Debt-Related Vulnerabilities and Financial Crises An Application of the Balance Sheet Approach to Emerging Market Countries
Christoph Rosenberg, Ioannis Halikias, Brett House, Christian Keller,
Jens Nystedt, Alexander Pitt, and Brad Setser
INTERNATIONAL MONETARY FUND
Washington, D.C.
2005
© 2005 International Monetary Fund
Production: IMF Multimedia Services Division
Typesetting: Alicia Etchebarne-Bourdin
Cataloging-in-Publication Data
Debt-related vulnerabilities and financial crises: an application of the balance sheet approach to emerging market countries/Christoph Rosenberg … [et al.]—Washington, D.C.: International Monetary Fund, 2005.
p. cm.—(Occasional paper; no. 240)
Includes bibliographical references.
ISBN 1-58906-425-9
1. Financial statements—Developing countries. 2. Financial statements—Developing countries—Statistics. 3. Financial crises—Developing countries. I. Rosenberg, Christoph B. II. Occasional paper (International Monetary Fund); no. 240.
HF5681.B2D32 2005
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Contents
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Preface
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I Overview
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II Balance Sheet Shocks and Their Transmission in Capital Account Crises
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Balance Sheet Concepts
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The Anatomy of Recent Balance Sheet Crises
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Operationalizing the Balance Sheet Approach
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III Public and Private Sector Balance Sheets in Emerging Market Countries: Recent Trends and Key Risks
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The Public Sector’s Balance Sheet
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The Financial Sector’s Balance Sheet
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The Nonfinancial Private Sector’s Balance Sheet
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Presenting Economy-Wide Vulnerabilities
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Appendix. Regional Groupings and Data Sources and Definitions
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IV Balance Sheet Developments in Recent Financial Crises: Some Case Studies
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Argentina: How Weaknesses in Private Sector Balance Sheets Contributed to the Crisis of 2001–02
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Uruguay: How a Run on Banks Led to the Sovereign Debt Crisis of 2002
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Turkey: How Banks’ Balance Sheet Positions Contributed to the Crisis of 2000–01
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Brazil: How the Public Sector Leveraged Its Balance Sheet to Insulate the Private Sector from the 1998–99 Currency Crisis
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Peru: How a Highly Dollarized Economy Remained Resilient in the Face of Regional Financial Turmoil
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Lebanon: How Confidence Can Uphold Fragile Balance Sheets
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V Conclusions
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References
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Boxes
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1.1. The Balance Sheet Approach in the Academic Literature
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2.1. The Balance Sheet Approach in Practice
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5.1. Extensions of the Balance Sheet Approach in the IMF
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Figures
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2.1. Sectoral Balance Sheets and Their Main Interlinkages
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2.2. Anatomy of a Balance Sheet Crisis
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3.1. Public Debt, 1992 and 2002
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3.2. Public Domestic Versus Public External Debt, 1992 and 2002
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3.3. Public Domestic Versus Foreign Currency Debt, 2002
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3.4. Privately Held Versus Officially Held External Public Debt, 1992 and 2002
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3.5. Average Maturity of Public External Debt, 1990–91 and 2000–01
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3.6. Structure of Domestic Government Bonds, 2001
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3.7. Public Sector Debt Sustainability Assessments
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3.8. Primary Balance, 1992 and 2002
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3.9. Total Public External Debt, 1992 and 2002
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3.10. Gross and Net Reserves, 1992 and 2002
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3.11. Banking Sector Assets, 1992 and 2002
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3.12. Credit to Private Versus Public Sectors, 1992 and 2002
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3.13. Foreign Currency Deposits, 1992 and 2002
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3.14. Domestic Foreign Currency Loans, 1992 and 2001
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3.15. Short-Term External Debt and Foreign Currency Deposits, 1992 and 2002
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3.16. Nonfinancial Private Sector Debt, 1992 and 2002
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3.17. Nonfinancial Private Sector External Debt and Private Domestic Foreign Currency Debt, 1994 and 2001
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3.18. Liabilities of BIS-Reporting Banks to Nonfinancial Private Sector, 1992 and 2002
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3.19. Nonfinancial Private Sector External Debt and Private Domestic Foreign Currency Debt, 1994 and 2001
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3.20. Economy-Wide Vulnerabilities, Emerging Market Countries, 1992, 1997, and 2002
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3.21. Economy-Wide Vulnerabilities, Regional, 1992 and 2002
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3.22. Vulnerabilities in Crisis and Noncrisis Countries, 1992 and 2002
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4.1. Argentina: Maturity Mismatches: With and Without Foreign Currency Deposits, 2001
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4.2. Uruguay: Dollarization of Deposits and Loans
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4.3. Uruguay: System-Wide Foreign Currency Balance Sheet, 2001
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4.4. Uruguay: Maturity Mismatch and Domestic Foreign Currency Deposits, 2001
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4.5. Uruguay: Foreign Currency Balance Sheets, 2001
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4.6. Uruguay: Foreign Currency Balance Sheets, by Ownership, 2001
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4.7. Uruguay: Gross Reserves
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4.8. Uruguay: Combined Public Sector Debt
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4.9. Turkey: Primary Auction Interest Rates in Real Terms
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4.10. Turkey: Banking Sector Assets
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4.11. Turkey: Funding from Foreign Banks
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4.12. Turkey: Banks’ Net Open Foreign Currency Positions
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4.13. Turkey: Change in Public Debt to GDP Ratio—Component Contribution by Year
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4.14. Turkey: Public Debt, by Instrument
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4.15. Brazil: Real Growth Effects of Currency Crises
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4.16. Brazil: Net Foreign Assets of Banking System
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4.17. Brazil: Corporate Sector External Debt
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4.18. Brazil: Composition of Federal Public Sector Debt
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4.19. Brazil: Net Foreign Currency Assets and Composition
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4.20. Brazil: Key Vulnerability Ratios
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4.21. Peru: Share of Foreign Currency and External Debt, 2002
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4.22. Peru: Foreign Currency Mismatch, 2002
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4.23. Peru: Liquid Dollar Assets Versus Banks’ Short-Term Dollar Liabilities, 2002
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4.24. Peru: Liquid Dollar Assets Versus Banks’ Dollar Liabilities and Short-Term Foreign Debt, 2002
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4.25. Peru: External and Financial Vulnerability Ratios
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4.26. Lebanon: Public Sector Balance Sheet, 2003
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4.27. Lebanon: Private Financial Sector Balance Sheet, 2003
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Tables
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4.1. Argentina: Foreign-Currency-Denominated Debt of the Corporate Sector
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4.2. Argentina: Principal Assets and Liabilities of the Banking System
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4.3. Uruguay: Deposit Structure, by Residency
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4.4. Peru: Foreign Currency Debt and Foreign Currency Income in the Private Nonfinancial Sector
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The following symbols have been used throughout this paper:
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… to indicate that data are not available;
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— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
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– between years or months (e.g., 2003–04 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
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/ between years (e.g., 2003/04) to indicate a fiscal (financial) year.
“n.a.” means not applicable.
“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.
Preface
The analysis of currency and maturity mismatches in sectoral balance sheets is increasingly becoming a regular element in the IMF’s toolkit for surveillance in emerging market countries. This paper describes this so-called balance sheet approach and shows how it can be applied to detect vulnerabilities and shape policy advice. It also provides a broad-brush overview of how balance sheet vulnerabilities have evolved over the past decade and presents a number of case studies.
This study is derived from several papers prepared for the IMF’s Executive Board, starting with “The Balance Sheet Approach to Financial Crisis” (IMF Working Paper No. 02/210). The project was initiated by Mark Allen, Director of the IMF’s Policy Development and Review Department, who—along with Juha Kähkönen—provided general direction. The team that drafted this and the previous paper was led by Christoph Rosenberg and included Ioannis Halikias, Brett House, Christian Keller, Jens Nystedt, Alexander Pitt, and Brad Setser. At various stages, the project has benefited from comments by the IMF’s Executive Board, management, various departments, and participants in several seminars organized by the European Central Bank, the Bank of England, the Bank of Canada, the IMF Institute, the Asia and Pacific Department, and the Policy Development and Review Department. In particular, the authors would like to acknowledge the contributions of Nouriel Roubini (who coauthored the earlier working paper), as well as Matthew Fisher, Olivier Jeanne, Leslie Lipschitz, Christian Mulder, Alan MacArthur, and Jeromin Zettelmeyer. Invaluable research assistance was provided by Rich Kelly and Gely Economopoulos. Esha Ray of the External Relations Department edited the paper and coordinated the production and publication.
The opinions expressed in the paper are those of the authors, and do not necessarily reflect the views of country authorities, the IMF, or IMF Executive Directors.