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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.
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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
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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
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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).
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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.
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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.
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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.
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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.
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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
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The Argentine Monetary and Financial Policies and the Crisis
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