-01 27-Nov-01 23-Jan-02 21-Mar-02 17-May-02 13-Jul-02 18-Oct-02 04-Nov-02 31-Dec-02
The need for the provision of
liquidity from the Central Bank
where largely reduced
j
Millones de Pesos
1,500 90%
61%
1,000 52% 60%
500 30%
29% 31% 29% 29%
0 0%
-500 -30%
Ene Feb Mar Abr May Jun Jul Ago Sep Oct Nov
mario.blejer@bankofengland.co.uk Title of seminar, DATE

Asistencia Neta Mensual Asistencia/Salida de Depósitos© Bank of England
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.
Decrease of average cost and duration of LEBACs
Average duration and cost of LEBACs in pesos

Days ANR 14d %
140 140
Average
120 120
Cost
100 100
80 80
60 60
Average
40 Duration 40
20 20
0 0
15-mar 14-apr 14-may 13-jun 13-jul 12-aug 11-sep 11-oct 10-nov 10-dec 9-jan
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
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)
International Reserves
In U$S millions
Total GDP
Quarterly – Seasonally Adjusted
300
290
280
270
260
250
240
230
220
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
Real GDP
(base 1993)
15% 300
var. a/a
10% 290
PBI real
5% 280
0% 270
-5% 260
-10% 250
-15% 240
-20% 230
I- III- I- III- I- III- I- III- I- III- I- III- I- III- I-
98 98 99 99 00 00 01 01 02 02 03 03 04 04 05
Labor Demand
120
100
80
60
40
20
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03
Fuente:
The Bank of England does not accept any liability Universidad
for misleading Di Tella
or inaccurate information or omissions in the information provided.
Consumers and Business CONFIDENCE
55.0
CONSUMERS
50.0
45.0
40.0
35.0
BUSINESS
30.0
25.0
Dic '99 M ar '00 Jun '00 Sep '00 Dic '00 M ar '01 Jun '01 Sep '01 Dic '01 M ar '02 Jun '02 Sep '02 Dic '02 M ar '03 Jun '03
Fuente:
The Bank of England does not accept any liability Universidad
for misleading Di Tella
or inaccurate information or omissions in the information provided.
Indeed, as always,
greed > panic
5. Lessons from the Crisis
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.
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.
2. Financing the Public Sector
and the “Crowding Out”
Effect
The Financial System needs restructuring
Financial statements situation - Dec2001/Dec2002
180
160
140
Loans to Private Sector
120
100
45%
80 17%
60
40 21% 54%
20
Dec 01 Dec 02
Loans to the Public Sector

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

function?
5. Capital Controls
Does capital account integration reduce

financial vulnerability?
Long run desirability vs. short run,

transitional, risks
Capital controls and crisis management


Managing The Financial Crisis: Argentina (2002)

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Managing the Financial Crisis:

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

Source: CEA-UCEMA en base a datos del INDEC.

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

2. Define the Tradeoffs

3. Define and Operational Strategy

4. Persevere in the Implementation

5. Learn some Lessons

The Argentine crisis was both a CURRENCY

The third crisis, the DEBT crisis – embodied in

The Currency Crisis reached its peak with the

The question to be analyzed is:

1. The loss of competitiveness of the

2. Macroeconomic policy inconsistencies

3. The “Sudden Stop” argument

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

Euro Zone Brazil USA

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

Argentina Brasil Chile

Public Debt (% of GDP)

Public Sector External

Private Sector External

Banking Sector Exposure

= High = Medium =Low

While the problems of convertibility and the

An important reason behind this fear was the fact

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

Public Sector Private Sector

2. a sharp increase in country risk

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

• December 2001: Riots the De la Rua and Cavallo

• First two weeks of January 2002:

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

-- Complete loss of confidence in the banks, the currency, and

-- Continuous bank run

-- A run on the peso that pressured strongly the exchange rate

-- No money market or debt instruments for open market

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

¾Having regained the LOLR function the CB

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

slow the pace of the bank run

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

-- Provide liquidity support to banks to prevent

-- Develop sterilization instruments at the Central

-- Utilize part of CB reserves to intervene in the

high interest rates

greed > panic

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

A ccumulat ed evolut ion (31-Jan-02 al 24-Jul-02)

Loans Assistance Bank Reserves fall Deposits fall

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

In million of pesos Feb Mar Abr May Jun Jul

mario.blejer@bankofengland.co.uk Title of seminar, DATE © Bank of England

Private Sector Deposits - Year 2002

In million of pesos Feb Mar Abr May Jun Jul