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CURRENT FINANCIAL TURMOIL: Some key issues
Guillermo A. Calvo
Research DepartmentInter-American Development BankNew York, September 10, 2001
GLOBALIZATION VS. MORAL HAZARDSGLOBALIZATION VS. MORAL HAZARDS
What Hazard?
Moral? Hard to make a strong case: Capital flows tended to contract after Tequila and
ensuing crises. FDI took a bigger role after crises.
Globalization? A case could be made: unprecedented flows starting in 1989 sharp contraction after crises (Sudden Stop) In 1990-2000 portfolio flows to EMs amounted to
US$ 478 billion, which may be heading for the Exit in the next crisis, globalizing it.
Net Capital Flows to Emerging Markets
-50
0
50
100
150
200
250
75 80 85 90 95 00
Total Emerging Markets Western Hemisphere
bill
ion
US
$
financial globalization starts--->
Tequila-->
Source: WEO, IMF, May 2001
Foreign Direct Investment to Emerging Markets
-50
0
50
100
150
200
250
75 80 85 90 95 00
Total FDI
billi
on U
S$
Source: WEO, IMF, May 2001
Portfolio Flows to Emerging Markets: A dying species?
-50
0
50
100
150
200
250
75 80 85 90 95 00
Portfolio Total
billi
on
US
$
financial globalization starts--->
Tequila-->
Source: WEO, IMF, May 2001
ARGENTINAARGENTINA
Argentina: Country Risk EMBI Plus Sovereign Spread, b.p.
300
500
700
900
1100
1300
1500
1700
1900
6/2
/97
9/2
/97
12
/2/9
7
3/2
/98
6/2
/98
9/2
/98
12
/2/9
8
3/2
/99
6/2
/99
9/2
/99
12
/2/9
9
3/2
/00
6/2
/00
9/2
/00
12
/2/0
0
3/2
/01
6/2
/01
9/2
/01
Financial Package
Cavallo becomes Minister
Beginning of Bush Administration
Argentina: What’s behind sharp deterioration?Reaching debt/GDP ceiling and revealing no
political will for fiscal adjustment, e.g., Lopez Murphy's cameo appearance? Expansionary monetary policy? Pou's departure and currency basket? Fiscal devaluation?
International factors Self-fulfilling bad equilibrium? No-bailout message from Treasury? Global recession?
Argentina: Is growth likely to resume?
Would zero deficit be enough to lower interest rates?
Is a big G7 package necessary?Should Argentina, Brazil and Chile
engage in greater exchange-rate harmonization?
Would involuntary debt restructuring help? Should the G7 be involved. . .a Brady II?
Crisis and Contagion
Is contagion likely?What countries will be involved: Brazil,
Peru. . .?What would be the mechanics of
contagion? Margin calls? Bank runs in other dollarized economies? G7 involvement or lack of it? Copycats if Argentina defaults?
CURRENT FINANCIAL TURMOIL: Some key issues
Guillermo A. Calvo
Research DepartmentInter-American Development BankNew York, September 10, 2001
