As part of the ongoing Bank series, Practitioners in
Development, Mario Blejer, Director of the Centre for Central
Banking Studies and Advisor to the Governor, Bank of England came
to the Bank on October 22nd to discuss his experiences managing the
financial crisis in Argentina in 2002. John Page, a sector director
in the Banks Poverty Reduction and Economic Management unit, made
opening remarks. Page noted the importance of the series was to
help the Bank understand how its policies actually impact events on
the ground. He provided some background information on Blejer, and
the chairman of days lecture, Murilo Portugal, Executive Director
of the IMF, and two discussants, Dr. Vijay Kelkar, Minister of
State in Indias Ministry of Finance, and Agustin Carstens, Deputy
Managing Director of the IMF and former Undersecretary of Finance
and Public Credit for Mexico.
Blejer noted his public service only lasted one year, but at a
serious time in both Argentinas history. He said the biggest
lesson for him was the clear difference between how one thinks
during normal times from what is necessary during a crisis. During
a crisis, a different policy making structure is necessary, one
which requires imagination and boldness. He said the lessons one
may draw from the Argentina experience may not be applicable to
normal circumstances. Crisis management has distinct phases. First,
one must understand the nature and causes. Then one must define the
trade offs one will be facing since any policy decision made will
have some down side. An operational strategy must be defined,
followed by issues of implementation. Blejer emphasized the
importance of being persistent in following a chosen strategy.
Changing strategies in the middle of implementation is dangerous,
he said. The final step is to draw lessons from the
experience.
The crisis was an attack
on the currency as well as a bank run. Blejer suggested one
might not have been able to happen without the other. He also noted
additionally there was a debt crisis. The currency crisis centered
on the convertibility regime, which was introduced in 1991 after a
period of rapid inflation. The goal was to fix the currency rate
and limit the central bank from changing monetary policy. It
positively affected the rapid inflation rate, and the economy began
growing again. But there were weaknesses in the regime as well. The
fixed currency rate made the economy uncompetitive with other
countries. There were also inconsistencies in the countrys
macroeconomic policies which increased debt. Finally, during the
late 1990s, capital flows reversed, which Blejer suggested was in
part caused by serious economic crises from other parts of the
world. Of the three reasons, Blejer believes the faulty
macroeconomic policies were the most damaging. The rigidity of the
system did not allow it to recover from shocks. Public debt began
to balloon by the end of the decade. This was exacerbate by
significant public expenditures and the start of a recession in
1998.
The banking crisis
occurred after more than a year of declining deposits, something
Blejer called unprecedented. So it was not a traditional
bank run. He said the reason was government abuse of the banking
sector. People took their money out of the banks, he said, because
they feared government policies would make the banks insolvent and
the government would confiscate the money. The fear developed
because he believes the public was observing the government
undermining the private sector in the bank portfolios. This was
occurring during 2001. The government began forcing the sector to
take on more and more government bonds. The interests rates were
high, so the initial reaction from the banks was positive, but
eventually they realized the government might default on the bonds,
so they began to refuse the deposits, which the government
continued to force upon the banks. Interest rates began to rise and
the price of the bonds fell. By the end of 2001, the banks
implemented withdrawal restrictions as investors began to panic.
The panic resulted in public riots and the fall of the government
by start of 2002. Currency was converted to pesos, which created
more debt for the banks. To avoid a total collapse of the sector,
the government sought to stabilize the banks by providing further
issuances of bonds. At that point, Blejer was appointed Director of
the Central Bank. The run was continuing despite restrictions the
banks were placing on withdrawals. A run began on the peso as
well, as the exchange rate began to climb. The Central Bank sought
to maintain liquidity in the banking system in order to defuse a
bank run. Such an effort would create hyperinflation, one of the
trade offs he and colleagues had to consider: either have
hyperinflation or allow the banking sector to collapse. To avoid
either scenario meant slowing the bank run and provide some
liquidity. Importantly, was to get investors to buy Central Bank
assets rather than government bonds. Also critical was to slow the
devaluation and chaos of the currency market. The strategy was
strongly opposed by the IMF which advised no intervention from the
Central Bank. The Central Bank settled on a dual strategy of
intervention which included higher interest rates and have a
falling exchange market intervention. Some banks had to be closed:
about 3%. Short term bills were created by the Central Bank.
Devaluation was not prevented, but chaos was averted.
Source: World Bank
