Dealing with the international
financial crisis from a SOE:
emerging issues.
Gerardo Licandro
Conference: “Quantitative Approaches
to Monetary Policy in Open
Economies.”
Structure of the presentation
• Financial Crisis: a view from the periphery
– Some background facts on the uruguayan
economy
– Three stages in crisis administration
• Until Lehman
• From Lehman until early 2009
• Recent events
– emerging issues for the international financial
system
• Some questions for the long run
Background notes on Uruguay
• SOE. Oil importing, agriculture accounts for more than 50% of gross
production value
• High exposure to the region on goods imports and service exports
• Record liability dollarization (decreasing)
• Financial crisis in 2002 legacy
– More than 80% of deposits are short term
– Low levels of banking credit
• Recent macro performance
–
–
–
–
Average growth 2003-2007 above 6%
Inflation ranged between 3-10%
Debt /GDP halved
Structural fiscal result close to equilibrium. Steady reduction in
spending/GDP
– Unemployment in lowest recorded level (7%)
The crisis until Lehman
• Strong capital inflows from late 2007 til the first semester of 2008
• Soaring commodity prices
• Domestic impact
–
–
–
–
Booming investment
Rising prices of food
Strong pressures in the exchange market
Rapidly growing fiscal revenue
• Policy response
–
–
–
–
Monetary policy: Reserve accumulation through sterilized intervention
Spike in reserve requirements
Asset management: flight from housing assets
Response of prudential regulation: control on asset composition of
banks
– Debt. Allow change in portfolio of private sector through debt exchanges
The answer to financial
panic
• Financial panic resulted in a change in the currency composition of
the portfolio of the private sector. Two conflicting forces led to this
result
– World deleveraging led to the cancellation of positions on domestic currency
– Deleveraging in Argentina brought dollar deposits to Uruguay.
• Plummeting commodity prices reduced inflation
• The priority in this environment turned to avoiding contagion.
Policymakers decided to let interest rates go to minimize the use of
reserves, while reducing excess volatility on the exchange rate.
Uncertainty about the lenght, depht and severity of the crisis was
key.
• Debt policy: debt exchanges, for limited amounts to allow portfolio
change and reduce pressure on the exchange rate market. Sign
contingent lines with IIFs
• Prudential response: preserve the assets of the banking sector. Run
on banks in trouble.
• Fiscal policy. Limited space due to prior spending commitments.
Lessons?
• Lack of international financial safety net might
lead to coordination failures in the response to
the panic.
– Idiosincratic prudential response deepens financial
panic.
– International reserve allocation followed a similar
pattern.
• Renewed influence of commodity prices leave
the question of its sustainability. Should we have
stabilization funds?
The long term questions
• More regulation and less financial intermediation?
• How do we solve the debt overhang in developed
countries?.>
– Are emerging markets going to pay through inflation?
– Is there going to be an adjustment of consumption?
• Effects of Contractionary environment
– Competitive monetary policies?
– Competitive trade policies?
– Closing capital accounts?
• Reduction in long run growth?
• loss of confidence on the US currency?.
Is US’s debt sustainable?
Dealing with the international
financial crisis from a SOE:
emerging issues.
Gerardo Licandro
Conference: “Quantitative Approaches
to Monetary Policy in Open
Economies.”
Bye bye fear of floating?
Argentina 1981
Indice ene 80=100
350
Brasil 1999
Indice ene 98=100
180
170
160
300
150
Var mar/set 81
250
140
$ argentino: 139%
$ uruguayo: 7%
200
Var ene/jun 99
real: 47%
$ uruguayo: 5%
130
120
150
110
100
100
90
50
Argentina 2001
Indice ene 01=100
400
120
m
ay
-9
9
-9
9
m
ar
en
e99
v98
no
se
p
-9
8
8
ju
l-9
m
ay
-9
8
-9
8
Subprime crisis2008
Indice ene 07=100
110
350
Var. ene/jun 02
300
$ argentino: 260%
$ uruguayo: 26%
250
100
90
Var mar09/ago 08
Fuente. BCRA, IPEA, INE y Pacific Exchange Rate.
ar
-0
9
m
no
v08
en
e09
se
p08
8
ju
l-0
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en
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ar
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m
ay
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M
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M
ar
2
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N
Se
p0
1
1
l-0
Ju
-0
1
M
ay
-0
1
M
ar
e0
1
60
m
0
real: 44%
€: 16%
$ uruguayo: 24%
ar
-0
8
70
50
m
100
no
v07
en
e08
80
7
se
p07
150
ju
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