Download Policy Trade-offs for Unprecedented Times: Confronting the Global

Coordinators
Alejandro Izquierdo, IADB Ernesto Talvi, CERES
Prepared for Presentation at the XXIX Meeting of the Latin American Network of
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America,
IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Central
Banks and Finance Ministries, IADB, Washington DC, April 22nd, 2009.
POLICY TRADE-OFFS FOR UNPRECEDENTED
TIMES: A LIQUIDITY APPROACH
I. Policy Trade-Offs
II. Policy Principles
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
CONFRONTING THE GLOBAL CRISIS IN
LATIN AMERICA: POLICY TRADE-OFFS
 Under precarious access to credit markets liquidity
considerations become paramount
 The benefits of alternative policies should be primarily
weighed against their immediate impact on the
international liquidity ratios (ILRs) of a country and
how they affect the likelihood of a liquidity crisis and a
severe output contraction
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Confronting the Global Crisis in Latin
America: Policy Trade-Offs
EXPANSIONARY FISCAL POLICY
Mitigate
Recessionary
Pressures
Weaken Liquidity
Position
Trade - Off
ILR
GDP
GDP with
expansionary policy
and no liquidity crisis
ILR with
no policy
GDP with
no policy
ILR with
expansionary
policy
Threshold
Threshold
GDP with
expansionary policy
and liquidity crisis
-1
0
1
2
0
3
1
2
3
4
t
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
t
Confronting the Global Crisis in Latin
America: Policy Trade-Offs
Mitigate
Recessionary
Pressures
Trade - Off
Weaken Liquidity
Position
EXPANSIONARY FISCAL POLICY
EXPANSIONARY MONETARY POLICY
DEBT BUYBACKS
CORPORATE BAILOUTS
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
POLICY TRADE-OFFS FOR UNPRECEDENTED
TIMES: A LIQUIDITY APPROACH
I. Policy Trade-Offs
II. Policy Principles
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
POLICY PRINCIPLES:
MAIN GOALS
 Anticipate gathering problems early on to act in a
timely fashion
 Design a set of policies that prevent countries from
entering into financially fragile territory that might
expose them to a liquidity crisis and a major
economic collapse
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
POLICY PRINCIPLES:
CONSTRAINTS
Sovereign and Corporate Bonds in US
Sovereign and Corporate Bonds in LAC
(US 10y T-Bonds and US BBB Corporate, Yield in %)
(Latin EMBI and Latin CEMBI, Yield in %)
5.5
10.5
13
10.0
5.0
12
9.5
4.5
8.5
4.0
8.0
3.5
7.5
7.0
3.0
BBB
US 10Y
11
9.0
US 10Y
10
9
8
Latin
CEMBI
6.5
7
2.5
6.0
Latin EMBI
BBB
Source: Bloomberg
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
5.5
6
Jan-07
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
2.0
POLICY PRINCIPLES
THE ROLE OF MULTILATERALS
 Precarious access to credit markets for many emerging
market governments calls for multilaterals to step in and
play a key role as a lenders-of-last resort, akin to the role
that credible governments, such as the US government,
play domestically
 The question then is not whether multilaterals should
play a key role in the current crisis, but which is the most
effective way to channel their intervention and at what
financial cost
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
POLICY PRINCIPLES
1. Strengthen the role of multilateral institutions. Multilateral support
will be vital under precarious access to credit markets.
2. Move away from short-term financing. Multilaterals should avoid
short-term emergency financing and only consider medium to
long-term financing in order to partially “complete” markets in
terms of maturities.
3. Redefine the emphasis of multilateral support. Multilaterals
should not only provide medium to long-term financing for fiscal
stimulus –when fiscal sustainability is not at stake– but more
importantly, they should provide for long-term refinancing of
maturing debt obligations.
4. Ensure that countries work towards sustainable fiscal policy while
strengthening social protection. Multilateral support should be
complemented with incentive-compatible conditionality, to ensure
fiscal sustainability and strengthen social protection.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Confronting the Global Crisis in Latin America:
The Role of Multilaterals
Financial
Support
 Stimulus packages
(when fiscal sustainability
not at stake)
Multilaterals
 Long term refinancing of
public debt amortizations
coming due
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
ILR Dynamics Under Alternative Policies
(LAC-7, L-Shaped Scenario, ILR2)
125%
Normal
International
Financial
Conditions
120%
115%
110%
105%
100%
95%
Full Financing of
Flows and
Precarization of
Stocks
90%
85%
Precarization
of Flows and
Stocks
80%
75%
2008
2009
2010
2011
2012
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru
and Venezuela. These countries represent 91% of Latin America’s GDP.
ILR 2t = Reservest / (Public Debt Amortizationst+1 + Short Term Private External Debt Amortizations)
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Confronting the Global Crisis in Latin America:
The Role of Multilaterals
Financial
Support
 Stimulus packages
(when fiscal sustainability
not at stake)
 Long term refinancing of
public debt amortizations
coming due
Incentive-Compatible
Conditionality
Multilaterals
 Targets to achieve fiscal
sustainability (IMF)
 Design of optimal
expenditure policy (MDBs)
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Full Financial Support by Multilaterals:
Financial Costs
(LAC-7, millions of dollars)
2009
Public Debt Amortizations
2010
2009-10
227,903 173,857
401,760
Domestic
194,084 155,458
349,542
External
33,818
18,399
52,218
Fiscal Deficit Financing
97,319
138,926
236,245
Passive Fiscal Deficit
79,515
118,127
197,642
Geithner’s Proposal*
17,804
20,799
38,603
325,222 312,783
638,005
Total Borrowing Requirements
*Assuming full impact of the Keynesian multiplier on output and fiscal revenues.
•
Scenario of deficit support and minimum rollover support to sustain liquidity ratios
above 1: US$ 470 billion.
•
Scenario a la Guidotti-Greenspan (public and private external obligations only): US$ 453 billion
LAC-7 is the sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
ILR Dynamics Under Alternative Policies
(LAC-7, L-Shaped Scenario, ILR2)
125%
Normal
International
Financial
Conditions
120%
115%
110%
Full Financing of
Flows and
Partial Financing
of Stocks
105%
100%
95%
Full Financing of
Flows and
Precarization of
Stocks
90%
85%
Precarization
of Flows and
Stocks
80%
75%
2008
•
2009
2010
2011
2012
Scenario of deficit support and minimum rollover support to sustain liquidity ratios
above 1: US$ 470 billion.
•
Scenario a la Guidotti-Greenspan (public and private external obligations only): US$ 453 billion
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru
and Venezuela. These countries represent 91% of Latin America’s GDP.
ILR 2t = Reservest / (Public Debt Amortizationst+1 + Short Term Private External Debt Amortizations)
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
CLOSING REMARKS
 A strategy by the IMF and multilaterals that only pays attention
to financing countercyclical fiscal policies is incomplete and
ignoring the impact of expansionary policy on liquidity ratios
can be a costly mistake.
 It is necessary that lender (and borrower)-of-last-resort
functions, similar to those that governments perform in
developed economies, be recreated for LAC by multilateral
institutions, so that liquidity concerns are kept at bay.
 This strategy has three basic requirements:
i. a strengthening of the resources of multilateral institutions to allow
them to act with a scale commensurate to the tasks at hand
ii. an appropriate division of labor between the IMF and MDBs
iii. a careful country-by-country analysis that determines the optimal
amount of liquidity support cum fiscally sustainable combinations of
expenditure increasing and expenditure switching policies
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Coordinators
Alejandro Izquierdo, IADB Ernesto Talvi, CERES
Prepared for Presentation at the XXIX Meeting of the Latin American Network of
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America,
IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Central
Banks and Finance Ministries, IADB, Washington DC, April 22nd, 2009.