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Asunto:NoticiasdelCeHu 1232/03 - Default, Devaluation and Depression: Argentina after 2001
Fecha:Lunes, 1 de Diciembre, 2003  22:27:22 (-0300)
Autor:Humboldt <humboldt @............ar>

NCeHu 1232/03
 
Default, Devaluation and Depression: Argentina after 2001

 

En el marco del ciclo de seminarios del Centro de Investigación en Métodos Cuantitativos Aplicados a la Economía y la Gestión,  el día Jueves 18 de Diciembre a las 17hs, en el Salón de Usos Múltiples de la Facultad, el profesor Marcus Miller de la Universidad de Warwick (Reino Unido),  presentará el paper: "Default, Devaluation and Depression. Argentina after 2001".

   Se adjunta resumen del paper.

    Esperando contar con su presencia, saluda atentamente

   Dra. María Teresa Casparri Directora del Centro de Investigación en
   Métodos
   Cuantitativos Aplicados a la Economía y la Gestión.

 Lugar de Realización: Salón de usos Múltiples (S.U.M.), Facultad de
Ciencias
 Económicas de la Universidad de Buenos Aires, Av. Cordoba 2122, Primer
Piso.
 Informes e inscripción:
cma@econ.uba.ar


Default, Devaluation and Depression: Argentina after 2001

 

PRELIMINARY DRAFT

October 2003

ABSTRACT

 

 

Marcus Miller (University of Warwick and CEPR)

Javier García Fronti (Universidad de Buenos Aires and University of Warwick)

Lei Zhang (University of Warwick)

 

Acknowledgements: We are grateful to the ESRC for financial support supplied to the research project “Moral Hazard and Financial Institutions” under Grant No. R000239216. We thank Mario Blejer, Guillermo De la Dehesa, Matthew Fisher and Daniel Heymann for discussion and suggestions; but responsibility for views expressed is our own.

 

In eliminating price inflation, the currency board system operated in Argentina proved extraordinarily successful; but, as Krueger and Fisher (2003) ruefully observe, “the combination of a highly dollarized banking system and a rigid exchange rate regime can result in vulnerabilities that are difficult to manage”.

 

Blame for the end of the currency peg and debt default has been attributed to the progressive loss of competitiveness of the Argentine economy over the decade when its currency was tied to the US dollar, and on growing doubts about long run fiscal sustainability, which together led to a “sudden stop” in the external finance, Gerchunoff and Llach (2003), Mussa(2002), Calvo et al (2002). But the end of the dollar peg did not simply involve a delayed  devaluation; it took the form of a ‘twin crisis’ in which a banking system heavily exposed to the sovereign’s unsustainable debt played a central role in precipitating and propagating economic contraction, Blejer (2003) and  Sturzenegger(2003). The insolvency of the entire banking system was, perhaps, the crucial element in accounting for the depth of the collapse.

 

It was inevitable and appropriate that, when Eduardo Duhalde was appointed as president in 2002 and  the peso lost almost half its value in terms of  the dollar, there should be a write-down of bank assets and liabilities in dollars, i.e. some ‘pesification’ of their balance sheets. What no one predicted was an asymmetric pesification - in which dollar deposits were converted to pesos at the rate of 1 to 1.4 and dollar loans converted  to pesos one to one – enough to wipe out the capital of the banking system even before taking account of the writedown of bank holdings of sovereign dollar denominated debt. Thanks to this enforced ‘de-dollarisation’, banks which had been long the US dollar suddenly found themselves unhedged, so the fall of the peso rendered them insolvent and brought the financial system to a halt.

 

If the actual process of  pesification was to prove so disastrous, why was it chosen? The only plausible reason for the asymmetry was the government’s desire to privilege the loan customers of the banks, Sturzenegger(2003). (After pressure from the IMF and the resistance of the banks, the government has - belatedly - issued new bonds to recapitalise the banks.)

 

The authors cited above provide us with a graphic history of these events, their causes and dire consequences, involving nothing less than an Argentine Great Depression. Our aim in this paper is first to provide an account of the implications of devaluation-with-pesification on  bank balance sheets; and then to incorporate this in a consistent framework of analysis, which includes other key features, particularly the severe effects of the falling peso corporate balance sheets. After describing how the enforced pesification of the banks can – and did - lead to insolvency, we therefore turn to ‘third generation’  macroeconomic models of crisis to show how this can produce a catastrophic collapse of the economy as a whole. To capture the adverse impact of high interest rates and devaluation on the on the supply side of the economy via the balance sheet effects on businesses and banks, we adopt the approach developed by Aghion et al (2000, 2001) and adapt it to fit the Argentine experience. We use it to show first how pesification can, in principle, mitigate adverse balance sheet effects (although the contractual structure was so dollarised that this would have difficult, Galiani et al., 2002) ; but how, mishandled, it can plunge the economy into chaos.

Finally, going beyond the positive economics of the macro-model, we offer a simple game theoretic explanation of why the ill-starred initiative of robbing Peter (the banks) to pay Paul (loan customers) was pursued.

 

References

AGHION, P., P. BACCHETTA, and A. BANERJEE (2000): "A Simple Model of Monetary Policy and Currency Crises" European Economic Review, 44, 728-38.

 

— (2001): "Currency Crises and Monetary Policy in an Economy with Credit Constraints" European Economic Review, 45, 1121-50.

 

BLEJER, M. (2003) “On Currency Collapses and Bank Runs: Argentine Twin Crises”. presented at “International Financial Crises: What Follows the Washington Consensus?”  Warwick University (Coventry),UK.

 

CALVO, G. A. (2002): "On Dollarization" Economics of Transition, 10, 393-403.

 

DE LA DEHESA, G. (2003): "Ganadores Y Perdedores De La Crisis Argentina" Foreign Affairs En Español.

 

GALIANI, S., D. HEYMANN, and M. TOMMASI (2002): "Missed Expectations: The Argentine Convertibility".Universidad de San Andres. Departamento de Economía. Documentos de Trabajo.55

 

Kroszner, Randall (1999) "Is it Better to Forgive Than to Receive?   Evidence from the Abrogation of Gold Index Clauses in Long-Term Debt During the Great Depression” University of Chicago. Mimeo.

 

Kroszner, Randall (2002) Panel discussion of the Argentine crisis; AEA Meetings , Washington DC.

 

KRUEGER, A. and M. FISHER (2003): " Building on a Decade of Experience: Crisis Prevention and Resolution” presented at “International Financial Crises:

What Follows the Washington Consensus?” . Warwick University (Coventry), UK.

 

KRUGMAN, P. (1999): "Balance Sheets, the Transfer Problem, and Financial Crises," in International Finance and Financial Crises: Essays in Honor of Robert P. Flood, Jr., ed. by P. Isard, A. Razin, and A. K. e. Rose.

 

GERCHUNOFF, P.  and J. LLACH (2003) El Ciclo de la Ilusión y el desencanto. 1a Ed. Buenos Aires: Ariel.

 

MUSSA, M. (2002): Argentina and the Fund: From Triumph to Tragedy. Washington, D.C.: Institute for International Economics.

 

STURZENEGGER, F. (2003) La Economía de los Argentinos. 1a Ed. Buenos Aires: Planeta.