Abstract
The first part of the article presents a comparative analysis of the macroeconomic behavior of some of the Eurozone economies (Greece, Ireland, Portugal, Spain and Italy: GIPSI countries) with that of a set of emerging market economies that experienced financial crises in the period of financial globalization. The comparison also focuses on the pro-cyclical fiscal policies implemented in common by emerging market and Eurozone countries. The second part of the article is devoted to the recent Argentine experience of crisis, foreign debt default and recovery.
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Notes
The article is based on a presentation prepared for the workshop ‘The Euro: manage it or leave it! The economics, social and political costs of crisis exit strategies’ 22–23 June, Faculty of Economics, Gabriele d’Annunzio University, Pescara, Italy.
It is important to differentiate financial crises that have taken place together with foreign debt crises from foreign debt crises not accompanied by financial crises, because the macroeconomic dynamics that lead to the crises differ in both cases. For instance, Brazil in the early 80s confronted a public foreign debt crisis without a domestic financial crisis. The public foreign debt, intended to deepen the ISI process and preserve relatively high rates of growth in a context of high energy prices, became unsustainable because two simultaneous negative shocks in 1979: the abrupt rise of the international interest rate and an additional jump in the oil price. In contrast with Argentina, Chile, Mexico and Uruguay, Brazil in the 1970s maintained the foreign exchange controls and did not open the capital account nor deregulate the financial system (Frenkel, 2003).
From 2002 on, there were no financial crises in emerging market economies, despite the strong negative real and financial shocks caused by the US sub-prime crisis.
Besides the pioneer work by Minsky and Kindleberger (1978), the role of credit expansion in the configuration of financial crises has gained increasing recognition (see for instance Kaminsky and Reinhart (1999) and Reinhart and Rogoff (2009)). Kaminsky and Reinhart have studied the role of credit expansion fed by international capital inflows in the configuration of ‘twin’ financial and balance of payments crises. Schularick and Taylor's (2012) study of financial crises in the period 1870–2008 provides strong support to the role of financial exuberance in the configuration of financial crises and to the general validity of Minsky's model.
The Asian countries that experienced crises in 1997–98 already had fixed exchange rate regimes when they liberalized the capital account to facilitate the reception of international credits in the 1990s.
The narrative draws on Frenkel (2003) and Frenkel and Rapetti (2009). A formal model, originally intended to interpret the Chilean and Argentine crises of the early 80s, is presented in Frenkel (1983). The model is sketched in Williamson (1983) and restated in Taylor (1991). Taylor (1998) argues that this framework is also applicable to the emerging market crises of the 1990s.
The cases of Ireland, Portugal and Spain seem to fit comfortably in the narrative. In Greece, public expenditures significantly contributed to the expansion of aggregate demand. Italy also experienced increasing current account deficits in the 2000s, mostly related to a stagnant productivity (Bagnai, 2012; Cesaratto, 2012; Bibow, 2012).
Particularly, this may be the case of Italy. This country had shown a high public debt/GDP ratio for a long time, but the sovereign risk premium only started to rise after the contagion of the Greek crisis.
For instance, emerging market economies after the Lehman Brothers’ bankruptcy experienced negative real and financial shocks of similar magnitude than the shocks that these economies confronted after the East Asian crises. Although in the late 1990s a number of emerging markets experienced deep crises, no crisis took place in these economies in the 2000s, because their external and financial configurations were more robust than in the late 1990s (Ocampo, 2010; Frenkel, 2012).
Also the emerging markets crises have simultaneously taken place in groups of countries: the Latin American economies in the early 80s, Mexico and Argentina in 1994–95, and the Asian countries, Russia, Turkey and a number of Latin American countries in the late 1990s–early 2000s.
A similar view on the role of international currency liquidity in financial crises in emerging markets is exposed in Chang and Velasco (1999).
A formal model is presented in Frenkel (2005).
On the Target2 balances of the European Central Bank see Sinn and Wollmershaeuser (2011) and Cesaratto (2012).
The ECB have had this role to some extent, but the rhetoric and weakness of its interventions did not eradicate the fears and uncertainties associated to the possibility of default on public debts The announcement by the ECB of the Outright Monetary Transactions (OMT) generated more optimistic expectations about the sustainability of the GIPSI public debts, but the conditionality to which these operations would be subjected leaves open doubts about their efficacy. No OMT operation has been implemented at the time I am writing this article.
Research by the IMF has recently shown that the market assessments of default risks are associated with the short-term growth performances, that is, perceived risk increases when output falls (Cotarelli, 2011). The author comments on the crucial mechanism of the vicious circle: ‘projected growth is important (higher growth leading to lower spreads), but, again, short-term growth is what matters, rather than potential growth. One unpleasant implication of this focus on short-term output growth is that, if the fiscal multiplier is sufficiently large (higher than 1.2–1.3 based on the estimated coefficients), a fiscal tightening can lead to a rise in spreads: the improvement in the deficit tends to lower spreads, but the short-term decline in GDP, acting also through the short-term rise in the debt ratio, tends to push spreads up.’
This assessment has recently gained support from the IMF. See, for instance, IMF World Economic Outlook, Chapter 1 (2012).
The discussion that follows draws on Frenkel (2008).
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The author thanks the comments by an anonymous referee and the support of Ford Foundation to the research.
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Frenkel, R. Lessons from a Comparative Analysis of Financial Crises. Comp Econ Stud 55, 405–430 (2013). https://doi.org/10.1057/ces.2013.2
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DOI: https://doi.org/10.1057/ces.2013.2