A Note on Argentina's Debt Management Strategy

NBER Chapters, 1998

The paper shows that the combination of large capital inflows and sovereign governments could give rise to self-fulfilling balance of payments crises. It argues that a current account deficit could impair the resolution of such crises, but the crises themselves could occur even though the current account is in balance. The key is a weak financial sector, possibly made so by an accommodating central bank. In contrast with most of the literature on this subject, the paper endogenizes output and discusses the channels (New Classical and Keynesian) through which a BOP crisis can result in output collapse. Building on a Time to Build model, the paper shows that a growth slowdown can take place even though a BOP crisis brings about no current account reversal. 1 It should be pointed out, however, that in the multiple equilibria literature cited above, the government reaction function plays a central role. 2 current account deficits. This is not intended to debunk the view that current account deficits are important, but to argue that, if they are, one has to bring to the fore features that are not commonly emphasized in the literature. Actually, the paper will argue that current account deficits, although not a necessary condition for currency or financial crises, play a key role-together with 'dollarization'-in the resolution of crises. It will be claimed that large current account deficits and dollarization make it more difficult to offset the effects of self-fulfilling crises on the basis of domestic policy alone, raising the need for international cooperation. The paper will argue that not bringing the government into the limelight is a major omission. International financial crises have a flavor of their own which is not fully shared by purely domestic episodes (e.g., Orange County, California). Thus, the paper will claim that a key reason for that is the presence of sovereign governments. This is a central aspect in the Debt Crisis literature, but has somewhat been ignored in the currency/financial crises literature. 1 The paper will argue that sovereignty and non-explicit government policy rules may go a long way towards generating financial vulnerability and multiple equilibria. Sovereignty induces "country risk," and the latter prompts the government-explicitly or implicitly-to favor short-term debt and deposits. Another aspect that will be highlighted in the paper is large capital inflows. It will be argued that, together with sovereignty, large capital inflows magnifies the financial vulnerability caused by short-term debt and deposits. In addition, and even more important, the perception that large capital inflows are transitory helps to plant into people's minds the notion that the

1998

SSRN Electronic Journal, 2000

This paper was prepared for the "The Development of Securities Markets in Emerging Economies: Obstacles and Preconditions for Success" Seminar at the Inter-American Development Bank (IDB). Iwant to thank Juan Carlos Barboza, Rafael Cici and Norberto Lopez Isnardi for their collaboration preparing the paper. The views expressed in the paper do not necessarily reflect those of the Ministry of Economy and Public Works and Services.

Series Históricas, 2003

CEPAL Review

SSRN Electronic Journal, 2000

ABSTRACT Political support for Argentina's currency board rested on distributing the early gains from ending hyper-inflation and the spending made possible with access to external credit. When these gains were exhausted and external shocks left the peso overvalued, neither Argentina's political system nor its economy could adjust. The needed adjustment went well beyond simple fiscal tightening: it required deciding who would incur the financial losses associated with the deep contraction needed to correct a real over-valuation in a heavily indebted economy. By 2000, Argentina faced the prospect of further economic contraction, a banking crisis and an external sovereign debt crisis. Even if none of the three crises was avoidable, preemptive action might have made one or more of them less severe. Yet preemption was a political orphan - no political constituency in Argentina argued to bring some pain forward for a chance of less pain down the road, and the IMF and G-7 preferred continued financing to the political risk of supporting a new macroeconomic strategy.

PUC-Rio working paper, 2002

Despite the large size of the Brazilian debt market, as well the large diversity of its bonds, the picture that emerges is of a market that has not yet completed its transition from the role it performed during the megainflation years, namely that of providing a liquid asset that provided positive real returns. This unfinished transition is currently placing the market under severe stress, as fears of a possible default from the next administration grow larger. This paper analyzes several aspects pertaining to the management of the domestic public debt. The causes for the extremely large and fast growth of the domestic public debt during the seven-year period that President Cardoso are discussed in Section 2. The main culprit is the very high and risky interest rate, with the recognition of old debts (hidden liabilities and state debt renegotiation) coming in second. Section 3 computes Value at Risk and Cash Flow at Risk measures for the domestic public debt. These risk measures show that the current composition of the public debt is very risky. The rollover risk is introduced in a mean-variance framework in Section 4, and the maturity structure evolution is discussed. The increased riskness was the cost to improve the maturity structure. Section 5 discusses a few issues pertaining to the overlap between debt management and monetary policy. Finally, Section 6 wraps up with policy discussion and policy recommendations.

1992

2000

The paper shows that the combination of large capital inflows and sovereign governments could give rise to self-fulfilling balance of payments crises. It argues that a current account deficit could impair the resolution of such crises, but the crises themselves could occur even though the current account is in balance. The key is a weak financial sector, possibly made so by an accommodating central bank. In contrast with most of the literature on this subject, the paper endogenizes output and discusses the channels (New Classical and Keynesian) through which a BOP crisis can result in output collapse. Building on a Time to Build model, the paper shows that a growth slowdown can take place even though a BOP crisis brings about no current account reversal. 1 It should be pointed out, however, that in the multiple equilibria literature cited above, the government reaction function plays a central role. 2 current account deficits. This is not intended to debunk the view that current account deficits are important, but to argue that, if they are, one has to bring to the fore features that are not commonly emphasized in the literature. Actually, the paper will argue that current account deficits, although not a necessary condition for currency or financial crises, play a key role-together with 'dollarization'-in the resolution of crises. It will be claimed that large current account deficits and dollarization make it more difficult to offset the effects of self-fulfilling crises on the basis of domestic policy alone, raising the need for international cooperation. The paper will argue that not bringing the government into the limelight is a major omission. International financial crises have a flavor of their own which is not fully shared by purely domestic episodes (e.g., Orange County, California). Thus, the paper will claim that a key reason for that is the presence of sovereign governments. This is a central aspect in the Debt Crisis literature, but has somewhat been ignored in the currency/financial crises literature. 1 The paper will argue that sovereignty and non-explicit government policy rules may go a long way towards generating financial vulnerability and multiple equilibria. Sovereignty induces "country risk," and the latter prompts the government-explicitly or implicitly-to favor short-term debt and deposits. Another aspect that will be highlighted in the paper is large capital inflows. It will be argued that, together with sovereignty, large capital inflows magnifies the financial vulnerability caused by short-term debt and deposits. In addition, and even more important, the perception that large capital inflows are transitory helps to plant into people's minds the notion that the

Occasional Papers, 2005