* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download The Argentine Monetary and Financial Policies and the Crisis
Bank for International Settlements wikipedia , lookup
Foreign exchange market wikipedia , lookup
Currency war wikipedia , lookup
Bretton Woods system wikipedia , lookup
Fixed exchange-rate system wikipedia , lookup
Exchange rate wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Pontificia Universidad Católica Argentina Santa María de los Buenos Aires Escuela de Negocios Documento de Trabajo Nro. 3 The Argentine Monetary and Financial Policies and the Crisis Martín Redrado The Argentine Monetary and Financial Policies and the Crisis The Argentine Monetary and Financial Policies and the Crisis Martín Redrado Professor of International Economics School of Business - Pontifical Catholic University of Argentina Abstract The emergence of the international financial crisis as from mid 2007 combined with a number of domestic sources of uncertainty yielded to four shocks faced by the Argentine economy in a period of two years. Each of these episodes was reflected in the volatility showed by capital flows and country risk indicators. However, unlike other episodes in the economic history of Argentina, the monetary and financial system was not an instability amplifier. The exchange rate behaved accordance with the region, the deposit base performed with stability, the Central Bank balance sheet showed its strength, there was no collapse in credit, no financial institution was forced to close, there was not any mega-devaluation and contracts were not broken. The risk management approach applied by the Central Bank based upon four pillars (convergence between supply and demand in the monetary market; managed floating exchange rate regime; build up of liquidity buffers, regulatory and supervision framework to reduce the exposure of the system to risks) was critical to allow the argentine economy to ride one of the largest international crisis without severe distress. JEL codes: E52- E58- E63- E65- F31 Keywords: MONETARY POLICY- FOREIGN EXCHANGE- CAPITAL FLOWSCENTRAL BANKS- STABILIZATION POLICIES- FINANCIAL SYSTEM- BANK REGULATION- EMERGING MARKETS. 2 The Argentine Monetary and Financial Policies and the Crisis Contents I. Introduction .....................................................................................................................4 II. A Risk Management Approach......................................................................................7 II. 1. Convergence between Supply and Demand in the Monetary Market.......................9 II. 2. Managed Floating Exchange Rate Regime ...........................................................11 II. 3. Generation of Liquidity Buffers in Foreign and Domestic Currency ..................155 II. 4. Financial System Regulation and Supervision ......................................................18 III. Situation of the Monetary and Financial System prior to the International Crisis..19 IV. A Sequential Response by the Central Bank to the Crisis .........................................24 IV. 1. Central Bank’s Operations in the Exchange Rate Market....................................26 IV. 2. Liquidity Provision in Domestic Currency, Appearance of the Lender of Last Resort..............................................................................................................................28 V. Results of the Policies Implemented.............................................................................31 VI. Conclusions..................................................................................................................37 References..........................................................................................................................39 3 The Argentine Monetary and Financial Policies and the Crisis I. Introduction The emergence of the subprime crisis in the United States as from mid 2007, which eventually became the worst economic and financial crisis of the last 70 years, was the first episode of turmoil suffered by the Argentine economy since it came out of the 2001-2002 domestic crisis. Added to this, there were also some domestic events that contributed to the uncertainty context. Thus, the Argentine economy was hit by four shocks through the financial channel during the instability period. The first one was related to the beginning of the subprime mortgage crisis in the United States (July-October 2007). The second episode was a sharp reduction in money demand as a result of the farming sector conflict (April-July 2008).1 The third shock was caused by a worsening of the international crisis generated by Lehman Brothers’ bankruptcy, added to the doubts of the market about the capacity of the national public sector to comply with its debt obligations (September-December 2008). The fourth episode was due to a new wave of instability in the international financial markets, caused by the uncertainty related to the implementation of the Financial Stability Plan announced by the US Administration, together with the advancement of the date established for the Argentine legislative elections (March-May 2009). 2,3 1 The conflict between the government and the farming sector started by mid March 2008 due to the creation of the variable export-tax system on the exports of grains, oilseeds and their by-products (the tax rate became dependant of commodity price levels), which initially implied an increase in tax rates. The conflict resulted in several weeks of lockouts by the farming sector and the suspension of meat-and-grain trading throughout the country, with mobilization of people to the roads. The situation improved in July that year when the variable export-tax system was not passed by the House of Senators. 2 In February 2009, the new US Administration announced the Financial Stability Plan, with an amount of USD 2 trillions, in order to generate a more comprehensive response to the crisis than the TARP (the Troubled Asset Relief Programme, which was announced in October 2008, included USD 700 billions to buy “toxic” assets of banks). The initial market reaction was negative, due to the lack of details about the measures of the programme, which started a new wave of financial instability. Nevertheless, as details about the programme were known and the FED started to buy long term Treasury and government agencies bonds, along with the coordination of policies resulting from the G-20 meetings in London, financial markets began to recover. 3 The legislative elections were held in June 2009 to renew half of the members of the House of Representatives and one third of the Senators. The election of the national congressmen was carried out in all the provinces of the 4 The Argentine Monetary and Financial Policies and the Crisis These events resulted in a significant increase of the country risk premium (measured by EMBI+), which deviated remarkably from the perceived risk for the Emerging Markets in general, due to the above-mentioned domestic uncertainty factors (see Figure 1), and in strong capital outflows, that in the case of the capital and financial account of the non financial private sector, reached USD 20 billion, higher than the one recorded during the Tequila crisis but lower than the outflow of the currency board (Convertibility Regime) collapse (close to USD 30 billion in the same period; see Figure 2). Figure 1: Country Risk Premium (EMBI+) 2,000 1,800 1,600 EMBI+ EMBI+ Argentina (basis points) 1,400 1,200 1,000 800 600 400 200 8 M ar -0 8 M ay -0 8 Ju l-0 8 Se p08 No v08 Ja n09 M ar -0 9 M ay -0 9 Ju l- 0 9 Se p09 -0 7 n0 Ja No v 7 -0 7 Ju l-0 Se p Ja n0 7 M ar -0 7 M ay -0 7 0 Source: based on J.P. Morgan data country, while national senators were elected in eight provinces: Catamarca, Córdoba, Corrientes, Chubut, La Pampa, Mendoza, Santa Fe and Tucumán. The elections had been previously scheduled for October 25, 2009 (the elected members would take office on December 10) but they were held earlier, on June 28 (but with the lawmakers still taking office on December 10). 5 The Argentine Monetary and Financial Policies and the Crisis Figure 2: Capital and Financial Account of the Non-Financial Private Sector (accumulated balances since the T period) 5,000 0 (millions of USD) -186 -5,000 -10,000 -15,000 -20,000 -19,477 -25,000 Tequila (T = I-95) Episode 2007- 2009 (T = III-07) 2001-2002 crisis (T = III-01) -30,000 -29,699 -35,000 T T+1 T+2 T+3 T+4 T+5 T+6 Source: based on INDEC data. Unlike other episodes in the economic history of Argentina, the monetary and financial system was not an instability amplifier: the Argentine Central Bank balance sheet did not deteriorate, there was not any widespread flight of deposits, there was no credit collapse, no financial institution was forced to close, there was not any mega-devaluation and contracts were not broken. The risk management approach applied by the Central Bank was critical for this successful performance. It is based on four pillars: 1) the convergence between supply and demand in the monetary market defined through yearly public commitments with quarterly targets, 2) the managed floating exchange rate regime, 3) the generation of liquidity buffers (both in domestic and foreign currency), and 4) the regulation and supervision of the financial system to reduce its risk exposure. Due to this approach, when the crisis started, the system was well prepared to face the successive instability episodes on the one hand and, on the other, the monetary authority could respond adequately to the turmoil through operations in the exchange rate market to contain the depreciating pressures and through liquidity provision in local currency for the financial institutions. 6 The Argentine Monetary and Financial Policies and the Crisis The purpose of this paper is to analyze the four pillars of the risk management approach implemented by the Central Bank and to show its positive impact on the status of the system before the crisis and on the monetary authority’s degrees of freedom to face the financial turmoil. Then, the measures taken by the Central Bank during the crisis will be analyzed, related to both the exchange rate market and the liquidity provision in domestic currency, and how they helped to minimize the impact of the shocks on the main variables of the financial system, accompanied by a comparison between this performance and the one evidenced in previous financial crises. In the following section, the four pillars of the policies will be described. The third section will focus on the situation of the financial system when the crisis started, while the fourth section will be devoted to the response by the Central Bank to the financial turmoil through exchange rate transactions and liquidity-provision measures. The results of the policies implemented in terms of the performance exhibited by some financial variables and the comparison with similar past events will be analyzed in section five, while the last section will include the conclusions. II. A Risk Management Approach In a country where instability has been a distinctive feature of the macroeconomic context for several decades, with its obvious cost in terms of welfare, and where risk aversion is a prevailing characteristic, the design of the monetary policy requires a primary focus on stability as an objective of the macroeconomic policy. This has been the cornerstone of Central Bank's task in the last five years. The “risk management approach” (Blinder and Reis, 2005) underlies the policies applied by the monetary authority in recent years, which prevented the system from acting, for the first time in several decades, as a shock amplifier during an international financial crisis. 7 The Argentine Monetary and Financial Policies and the Crisis In the risk management approach, the policy maker must consider not only the most likely economic evolution path ahead but also the probability distribution of outcomes around this path, together with an analysis of the costs and benefits of these likely scenarios under alternative policy choices. It may happen then that the outcome of a low-probability event has serious adverse consequences for the economy, as a result of which it may then be considered more costly than the negative effects of having insured against that contingency, even when in the end it does not occur. This means that, on some occasions, it may be beneficial to insure against a “catastrophe”. This entails acting preemptively to reduce the probability of occurrence of such scenarios and, simultaneously, to generate guidelines for action in case these scenarios finally occur, with the purpose of minimizing their impact on the economy. In the Argentine case, this approach has taken into account the country’s economic history and the idiosyncrasy of the Argentine citizen who, in the last 20 years, has faced two hyperinflations and two deposit freezings, among other crises.4 Thus, the practical implementation of this approach consisted in the early adoption of prudential and countercyclical measures that rendered the economy less vulnerable to the changing economic environment, which may be classified in four pillars: 1) convergence between supply and demand in the monetary market through an annual program of monetary aggregates with quarterly targets; 2) a managed floating exchange rate regime; 3) generation of liquidity buffers in domestic and foreign currency and 4) financial system regulation and supervision to reduce risk exposure. We will now proceed to analyze each pillar in detail. 4 The hyperinflations were recorded in mid 1989 and early 1990, while deposit freezings were implemented during the Bonex plan in December 1989 and the “corralito-corralón” in 2001-2002. 8 The Argentine Monetary and Financial Policies and the Crisis II.1. Convergence between Supply and Demand in the Monetary Market The Central Bank has put into practice a monetary policy based on monetary aggregates targeting through a monetary program submitted annually before the National Congress and implemented via several instruments such as Central Bank´s bills and notes, open market transactions with government securities, repo transactions and rediscount cancellations (20052009). Why are monetary aggregates used as monetary policy intermediate targets instead of simply signaling the monetary policy through the interest rate? Because the choice between price (interest rate) and amount (monetary aggregates) is based, among other things, on the relationship between the volatility of the real interest rate and the volatility of money velocity. If money demand is highly unstable (i.e., if money velocity is highly volatile), controlling money supply leads to a high volatility in interest rates and in the economic activity in general. When a central bank controls the short-term interest rate (in general, the nominal interest rate), the purpose is to influence the real interest rate of the economy through the yield curve and to influence the economic activity across the cycle with the final objective of stabilizing the level of inflation. In general, and Argentina has not been the exception, when a country comes out of a crisis such as that caused by the abandonment of the currency board (Convertibility regime), the real interest rate is highly volatile (partially influenced by the volatility of the inflation rate and the risk premium) and even exceeds that of the money velocity. Besides, in the Argentine case, uncertainty and the shortening of horizons inherent to a context of crisis, compounded by public and private debt defaults, hindered the existence of a benchmark interest rate curve and thus a monetary policy transmission mechanism through the use of the interest rate. This situation rendered the control of monetary aggregates more convenient to implement the monetary policy in the aftermath of the crisis. 9 The Argentine Monetary and Financial Policies and the Crisis At the beginning the program was based on quarterly targets of the monetary base, then changed in 2006 to quarterly targets on M2 in pesos (bills and coins held by the public plus public and private sectors’ current and savings accounts) with the purpose of improving transparency and advancing on a more representative aggregate to guide the monetary conditions of the economy. This qualitative improvement was based on money demand research made by Central Bank´s economic team, in which the time series empirical analyses from 1975 to date showed a long-term positive correlation between M2 aggregate and inflation. The definition of the M2 targets is based on an estimation of money demand (which depends on factors such as GDP and the interest rate, among others) over an annual horizon, which is later contrasted with forecasts of aggregate supply expansion factors, so as to ensure the convergence between money supply and demand and thus monetary stability. The use of economic forecasts brings about some level of uncertainty, and the Central Bank is no exception in this sense when it forecasts the evolution of money supply and demand. In this case, the sources of uncertainty are to be found both in the variables typically accounting for money supply and demand and in the econometrically-estimated parameters in the case of demand. The existence of this uncertainty is what justifies the use of a range for monetary aggregate targets. At the same time, uncertainty can be quantified, which is reflected in the size of the target range established by the monetary authority. On the other hand, the monetary program range provides elements to impact on the economic liquidity in what we might call “policy fine tuning”, managed through short-term interest rate control by means of daily transactions in the repo market with the purpose of developing a short-term liquid money market. Thus, the short-term interest rate is used to affect the liquidity of the economy provided it does not go against the monetary aggregate guidelines. In this context, the period between the 2001–2002 crisis and the subprime crisis eruption (by mid 2007) was characterized by capital inflows and Central Bank transactions in the exchange rate market with the purpose of reducing domestic currency volatility. Thus, excess issuance 10 The Argentine Monetary and Financial Policies and the Crisis generated by foreign currency purchase was sterilized through different tools to comply with the monetary program targets and ensure a balance between money supply and demand. These instruments included, among others, bills and notes issued by the Central Bank, the cancellation of rediscounts received by banks during the 2001-2002 crisis and repo transactions with financial institutions. At the time the international turmoil was starting, the monetary program had been in force and in full compliance for 16 quarters in a row, and it was still complied with throughout the crisis so that it accumulated 25 consecutive quarters of compliance by September 2009 (see Figure 3). Figure 3: Monetary Program on M2 (in ARS, both public and private) 210,000 200,000 (millions of ARS) 190,000 M2 in pesos, moving averages of 30 days Lower target Upper target 180,000 170,000 160,000 150,000 140,000 130,000 120,000 110,000 Ja n06 Ap r-0 6 Ju n06 Se p0 D 6 ec -0 6 M ar -0 7 Ju n07 Se p0 D 7 ec -0 7 M ar -0 8 Ju n08 Se p0 D 8 ec -0 8 M ar -0 9 Ju n09 Se p0 D 9 ec -0 9 100,000 Source: BCRA. II.2. Managed Floating Exchange Rate Regime The managed floating regime adopted by the Central Bank consists in operating in the exchange rate market to reduce the short-term nominal volatility and avoid sharp fluctuations in currency demand (that may destabilize money demand) or sizable imbalances in the real 11 The Argentine Monetary and Financial Policies and the Crisis exchange rate, but without creating a commitment on the exchange rate level or variation rate that might result in a free exchange rate hedge. This means that the Central Bank operates in the exchange rate market to reduce volatility, but respecting the trend determined by the macroeconomic fundamentals to reach a long-term equilibrium in the real exchange rate. A sizable number of countries are deemed as “managed floaters”. According to the IMF classification of exchange rate regimes, 48 out of 187 countries had a regime of this sort in 2007, exceeding the number of countries with more flexible exchange rate schemes (35).5 This group included Colombia, Czech Republic, Indonesia, Peru, Romania, Thailand, India, Malaysia, Russia and Singapore, among the largest countries in size. Even in countries with “purer” inflation targeting regimes (such as Chile and Brazil), which usually require a floating exchange rate to avoid contradictions with the inflation target, the monetary authority operates in the exchange rate market very actively on some occasions. In this respect, Mohanty and Klau (2004) and Hammerman (2004) find that the reaction of central banks with inflation targeting regimes in Emerging Countries has a significant coefficient for the nominal exchange rate. According to Mohanty and Klau, the response of the interest rate to the exchange rate is, in some cases, higher than the response related to GDP gap or to inflation deviation from the target. Likewise, Chang (2008) reviews the experience of several Latin American central banks with inflation targeting regimes and finds that their policies evidence a concern about exchange rate volatility and purposeful reserve accumulation policies. During expansions (for example, capital inflows and/or high terms of trade), there is a “preemptive” argument in favor of the use of the managed floating regime. The reason behind this argument is “avoiding an exchange rate crisis”, especially in developing countries with a 5 Due to the contributions made by Calvo and Reinhart (2000) and Levy-Yeyati et al. (2002) on the distinction between what governments do and say in exchange rate matters, the IMF replaced a de jure classification with a de facto classification. The latter combines the analysis of exchange rate and other quantitative information with the judgment on the nature of the exchange rate regime by the economists participating in each country’s monitoring (Bubula and Otker-Robe, 2002). 12 The Argentine Monetary and Financial Policies and the Crisis limited capacity to absorb external resources through their capital markets and where access to hedge instruments is more restricted. In this sense, the overvalued currencies tend to show an explosive dynamics, especially if they are related to fixed exchange rate regimes. Edwards (2004) reveals that current account surpluses are more persistent than deficits and that current account deficit reversals are related to exchange rate crises, to a violent stop of capital inflows and to recessions, which are less costly in the case of more flexible exchange rate regimes. In this context, avoiding a sharp and sudden appreciation of the domestic currency may help to avoid overvaluation-related booms, with their impact on domestic assets valuation, and the resulting costs of the crisis ahead. By the same token, the managed floating regime does not entail an explicit commitment to a specific exchange rate parity, which could serve as a free exchange rate hedge and thus encourage higher capital inflows and exacerbate the domestic currency overvaluation. In turn, during the contraction of capital and/or trade flows, when the exchange rate market faces depreciation pressures, several arguments justify the use of a managed floating regime to lean “against the wind”. One of the most common is the existence of currency mismatches (Calvo and Reinhart, 2000), which is based on the negative impact of the domestic currency depreciation on the balance sheets of households, companies, banks and the public sector against a backdrop of assets in domestic currency and liabilities in foreign currency, which may lead to defaults and cause recessive effects on the economy. In the Argentine case, currency mismatches have been reduced through prudential rules; therefore, they were not a significant argument to avoid sharp exchange rate fluctuations. In this sense, the reasons why the monetary authority decided to operate in the exchange rate market during the current crisis were different. One was related to the possibility of a direct pass through of the local currency depreciation to domestic prices, which was even more relevant in the context prevailing in mid 2007 and early 2008 when food and energy international prices pressed on the domestic inflation rate. The other one was related to the role of the US dollar in the Argentine economy 13 The Argentine Monetary and Financial Policies and the Crisis as a nominal benchmark and in the formation of inflation expectations by the economic agents. The relevance of this factor is due to the long Argentine history of high inflation and macroeconomic instability which led to an increasing use of the US currency as reserve value, account unit and even means of payment for some transactions. Economic agents consider the US dollar as a shelter of value during times of uncertainty; therefore, curbing inflation expectations through operations in the exchange rate market and reducing the decline in money demand have positive aftereffects not only on inflation expectations but also on the stability of the financial market since they seek to prevent a bank run generated by a flight to the US dollar. Figure 4 shows the positive correlation between nominal exchange rate volatility and the private sector's variation of deposits in pesos, which illustrates the relationship between exchange rate and financial stability in the Argentine case. Figure 4: Exchange Rate Volatility and Time Deposits 14% 4 10% 3 (% var.) 1 2% 0 -2% -1 -6% -10% -2 Retail Time Deposit 30 days Rate of Change (%) -3 Annualized Volatility (ARS/USD)* -14% Mar-07 (billions of USD) 2 6% 30 days cummulative USD bid/offer -right scaleJun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 -4 Jun-09 Sep-09 (*) Volatility is measured as the change against the average value, with a 30-day horizon; and it is later annualized. Source: BCRA. 14 The Argentine Monetary and Financial Policies and the Crisis II.3. Generation of Liquidity Buffers in Foreign and Domestic Currency Typically, the development of foreign currency liquidity buffers refers to the accumulation of international reserves by central banks. During the last century, the role of international reserves in the global economy has changed significantly (Redrado et al., 2006). During the Gold Standard, they were the backing of money issuance and the guarantee of domestic currencies’ credibility. As from Bretton Woods (fixed exchange rates against the dollar and the US dollar with a fixed value in terms of gold), the reserves started to give degrees of freedom to avoid sharp economic adjustments vis-à-vis external shocks in a global context of exchange rate and capital controls. Then, after the collapse of Bretton Woods, the increasing flexibility of exchange rates as from 1971 (and the increasing role of the exchange rate as a factor of absorption of external shocks) did not stop the incentive for reserve accumulation, as could have been expected. In the 1990s, the growing trade and financial openness to the world was accompanied by the acceleration in reserve accumulation. Especially, the increasing financial integration led to higher financial volatility and successive crises in emerging markets, as a result of which the latter accounted for the largest reserve accumulation during the period. Thus, global international reserves increased from USD 200 billion at the beginning of the 1970s to a record level of USD 6.5 trillion in 2007, driven largely by emerging countries (see Figure 5). 15 The Argentine Monetary and Financial Policies and the Crisis Figure 5: Global International Reserve Accumulation 7 6 Global Imbalances (trillions of USD) 5 4 Floating Dollar 3 Bretton Woods 2 1 Real (deflacted by the US export price index) 2008 2005 2002 1999 1996 1993 1990 1987 1984 1981 1978 1972 1975 1969 1966 1963 1960 1957 1954 1951 1948 0 Nominal Source: based on IMF data. In the absence of an international lender of last resort, since international financial institutions could not fulfill that role, the accumulation of reserves became a self-insurance mechanism by the Emerging Countries to face temporary liquidity crises. This non-cooperative scheme is a second-best solution. In fact, a better scheme would lie in the existence of a global system to manage a reserve pool that exploits the possibilities for risk diversification, an issue that has not been raised yet in the current discussion about the reform of the International Financial Architecture. Among other advantages, this policy proved to be a guarantee for macroeconomic stability since it increased the confidence in the domestic currency and reduced the impact of external shocks and public and private financing cost. While in normal situations this insurance represents a less visible benefit, it provides concrete benefits in terms of financial and monetary stability in times of stress. In the case of Argentina, the accumulation of reserves resulted from currency purchases by the Central Bank after the 2001-2002 crisis. Consequently, reserves increased from USD 9 16 The Argentine Monetary and Financial Policies and the Crisis billion in August 2002 to over USD 50 billion in March 2008. This policy was accompanied by a sterilization process of exchange rate market transactions through the issuance of Central Banks's bills and notes (LEBACs and NOBACs) and the cancellation of rediscounts through bids as from early 2005. This process allowed the monetary authority to neutralize the impact of any excess monetary issuance caused by currency purchase. As a result, it was possible to preserve monetary stability, another pillar of the approach, evidenced in the strict compliance, quarter after quarter, of the annual monetary programs. In turn, this allowed for the accumulation of a contingent liquidity network in domestic currency to be managed by the Central Bank. Thus, Central Banks’s stock of bills and notes grew as from the first issuance in March 2002 to a maximum of around ARS 60 billion in June 2007, out of which approximately 70% was being held by financial institutions, accounting for 18% of total deposits of the financial system. In addition, in the period 2005-2009 rediscounts for ARS 20 billion granted during the previous crisis were cancelled by the banks, generating as a result an additional absorption factor. Although reserve accumulation and sterilization policies can create quasi-fiscal costs, since in Emerging Economies the interest rates of domestic instruments are likely to be higher than the return on external assets (mainly liquid assets of a high credit quality), these costs should be weighed against the benefits of preventing or lessening the impact of external shocks on the economy (which are more difficult to quantify). Anyway, in the Argentine case, the revenue generated by Central Bank’s policy more than offset the financial cost. Thus, the comparison between revenue from interests on external assets (international reserves) and domestic assets (rediscounts and government securities) with the expenditure on interests of external liabilities (obligations with multilateral lending agencies) and domestic liabilities (Central Bank bills and notes, and other financial system transactions) showed a positive result between 2003 and 2007 of around ARS 1.5 billion annually on average (see Frenkel, 2007, for an analysis of sterilization policy sustainability). 17 The Argentine Monetary and Financial Policies and the Crisis At the same time, the international reserve accumulation policy was accompanied by a reserve portfolio management policy whose purpose was to improve the profitability of the portfolio subject to the liquidity restrictions inherent to reserve assets, and simultaneously diversify the credit, market and currency risks. This helped to maintain high asset liquidity and prevent the quasi-fiscal result from becoming a limitation for the reserve accumulation policy. II.4. Financial System Regulation and Supervision After the 2001-2002 crisis, the financial system regulation and supervision focused on normalizing the balance sheets of banks (contributing to their recovery after the impact of the crisis) and on reducing the risk exposure that in the past had had a strong destabilizing effect on financial institutions, such as currency, public sector and liquidity risk exposures. The final objective was to develop a financial system that could serve as a buffer rather than an amplifier of shocks, as it had happened in the past. In this sense, the most important measures tending to consolidate the strength of the financial institutions after the currency board (Convertibility regime) collapse were the following: • Limits to the exposure to public sector risk: Minimum capital requirements differentiated according to government jurisdiction (national, provincial and municipal) were established, as well as a ceiling to public sector instruments’ share of total assets, which went down progressively until July 2007. • Limits to currency mismatches: It was established that foreign currency deposits could only be applied to loans in dollars and that debtors of credits in dollars must have income in the same currency; minimum capital requirements were imposed on currency mismatches, and the development of the futures market was firmly encouraged. 18 The Argentine Monetary and Financial Policies and the Crisis • Incentives to improve the composition of banks’ liabilities: The Central Bank encouraged the early cancellation of rediscounts granted during the 2001-2002 crisis. Incentives were also created to extend the liabilities terms through the increase of the minimum cash requirements for current accounts and savings accounts as well as the elimination of interest charges on these deposits. Other measures were the elimination of the minimum cash requirements for time deposits over 180 days and the establishment of a 100% requirement of this kind for deposits whose interest rate exceeded the reference rate by 15%. • Creation of tools for liquidity management: The sterilization policy of exchange rate market operations with Central Bank’s bills and notes strengthened its use as instruments to generate a liquidity buffer in the financial system. III. Situation of the Monetary and Financial System prior to the International Crisis When the crisis erupted, the pillars described above allowed the Central Bank to count on a high stock of international reserves and permitted banks to face the financial turmoil with high liquidity levels, low delinquency levels, adequate solvency levels and a low exposure to currency and public sector risks. On the one hand, in June 2007 international reserves ratios with respect to the different monetary aggregates, to Central Bank’s liabilities or to the size of the economy reflected the strength of the monetary authority to face the crisis as compared to the situation in previous years, and even as compared to the ratios prior to the currency board collapse (Convertibility Regime; see Table 1 and Figure 6). This provided the Central Bank with high “fire power” to 19 The Argentine Monetary and Financial Policies and the Crisis manage the depreciation pressures observed in the exchange market during the crisis and that will be explained in further detail in section IV.1. Table 1: International Reserve Ratios International reserves ratios in relation to: 2001 (average) 2003 2005 (December) (December) 2007 (June) 2009 (June) Private M3 (ARS and USD) 32% 41% 59% 67% 72% Private time deposits (ARS and USD) 52% 105% 190% 206% 228% BCRA monetary liabilities (ARS and USD) + LEBACs and NOBACs + net repos 103% 69% 87% 81% 95% 9% 11% 16% 18% 17% Nominal GDP Source: BCRA. Figure 6: Central Bank’s international reserves 55,000 Reserves / private M3 (ARS and USD) 50,000 45,000 65% 40,000 55% 35,000 30,000 45% 25,000 35% 20,000 (reserves - millions of USD) Reserves in millions of USD 15,000 25% 10,000 15% 5,000 Ja n00 Ju l- 0 Ja 0 n01 Ju l- 0 Ja 1 n02 Ju l- 0 Ja 2 n03 Ju l- 0 Ja 3 n04 Ju l- 0 Ja 4 n05 Ju l- 0 Ja 5 n06 Ju l- 0 Ja 6 n07 Ju l- 0 Ja 7 n08 Ju l- 0 Ja 8 n09 Ju l- 0 9 (reserves/ private M3 (ARS and USD) 75% Source: BCRA. 20 The Argentine Monetary and Financial Policies and the Crisis On the other hand, the strength of the banks´ balance sheets increased in recent years, which is reflected in the evolution of the following indicators (see Table 2): • Liquidity: The financial system showed, at the onset of the crisis, high liquidity levels. Even though the ratio of liquid assets (deposits in Central Bank current account, cash in banks and reverse repos) to total deposits, in June 2007, was at levels similar to those at the end of 2001 (20%), upon adding LEBACs and NOBACs the liquidity levels of 2007 increased up to 43% of banks’ deposits. • Exposure to public sector risk: Upon the onset of the crisis, the exposure of the financial system to public sector risk, measured as the weight of government securities (excluding CENTRAL BANK’s instruments) plus loans to the public sector in total assets, reached 17.3% (June 2007), thus accumulating a 33 percentage point reduction from the maximum reached by mid 2002. The figure prior to the eruption of the subprime crisis was even below the one recorded in the end of 2001 (27.1%). This dynamics was encouraged by Central Bank’s rules and regulations, added to the improvement of the fiscal position after the 2001-2002 crisis. • Private sector credit risk: The other side of the reduction of indebtedness with the public sector was the increase of credit to the private sector by around 30% annually on average as from 2003, which entailed an increase of the weight of such loans in the assets of financial institutions from 18.1% to 32.1% in June 2007. This dynamism of credit to the private sector occurred within the context of a reduction of delinquency rates (measured as the loans to the non-financial private sector in arrears as a percentage of total loans to such sector), which declined from 33.5% to 3.9% within the same period, encouraged by the improvement of economic conditions, and even showing a level below that observed during 2001 (19.1%). Simultaneously, the equity exposure to this risk (measured as the delinquency rate less the loan loss provisions with respect to equity) remarkably fell in 21 The Argentine Monetary and Financial Policies and the Crisis relation to what had been observed at the beginning of the decade, by declining from 22% in late 2001 down to -3% in June 2007. • Exposure to currency risk: The Central Bank’s rules and regulations encouraged a reduction of exposure of the financial institutions’ balance sheets to exchange rate risk. Thus, net exposure to exchange rate risk, measured as the difference between assets and liabilities in foreign currency as a percentage of total assets, declined from 10.6% at the end of 2001 down to 3.4% by mid 2007. • Liability structure: A reduction was observed of the weight of discount window loans granted during the 2001 crisis in banks’ liabilities, which had practically disappeared from their balance sheets in June 2007 (accounting for only 1.4% of the financial system liabilities, after having reached a maximum of 17.2% at the end of 2002). There was also a decline in the weight of corporate bonds and credit lines from abroad, from 11% of liabilities at the end of 2001 down to 4% in June 2007. The other side of this dynamics was the consolidation of deposits (both public and private) as the banks’ main funding source (from 46.5% in 2002 up to 75% at the time prior to the eruption of the subprime crisis). • Solvency: The recovery of profitability due to the normalization of the financial intermediation business after the 2001-2002 crisis and the new capital injections by financial institutions (which accumulated USD 5.4 billion between 2002 and June 2007) fostered the recovery of solvency. Thus, the equity of banks increased 60% up to mid 2007 (until accounting for 13.4% of assets), whereas minimum capital requirements reached 16.8% of assets weighted by risk in June 2007, a level exceeding the minimum standards required locally and internationally (8% was the figure recommended by the Basel Committee at that time). 22 The Argentine Monetary and Financial Policies and the Crisis Table 2: Financial system indicators 2001 (Dec.) Liquidity (CB current account deposits + cash in banks + reverse repos + LEBAC and NOBAC) / Total deposits 2003 (Dec.) 2005 (Dec.) 2007 (June) 2009 (June) 19,6% 29,1% 36,0% 43,4% 41,4% 27,1% 46,6% 31,3% 17,3% 12,5% 42,7% 19,1% 21,9% 18,1% 33,5% 12,4% 25,8% 7,6% -4,1% 32,1% 3,9% -3,1% 38,6% 3,7% -2,2% 10,6% 7,7% 4,4% 3,4% 3,7% 62,0% 10,9% 4,2% 57,4% 13,3% 16,7% 70,0% 5,8% 8,7% 75,0% 4,4% 1,4% 77,8% 2,9% 0,3% Exposure to public sector risk (Government securities w/o LEBACs and NOBACs + Loans to public sector + Compensations to collect) / Total assets Private sector credit risk Credit / Total assets Credit in arrears(*) / Total credits (Credit in arrears - Loan loss provisions ) / Equity Currency risk (Foreign currency assets - Foreign currency liabilities) / Total Assets Liability structure Deposits / Total liabilities Corp. Bonds and credit lines abroad / Total liabilities Obligations to BCRA / Total liabilities Solvency Equity / Net assets(**) Capital integration / Assets weighted by risk according to CB regulations on minimum capital requirements Total capital position (Integration less requirement, including allowances) / Capital requirement 14,9% 11,9% 12,9% 13,4% 13,2% 21,4% 14,5% 15,3% 16,8% 17,4% 54,0% 116,0% 173,0% 92,0% 86,0% (*) Credit in arrears: loans in situations 3 to 6, according to debt classification regime. (**) Net assets: assets and liabilities net from accounting duplications due to repo operations, derivatives and operations unliquidated to cash liquidate. transactions. Source: BCRA. Even though the policies implemented by the Central Bank played a key role in the favorable performance of the financial system during the crisis, there were other factors that also contributed to the strength shown by banks: 23 The Argentine Monetary and Financial Policies and the Crisis • Unlike the situation observed in the developed world, upon the beginning of the crisis, the Argentine economy presented low levels of indebtedness. Despite the dynamism shown by credit in the post-crisis period, the ratio of bank credit granted to private sector in relation to GDP was 11.5% in June 2007 (up from 7.5% of GDP in January 2004). Behind this performance, there may be found some factors deriving from the 2001-2002 crisis, such as a more prudent attitude by banks with respect to credit, with a higher preference for liquidity, and a greater availability of internal funds deriving from the profitability increase upon the remarkable change of post-devaluation relative prices. • The financial system presented no direct exposure to subprime risk and, therefore, this transmission channel, which was remarkably strong in the developed world, did not operate. In addition, the system was neither significantly dependent upon foreign funding, which declined considerably during the crisis. IV. A Sequential Response by the Central Bank to the Crisis In the four critical episodes, a marked reduction of money demand was observed, which was reflected in deposit falls (in particular, time deposits), domestic interest rate increases (except in the fourth episode) and a strong buying pressure in the exchange rate market, evidenced by remarkable foreign currency outflows. In this context, any recipe to overcome a crisis or situation of financial turmoil must meet three essential conditions: 24 The Argentine Monetary and Financial Policies and the Crisis 1) Forcefulness: The measures must be convincing if the objective is to “twist” expectations and recreate confidence. They must reflect the conviction of the authorities as to the path to follow. 2) Simplicity: The instruments used must be transparent and clear so as to increase effectiveness. A measure may be technically impeccable but, if agents find it difficult to understand, such measure generates uncertainty and lacks efficacy. 3) Capacity of execution: The effectiveness to overcome the complexities associated with the implementation of any measure is a relevant condition that allows, at the same time, to gain credibility. These principles guided the Central Bank when putting into practice the measures to face the impact of the international crisis on the economy. In this context, the monetary authority decided to fight on two fronts on a sequential basis. On the one hand, it made transactions in the exchange rate market to avoid an excessive volatility of exchange rate that might affect expectations, impacting in a disruptive manner on money demand. To such effect, the key factor was the managed floating exchange rate regime that the monetary authority was already implementing and the availability of a significant stock of international reserves. On the other hand, the Central Bank injected liquidity in pesos to the market to mitigate the impact of capital outflows on interest rates and on the availability of credit to the private sector and to ensure the stability of the financial system, which reflected the return of the lender of last resort for the domestic economy. The availability of liquidity buffers, created in the financial system through the sterilization policy (through the issue of Central Bank´s bills and notes), was a fundamental factor to achieve the stability of the financial system and to sustain the demand in pesos. 25 The Argentine Monetary and Financial Policies and the Crisis IV.1. Central Bank’s Operations in the Exchange Rate Market Throughout the crisis, the managed floating regime was reflected in the operations of the Central Bank in the spot and futures exchange rate markets, sometimes in coordination with government-owned banks, so as to avoid the potential transfer of depreciation expectations to domestic prices and, at the same time, to contribute to recompose the demand for domestic assets and assure the stability of the financial system. In this respect, the sale of foreign currency was intense during the periods of stronger pressure on the exchange market. Thus, in the first episode, such sale reached USD 1.5 billion, in the second episode, USD 3 billion, in the third, USD 4 billion and in the fourth, USD 2.3 billion. However, in the June 2007-March 2009 period, net accumulated sales accounted only for USD 1.8 billion, since intervals of reserve purchases were observed during the normalization periods subsequent to each episode (see Figure 7). Figure 7: Central Bank’s operations in the foreign exchange market 1st Episode 2nd Episode 3rd Episode 4th Episode 300 3.8 200 (ARS/USD) 0 -100 3.4 -200 3.2 (millions of USD) 100 3.6 -300 -400 3.0 BCRA’s operations in the spot exchange rate market (right axis) -500 Exchange rate 2.8 -600 Jul-07 Nov-07 Feb-08 Apr-08 Jul-08 Sep-08 Dec-08 Mar-09 Jun-09 Source: BCRA. 26 The Argentine Monetary and Financial Policies and the Crisis Despite the net sales of foreign currency, the stock of international reserves increased around USD 2 billion since the beginning of the international crisis (from USD 44.2 billion at the end of 2007, to a maximum of USD 50.5 billion prior to the farming sector crisis, and then to USD 46.2 billion at the end of March 2009). On the other hand, the exchange rate gradually increased to reflect, to some extent, the adjustment to the negative external shock, but avoiding any potentially-destabilizing abrupt movement. Thus, the exchange rate against the US dollar changed from ARS 3.1 at the beginning of July 2007 to ARS 3.7 at the end of March 2009, which entailed a 19% increase, well below the depreciation showed by countries with more flexible exchange rate regimes, such as Brazil and Chile, where the exchange rate increased around 50% from the beginning of the crisis during 2008. In addition to Central Bank’s operations in the spot and futures exchange markets, several supplementary measures were also established for the purpose of reducing the pressure existing on the exchange rate market and on international reserves. Some of the most important measures were the following: • Futures market: Limits to operate in the futures markets were extended, both for the Central Bank and for those agents associated with any of the counterparties; it was allowed that the benchmark exchange rate applicable to futures and forward transactions between the Central Bank and its counterparties be fixed by the Emerging Market Traders Association; transactions started to be performed up to one year and with counterparties with a credit rating not below AA in the Non-Deliverable Forward (NDF) market. • Additional measures to reduce the expectation of depreciation: In this case, a mechanism of repos in USD was created, open market transactions were performed with government securities in USD and a swap of currencies was agreed with the Central Bank of the People’s Republic of China for three years for the sum of Yuan 70 billion (USD 10.25 billion). This access to contingent liquidity was a real token of confidence by the fourth monetary authority worldwide. 27 The Argentine Monetary and Financial Policies and the Crisis • Minimum cash requirement: The reserve requirement ratios on foreign currency deposits were reduced in order to increase the availability of funds for foreign trade funding. IV.2. Liquidity Provision in Domestic Currency, Appearance of the Lender of Last Resort In recent years, the operations in the exchange rate market, both to accumulate international reserves and to avoid sudden exchange rate swings, were combined with a deep and high quality6 sterilization policy. This allowed the monetary authority to maintain an independent monetary policy and regain the role of lender of last resort in pesos, a function that was very much limited in the context of the Argentine currency board regime. Thus, the Central Bank supplied liquidity in pesos in order to ensure the financial stability and the proper operation of the payment system. In recent years, the existence of a sterilization policy facilitated this task since it enabled the instruments required to supply funds efficiently. The following are some of the most relevant measures taken to supply liquidity in pesos, thus mitigating the impact of deposit outflows on credit and interest rates and avoiding difficulties in banks’ health: • Repos market: Repo transactions were offered at fixed and variable interest rates (BADLAR rate),7 the menu of terms was extended, the repo line at fixed rate was increased from ARS 3 billion to ARS 10 billion, repo auctions were established, the menu 6 The public sector was a source of absorption as well as the financial system due to advance payment of rediscounts. 7 The BADLAR rate is the weighted average interest rate (weighted by the amounts of deposits) of time deposits between 30 a 35 days and with an amount higher than a million of pesos. 28 The Argentine Monetary and Financial Policies and the Crisis of instruments for repo transactions with the Central Bank was extended to Argentine government securities, a mechanism was determined for the auction of repo options in pesos up to one year, and a new liquidity window was enabled allowing to use the Bogar and Secured Loans as collateral for repo transactions (not used in traditional repos), also establishing that they may be used as collateral in interbank loans. • LEBACs and NOBACs: Maturities were partially renewed, repurchase auctions were established and a new channel was implemented for daily automatic repurchase in real time for these bills and notes in the secondary market in order to contribute to liquidity supply. Besides, a mechanism was established for the auction of put options on these instruments that permitted the financial institutions to sell their securities back to the Central Bank before maturity at a pre-established discount (a margin with respect to the BADLAR rate). Simultaneously, for the purpose of preserving their function as monetary absorption mechanism and liquidity reserve and in order to avoid distortions deriving from foreign investors’ activities, the Central Bank issued LEBACs and NOBACs to be traded only locally and among residents. • Open market transactions with government securities: Open market operations with government securities in pesos were made to inject liquidity beyond the financial system. • Minimum cash requirement: The minimum cash position of July-August and OctoberNovember 2007 and of June-July 2008 was unified in a bi-monthly period, thus enabling a better liquidity management in banks. Financial institutions were temporarily allowed to compute all their holdings in cash, in transit and in money transportation companies for the purposes of compliance of minimum cash requirements (before, only two thirds of such holdings could be computed). 29 The Argentine Monetary and Financial Policies and the Crisis • Central Bank’s regime of financial assistance: a collateral pre-qualification window was established to facilitate the discount loans window (with banks’ loans as collateral). In particular, open market transactions with Central Bank’s bills and notes (maturities partial renewal and repurchase auctions) were the main mechanism used to inject liquidity to the financial system. To a lesser extent, repo transactions with financial institutions were used, while the purchases of Treasury bonds were specially addressed to manage liquidity beyond the financial system. Thus, in the period from July 2007 to March 2009, the expansion of the monetary base generated by open market transactions with LEBACs and NOBACs was approximately ARS 35 billion, and this permitted to counteract the contraction factors, such as US dollar purchase by the private sector (Foreign private sector in Figure 8) and the reduction of reverse repos by banks to obtain liquidity (Financial System in the same Figure). Figure 8: Factors of expansion of monetary base (between July 2007 and March 2009) 40,000 (millions of ARS) 30,000 20,000 10,000 0 -10,000 -20,000 Monetary Base Foreign Priv. Sector Net Public Sector Financial System Lebacs and Other Nobacs Source: BCRA. 30 The Argentine Monetary and Financial Policies and the Crisis V. Results of the Policies Implemented The robust monetary policy strategy allowed the stabilization of financial variables after the initial negative shocks in each one of the four episodes. Thus, domestic interest rates showed initial increases, both in the interbank market and in the wholesale and retail deposit markets (see Figure 9), jointly with the fall in private sector deposits in pesos and with an increase of liquidity demand by financial institutions. In the consecutive episodes, after demonstrating the Central Bank’s intent and capacity to mitigate the volatility of local markets, monetary variables started to come back to normal. In this context, even though sometimes the growth of credit stock slowed down, which was reflected in a certain stagnation of funding to private sector, no collapse of such stock was observed, showing a clearer recovery after the fourth episode (see Figure 10). Figure 9: domestic interest rates % 1st Episode 2nd Episode 3rd Episode 4th Episode 30 Overnight call rate Retail time deposit interest rate 26 Wholesale time deposit interest rate 22 18 14 10 6 2 Jul-07 Sep-07 Dec--07 07 Mar-08 Jun-08 Sep-08 Dec--08 08 Mar-09 Jun-09 Sep-09 Source: BCRA. 31 The Argentine Monetary and Financial Policies and the Crisis Figure 10: Private sector deposits and credit in pesos (Moving averages of 20 days) 1st episode 2nd episode 3rd episode 4th episode 150 140 120 Deposits Credit 135 110 100 130 125 90 120 80 115 110 (credit – billions of ARS) (deposits – billions of ARS) 145 70 105 2Ja n27 07 -F e 27 b-0 -A 7 pr 27 -07 -J un 24 -07 -A u 22 g-0 -O 7 c 18 t-07 -D e 18 c-0 -F 7 eb 18 - 0 -A 8 p 17 r-08 -J un 13 -08 -A ug 9O 08 ct9- 08 D ec -0 58 Fe b6- 09 Ap r5- 09 Ju n5- 09 Au g 1- -09 O ct09 100 60 Source: BCRA. An interesting feature of the consecutive financial turmoil episodes was the increase of dollarization in private sector deposits (see Figure 11). This means that the drop of deposits in pesos was combined with an increase of deposits in US dollars, so that their weight in total deposits of the private sector went up by 8 percentage points after the four episodes. Even though portfolio dollarization is an usual feature inherent to times of distrust in local currency, on this occasion there was no withdrawal of deposits in US dollars, which represented a sign of confidence that banks would find no difficulties in meeting their commitments and, therefore, there would be no extreme measures on foreign currency deposits (for instance, restrictions on the withdrawal of funds). This dynamics was related to the high liquidity levels in US dollars of banks upon the beginning of the crisis, a situation deriving from the above-stated Central Bank’s rules and regulations related to the reduction of the exposure of financial institutions to exchange rate risk. 32 The Argentine Monetary and Financial Policies and the Crisis Figure 11: Ratio of private sector US dollar deposits to total deposits (Moving averages of 20 days) (% deposits in USD / total deposits) 22,0% 1st Episode 2nd Episode 3rd Episode 4th Episode 20,0% 18,0% 16,0% 14,0% 12,0% 2Ja n -0 7 13 -M ar -0 7 29 -M ay -0 97 Au g07 22 -O ct -0 7 7Ja n -0 8 17 -M ar -0 28 Ju n08 13 -A ug -0 24 8 -O ct -0 8 8Ja n -0 9 19 -M ar -0 59 Ju n09 20 -A ug -0 30 9 -O ct -0 9 10,0% Source: BCRA.. As regards the exchange rate market, the monetary authority’s response contributed to reduce the exchange rate volatility during the four episodes. To a certain extent, the exchange rate was allowed to act as a variable of adjustment to the external shock, but avoiding any sudden movements that may impair the stability of the financial system. Even though the domestic currency depreciated around 19% throughout the whole period, the countries of the region (in particular, those having more flexible regimes) showed maximum levels of depreciation of around 50% (for example, Chile, Colombia and Brazil). Then, at the normalization phase, these same countries observed a significant appreciation of their currencies. Thus, at the end of the four episodes, the change of the real exchange rate against the US dollar in the 33 The Argentine Monetary and Financial Policies and the Crisis “floating” economies was similar to those of the real exchange rate in Argentina (see Figure 12), with the important difference that the Central Bank sought to mitigate exchange volatility, since it accurately assessed that shocks were going to be temporary, and, consequently, avoided the already stated impact on the stability of the financial system. Figure 12: Real exchange rate against the US dollar (Average of 2007 = 100) 130 120 Argentina Brazil Chile Colombia Mexico Peru 110 100 90 80 70 7 7 9 8 8 9 7 8 9 07 08 09 07 08 09 08 -0 -0 -0 -0 -0 -0 l -0 l -0 l-0 pppvvnnar ar ar ay ay ay Ju Ju Ju Se M Se Ja M M M Ja Se No M M No Source: Central Banks. 7 07 n- n0 Ja Ja The effectiveness of the policies implemented may also be observed when comparing the performance of the financial system in the recent crisis with other past critical episodes, such as the crisis caused by the Tequila effect in 1995 and the 2001-2002 crisis. In general terms, upon comparing the performance of interest rates, deposits and credits, it may be concluded that the financial system showed a better performance during the 2007-2009 episodes, taking into account the three above-stated variables, in particular when comparing with the 20012002 crisis (see Figure 13). 34 The Argentine Monetary and Financial Policies and the Crisis Figure 13: compared evolution of interest rates, deposits and credit in different crises (a) Interest Rate of 30-to-59-day Time Deposits in ARS 90 Tequila (T = Dec-94) 2001-2002 Crisis (T = Feb-01) Episode 2007-2009 (T = Apr-08) 80 (% Nominal annual rate) 70 60 50 40 30 20 10 T 0 T-3 T-1 T+1 T+3 T+5 T+7 T+9 T+11 T+13 T+15 T+17 T+19 T+21 T+23 T+25 T+27 T+29 (months) Source: BCRA. (b) Private Sector Total Deposits 110 Tequila (T = Dec-94; pesos and foreign currency) 2001-2002 Crisis (T = Feb-01; pesos and foreign currency) 105 Episode 2007-2009 (T = Apr-08; pesos) (T Index = 100) 100 95 90 85 T+4 80 Pesification 75 70 T T+3 Source: BCRA. T+6 T+9 T+12 T+15 (months) 35 The Argentine Monetary and Financial Policies and the Crisis (c) Private Sector Total Loans (Evolution in Real Terms) 140 Tequila (T = Dec-94; pesos and foreign currency) 2001-2002 Crisis (T = Feb-01; pesos and foreign currency) 120 Episode 2007-2009 (T = Apr-08; pesos) (T Index = 100) 100 T+8 80 60 40 T+35 20 T-12 T-8 T-4 Source: BCRA. T T+4 T+8 T+12 T+16 T+20 T+24 T+28 T+32 T+36 (months) We may say, then, that on this occasion the monetary and financial system was not an amplifier of the crisis like in other events of the Argentine economic history. The Central Bank played a “buffer” role to reduce the effects of financial turbulences on the economy in two ways: a preemptive way, developed in previous years, based on the four pillars described above, aimed at improving the equity position and reducing the risks inherent in the monetary and financial system; and a reactive way, by taking the measures necessary to ensure, upon the situations of uncertainty that took place, the monetary and financial stability of the country. Therefore, the proper management of risks and the correct use of policy tools allowed to discourage the possibility of speculative attacks. The set of policies implemented caused the main monetary and financial variables not to be seriously impaired, like happened in other episodes of the recent Argentine history. Consequently, there were no bank runs, no collapse of credit, no bank closures, no breach of financial contracts and no significant depreciation of the local currency, and this is even more remarkable taking into account that the world experienced the worst financial and economic crisis in the last 70 years. 36 The Argentine Monetary and Financial Policies and the Crisis VI. Conclusions Macroeconomic instability is an outstanding feature of the Argentine history. One of the reasons why it is advisable to reduce such instability is given by its strong negative correlation with investment and economic growth rates (see Figure 14). Besides, high volatility creates the conditions where investment is driven towards short-term profits, a pattern which is not optimal for any economy. Moreover, this is particularly harmful for the most vulnerable people, since they have a lesser capacity to adapt to depressions in the labor market and have neither assets nor access to credit markets, so as to smooth consumption over the economic cycle. In addition, protracted unemployment periods associated with deep recessions may lead to irreversible losses of human capital. Figure 14: Growth and volatility - Argentina vs. selected countries (1970-2004) 9 8 Growth annual rate Standard deviation of growth rate from GDP 7 6 5 4 3 2 1 0 Argentina Sub-Saharan Africa Latin America and Caribbean OECD Developed Countries Middle East and Northern Africa Southern Asia Eastern Asia and Pacific 37 The Argentine Monetary and Financial Policies and the Crisis In this context, it is highly important to design policies, such as those implemented by the Central Bank, aimed at both reducing the likelihood of occurrence of negative shocks and its effects over the economy and, consequently, to provide economic agents with a stable macroeconomic environment. The aim is to exclude from the formation of expectations the deeply-rooted belief that the Argentine economy undergoes violent crises on a fairly frequent basis (one crisis every seven years in the last thirty years, namely: 1975, 1982, 1989, 1995 and 2002), so that economic agents can make their long-term decisions such as those related to investment, incorporation of technology and human capital, savings and consumption of durable goods, with the greatest possible predictability. The prudential policies and measures for crisis contention implemented by the Central Bank allowed the domestic economy to overcome one of the most severe financial and economic crises in world history, without serious consequences over citizens’ behavior. Thus, unlike other critical episodes in Argentine history, no breaches of contracts, collapses of financial activity or maxi-devaluations occurred. The outcome was a limited impact over the real sector, allowing for the first time in a long period, to go through a complete Argentine economic cycle without trauma. This represents in itself an extraordinary contribution by the monetary authority to macroeconomic stability, an unavoidable pillar to attain a sustainable growth path. 38 The Argentine Monetary and Financial Policies and the Crisis References Basco, E., T. Castagnino, S. Katz and S. Vargas (2007); “Política Monetaria en Contextos de Incertidumbre, Cambio de Régimen y Volatilidad Pronunciada”, Serie Estudios BCRA No. 4. Blinder, A. and R. Reis (2005); “Understanding the Greenspan Standard”, Conference “The Greenspan Era: Lessons for the future”, Federal Reserve of Kansas, Jackson Hole, Wyoming, August, pp. 25-27. Bubula, A. and I. Otker-Robe (2002); “The Evolution of Exchange Rate Regimes since 1990 Evidence from De Facto Policies”, IMF Working Paper 02/155. Calvo, G. and C. M. Reinhart (2000); “Fear of Floating”, NBER Working Paper No. 7993. Chang, R. (2008); “Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America”, Banco de la República de Colombia, Borradores de Economía Nº 487. Edwards, S. (2004); “Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops”, NBER Working Paper 10276. Frenkel, R. (2007); “La sostenibilidad de la política de esterilización”, CEFIDAR, Working Paper No. 17, August. Greenspan, A. (2003); Opening speech at “Monetary Policy under Uncertainty”, conference organized by the Federal Reserve of Kansas, Jackson Hole, Wyoming. Greenspan, A. (2004); “Risk and Uncertainty in Monetary Policy”, speech at the meeting of the American Economic Association, San Diego, California, January 3. 39 The Argentine Monetary and Financial Policies and the Crisis Hammerman, F. (2005); “Do Exchange Rates Matter in Inflation Targeting Regimes? Evidence from a VAR Analysis for Poland and Chile”. In Langhammer, R. J. and L. Vinhas de Souza. (Eds): Monetary Policy and Macroeconomic Stabilization in Latin America. Levy Yeyati, E., F. Sturzenegger and I. Reggio (2002); "On the Endogeneity of Exchange Rate Regimes", Business School Working Papers 21, Universidad Torcuato Di Tella. Levy-Yeyati, E. and F. Sturzenegger (2007); “Fear of Appreciation”, World Bank Policy Research Working Paper Nº 4387. Mishkin, F. S. (2008); “Monetary Policy Flexibility, Risk Management, and Financial Disruptions”, conference at the Federal Reserve of New York, New York, January 11. Mohanty, M. S. and M. Klau (2004); "Monetary Policy Rules in Emerging Market Economies: Issues and Evidence", BIS Working Papers 149. Prasad, E., R. Rajan and A. Subramanian (2007); “Foreign Capital and Economic Growth”, IZA Discussion Paper No. 3186. Redrado, M., J. Carrera, D. Bastourre and J. Ibarlucia (2006); “La política económica de la acumulación de reservas: nueva evidencia internacional”, Serie Estudios BCRA Nº 2. 40 The Argentine Monetary and Financial Policies and the Crisis Información para autores interesados en publicar en la Serie de Documentos de Trabajo de la Escuela de Negocios Formato Se aceptan manuscritos en español, portugués o inglés. Los manuscritos no podrán exceder 50 páginas, incluyendo tablas y gráficos, utilizando interlineado 1,5, fuente Times New Roman 12 y márgenes amplios (2,5 cm izquierdo y derecho). El texto deberá incluir una página de presentación con el nombre completo y afiliación del autor(es), un resumen de no más de 150 palabras, los códigos JEL (Journal of Economic Literature (JEL) Classification System) y un mínimo de 3 palabras clave. De haber ecuaciones ellas se numerarán consecutivamente en estilo arábigo. Las referencias bibliográficas se mencionarán utilizando el estilo del American Economic Review (ver http://www.aeaweb.org/sample_references.pdf ) La Escuela de Negocios y la Pontificia Universidad Católica Argentina entienden que la opinión vertida por el autor(es) es de su exclusiva responsabilidad. Enviar el texto a la dirección electrónica: [email protected] aceptan textos únicamente en formato Microsoft Word. Frecuencia: no hay una periodicidad predeterminada. Los manuscritos los aprueba un comité editorial y se publican electrónicamente luego del proceso de edición y formateo. 41 The Argentine Monetary and Financial Policies and the Crisis Para más información ver http://www.uca.edu.ar/index.php/site/index/es/universidad/escuela-negocios/investigacionaplicada/serie-de-documentos-de-trabajo/ 42