- Comments and Discussion on the Argentine Papers
1. JP Morgan (2000).
2. JP Morgan (2001).
3. To cite a few, see Calvo and others (2002); Krueger (2002); Mussa (2002); Perry and Servén (2002).
4. The paper contains a brief discussion of a possible way out: pesification of financial assets and liabilities, combined with exchange rate flexibility. By eliminating the currency mismatch, it was expected that the exchange rate movement would correct for the misalignment without generating financial distress in banks and corporations. However, a forced pesification is equivalent to a default, since the public would have been obliged to hold certain kinds of assets against their will. In my view, this was not an appropriate way out of the problems.
5. This should not be a surprise. It is a common joke among practitioners that adding one more economist to the discussion invariably brings a different point of view.
6. I find the treatment of the fiscal issues in Hausmann and Velasco particularly problematic. For example, the paper does not recognize the crucial importance that the markets were giving to fiscal expenditure as a tool to react to the shocks. Indeed, to argue that the fiscal stance was not expansionary, they show that primary spending as percentage of GDP had "remained remarkably flat." But that is precisely a point that disappointed the market. With fiscal revenues adversely influenced by the recession and with increasing debt service payments, the only possible fiscal policy had to come from a tightening in fiscal expenditure as proportion of GDP. Moreover, as a further proof that the root of the crisis was not fiscal, they argue that both the primary surplus (excluding Social Security payments) and the provinces' fiscal balance improved. But again, what matters to assess the capacity of the government to meet its obligations is the primary balance of the consolidated public sector and, certainly since 1999, there was not consistent improvement (based on table 2 in the Hausmann and Velasco paper). Thus the authors' comparison between the fiscal adjustment in Argentina, excluding the Social Security system in the precrisis period, and that of the consolidated public sector in Brazil in 1999-2000 is simply incorrect.
7. Banking issues related to the Argentina crisis are also discussed in de la Torre, Levy Yeyati, and Schmukler (2002).
8. The fact that the authorities and analysts never stop worrying about the adverse effects of a potential devaluation on the banks is proof that banks did not take sufficient precautionary measures against that risk.
9. According to Hausmann and Velasco's data, real growth of exports declined from an average of 13.6 percent in the period 1994-98 to an average of 1.4 percent in the 1999-01 period.
10. This distortion is extremely severe in most emerging markets. When estimating their capital requirements, most of these economies attach a 0 percent risk weight to their own government paper and a 100 percent weight to private sector liabilities. See the extensive discussion of the problems associated with this practice...