- G. Kincaid, and Charles Collyns
- Published Date:
- April 2003
© 2003 International Monetary Fund
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Figures: Sanaa Elaroussi and Massoud Etemadi
Managing financial crises : recent experience and lessons for Latin America/edited by Charles Collyns and G. Russell Kincaid—Washington, D.C. : International Monetary Fund, 2003
p. cm.—(Occasional paper, ISSN 0251-6365 ; 217)
Includes bibliographical references.
1. Financial crises—Latin America. 2. Financial crises—Argentina. 3. International Monetary Fund—Argentina. I. Collyns, Charles. II. Kincaid, G. Russell. III. International Monetary Fund. IV. Occasional papers (International Monetary Fund) ; no. 217 HC125.M35 2003
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The following symbols have been used throughout this paper:
… to indicate that data are not available;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (e.g., 2000–01 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 2000/01) to indicate a fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
It is now almost ten years since Mexico’s crisis of 1994 was termed the “first crisis of the twenty-first century” by then Managing Director of the IMF, Michel Camdessus. There have been a series of financial crises in emerging market countries around the world since then: in Asia, in Russia and other countries in transition, in Turkey, and in Latin America. While each of these events has had its own characteristics, they have all shared several features. Each has involved a capital account crisis in which the balance of payments is hit by a rapid outflow of capital by both domestic residents and foreign investors. At the same time, each has also experienced a balance sheet crisis, in which depositors lose confidence in the safety of their funds, financial systems fail, and corporate and household sectors suffer widespread insolvencies. These financial crises have also typically been associated with rapidly changing asset prices (notably the exchange rate), high interest rates, defaults on public debt, sharp contractions of economic activity, and widespread social distress, particularly for those least able to protect themselves from economic turmoil.
Dealing with such financial crises is extremely difficult. The economic authorities’ room for policy maneuver is typically limited by the need to reestablish confidence in the government’s own longer-term solvency as well as to secure financing for its immediate needs; by concerns about the damage done to longer-term productive capacity by corporate bankruptcies and financial system failures; by difficulties in organizing private sector financial support when creditors are diverse and dispersed; and by the need to mobilize political support for tough measures at a time when public trust in economic management has severely eroded.
This Occasional Paper seeks to draw lessons from the IMF’s work with countries in financial crisis over the past ten years. In the context of the rapidly developing crisis in Latin America in 2002, IMF management decided to ask a group of staff economists who had been involved in responding to crises around the world to draw on their experience to prepare policy-oriented guidance notes that would provide timely input to management, operational staff, and the country authorities. The papers emanating from these groups contained a number of valuable insights, many of which had not previously been articulated. It was decided, therefore, that a volume containing these papers could be extremely useful to many in the policy community and beyond.
The sections that make up this Occasional Paper are the fruit of these efforts. The papers are the work of individual IMF staff members and are not intended to provide definitive answers on crisis resolution or to represent the approved policy advice of the IMF as an institution. Indeed, elements of the analyses are still hotly debated within (as well as outside) the Fund. Instead, the aim is to provide pragmatic advice from a group of practical-minded economists who have dealt firsthand with these most difficult problems, and are only too aware of the difficult judgments and tradeoffs that need to be made in a real-world context.
Anne O. Krueger
First Deputy Managing Director International Monetary Fund
This Occasional Paper originated in internal reports prepared during the course of 2002, in the context of the rapidly developing financial crisis in Latin America. To respond quickly and effectively to these evolving developments, the management team of the IMF—principally, the Managing Director, Horst Köhler, and the First Deputy Managing Director, Anne Krueger—sought to draw on the relevant expertise and experience of the entire institution. Two interdepartmental task forces were sequentially commissioned to distill the lessons that the IMF staff had learned in working on relevant aspects of earlier financial crises in Russia, Mexico, Asia, Turkey, and elsewhere around the world and to provide broad, useful operational guidance to the staff teams working in the field with the authorities of Latin America. The first task force, constituted in early 2002, focused on issues directly relevant to Argentina, the country where the crisis had first emerged and where the collapse was of almost unprecedented magnitude. The second task force concentrated on the threat of spillover to other countries in the region and the appropriate policy responses to specific vulnerabilities, such as those posed by dollarized financial systems.
Each task force was divided into several teams and instructed to produce short, policy-oriented papers under tight deadlines. (A list of task force members is included at the end of this Occasional Paper.) The sections of this volume largely derive from these papers, which were put together in the spring and then over the summer of 2002. Some analysis, however, has not been included for reasons of space, or because the issue lacked broader, continuing interest (such as how to deal with the short-lived dual exchange rate regime of Argentina), or because of continuing market sensitivities.
We would like to extend our profound thanks to all the IMF staff who contributed to this Occasional Paper—to the economists on the two task forces who were asked to take on this additional work with no relief from their already demanding regular duties; to the many other economists who commented on drafts and participated in discussions of the task force results; and to the many research officers and assistants as well as the administrative assistants who helped to prepare the text, tables, and charts. Finally, we wish to acknowledge the special contributions made by Jim McEuen, who edited the manuscript and coordinated production of the publication, and Hilda L. Scioville, for her patience and dedication in shepherding the document through its final stages.
G. Russell Kincaid
Asset management companyBIS
Bank for International SettlementsCAC
Collective action clauseCIS
Commonwealth of Independent StatesCPI
Consumer price indexECA
Export credit agencyERM
Exchange rate mechanism (European Monetary System)EWS
Early warning systemFICORCA
Fideicomiso para la Cobertura de Riesgos Cambiarios (Mexico)FSAP
Financial Sector Assessment Program G-10 Group of Ten HP Hodrick-PrescottIDB
Inter-American Development BankIFC
International Finance CorporationIMFC
International Monetary and Financial CommitteeINS
Information Notice SystemLOI
Letter of IntentMEFP
Memorandum on Economic and Financial PoliciesNDA
Net domestic assetsNDC
Net domestic creditNFA
Net foreign assetsNIR
Net international reservesREER
Real effective exchange rateSDRM
Sovereign Debt Restructuring Mechanism UN United NationsUNCITRAL
UN Commission on International Trade LawVAT