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The Global Crisis and LAC Views from Washington

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Title: The Global Crisis and LAC Views from Washington


1
The Global Crisis and LACViews from Washington
  • Guillermo Calvo
  • Columbia University

Inter-American Development Bank, Vice Presidency
for Sectors and Knowledge Research Department and
the Regional Policy Dialogue, Washington, DC,
April 24, 2009
2
Main Policy Innovations
  • G20 re-funding and re-founding of the Fund.
  • Pro-active monetary and financial policy in the
    G7.
  • G7 Stimulus packages.

3
I. G20 Re-funding and Re-founding the Fund
  • The G20 decision to substantially increase IMF
    funding, and the new IMF Flexible Credit Line,
    represent major strategic changes in
    international financial cooperation.
  • The FCL offers an alternative to international
    reserve accumulation, a costly self-insurance
    scheme.
  • The FCL could be instrumental in recycling
    Flight-to-Quality capital, and preventing BOP
    crises.

4
  • Remarkably, a US47 billion FCL for Mexico was
    approved, even though Mexico is not suffering
    from a balance-of-payments, BOP, crisis.
  • In contrast, in 1995 Mexico got a US50 billion
    package many weeks after BOP crisis erupted too
    late for preventing major output collapse.
  • Thus, the Fund is beginning to act as a regular
    central bank (at a global level).

5
II. Pro-active Monetary and Financial Policy in
the G7
  • Lowering of policy interest rates and the many
    other operational innovations at the Fed and
    other G7 central banks may have contributed to
  • Protecting EMs from contagion through the capital
    market (as during the 1998 Russian crisis).
  • Surge of capital flows to EMs until mid 2008
  • Low yields of EM bonds.

6
External Financial Conditions for EMs(daily
data, EMBI, bps, last value 04/07/09)
ENRON Effect
Greenspans conundrum testimony
Lehman Brothers files for bankruptcy
Fears of FED tightening
Basis points
Yields
Pre-Asian Crisis Yield
?-12
Spreads
?54
Pre-Asian Crisis Spread
Beginning of improvement in international
financial conditions
Source Bloomberg.
7
US Junk EM Bonds (yields in , last value
04/07/09)
US Junk
EM Sovereign
EM Corporate
Note (1) EM Corporate Credit Suisse Corporate
Bond. (2) EM Sovereign JP Morgan EMBI
Sovereign. (3) US Junk MSCI High Yield
Bonds. Source Bloomberg.
8
III. G7 Stimulus Packages
  • Several experts and commentators expect that
    effects on EM output will be modest.
  • Moreover, these packages could contribute to
    further crowding out of capital flows from EM,
    especially if global output takes time to react
    to stimulus packages.

9
Inflation Risks in LAC
10
  • Global inflation may surge as credit starts to
    flow to the private sector.
  • Commodity prices are likely to be the first in
    line to rise
  • which, as experienced in 2008 Q-I, will result in
    higher EMs inflation.
  • G7 central banks are unlikely to tighten monetary
    policy before they see output firmly recuperating
    and inflation reflected in their CPIs.

11
  • Therefore, as inflation flares up, LACs are
    likely to be on their own
  • And may face a serious tradeoff between
  • stopping inflation
  • and
  • stopping outputs rebound.

12
Commodity Prices(daily data, Index 3-Sep-07
100, last value 4/7/09)
Source Bloomberg.
13
The Global Crisis and LACViews from Washington
  • Guillermo Calvo
  • Columbia University

Inter-American Development Bank, Vice Presidency
for Sectors and Knowledge Research Department and
the Regional Policy Dialogue, Washington, DC,
April 24, 2009
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