【正文】 ddisonWesley. All rights reserved. Latin American Financial Crises (cont.) ? Because the central bank was not allowed to print more pesos without have more dollar reserves, inflation slowed dramatically. ? Yet inflation was about 5% per annum, faster than US inflation, so that the price/value of Argentinean goods appreciated relative to US and other foreign goods. ? Due to the relatively rapid peso price increases, markets began to speculate about a peso devaluation. ? A global recession in 2022 further reduced the demand for Argentinean goods and currency. 2239 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Latin American Financial Crises (cont.) ? It extended credit to newly privatized banks with loan losses. ? Losses were a problem due to weak enforcement or lack of accounting standards like asset restrictions and capital requirements. ? Political instability and the banks’ loan defaults contributed to another crisis in 1994, after which the Mexican government allowed the value of the peso to fluctuate. 2237 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Latin American Financial Crises (cont.) ? The US government insisted that the private banks reschedule the debts, and in 1989 Mexico was able to achieve: ? a reduction in the interest rate, ? an extension of the repayment period ? a reduction in the principal by 12% ? Brazil, Argentina and other countries were also allowed to reschedule their debts with private banks after they defaulted. 2235 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Types of Financial Capital (cont.) ? Debt finance includes bond finance, bank finance and official lending. ? Equity finance includes direct investment and portfolio equity investment. ? While debt finance requires fixed payments regardless of the state of the economy, the value of equity finance fluctuates depending on aggregate demand and output. 2233 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Types of Financial Capital 1. Bond finance: government or mercial bonds are sold to private foreign citizens. 2. Bank finance: mercial banks lend to foreign governments or foreign businesses. 3. Official lending: the World Bank or InterAmerican Development Bank or other official agencies lend to governments. ? Sometimes these loans are made on a “concessional” or favorable basis, in which the interest rate is low. 2231 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. The Problem of “Original Sin” ? When developing economies borrow in international financial capital markets, the debt is almost always denominated in US$, yen, euros: “original sin”. ? The debt of the US, Japan and European countries is also mostly denominated in their respective currencies. ? When a depreciation of domestic currencies occurs in the US, Japan or European countries, liabilities (debt) which are denominated in domestic currencies do not increase, but the value of foreign assets does increase. ? A devaluation of the domestic currency causes an increase in foreign wealth. 2229 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Borrowing and Debt in Developing Economies (cont.) ? If the central bank tries to fix the exchange rate, a balance of payment crisis may result with a debt crisis. ? Official international reserves may quickly be depleted, forcing the central bank to abandon the fixed exchange rate. ? A banking crisis may result with a debt crisis. ? High default rates may increase bankruptcy. ? If depositors fear bankruptcy due to possible devaluation of the currency or default on government debt (assets for banks), then they will quickly withdraw funds (and possibly purchase foreign assets), leading to bankruptcy. 2227 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Borrowing and Debt in Developing Economies (cont.) ? Otherwise, the country can not afford to pay people who want to remove their funds from the domestic economy. ? The domestic government may have no choice but to default on its sovereign debt when it es due and investors are unwilling to reinvest. 2225 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Borrowing and Debt in Developing Economies (cont.) A financial crisis may involve 1. a debt crisis: an inability to repay government debt or private sector debt. 2. a balance of payments crisis under a fixed exchange rate system. 3. a banking crisis: bankruptcy and other problems for private sector banks. 2223 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Borrowing and Debt in Developing Economies (cont.) ? national saving – investment = the current account ? where the current account is approximately equal to the value of exports minus the value of imports ? Countries with national saving less than domestic investment will have a financial capital inflows and negative current account (a trade deficit). 2221 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Characteristics of Poor Countries (cont.) 2219 Copyright 169。 2022 Pearson AddisonWesley. All rights reserved. Characteristics of Poor Countries (cont.) ? Weak of enforcement of banking and financial regulations (., lack of examinations, asset restrictions, capital requirements) causes banks and firms to engage in risky or even fraudulent activities and makes savers less willing to lend to these institutions. ? A lack of monitoring causes a lack of transparency (a lack of information). ? Moral hazard: a hazard that a borrower (., bank or firm) will engage in activities that are undesirable (., risky investment, fraudulent activities) from the less informed lender’s point of view. 2217 Copyright 169。 unstable output and employment is also co