Argentina/Mexico Case Study [GCP Brazil: Modulo 2]

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Argentina/Mexico Case StudyGCP Brazil Modulo
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Class assignment Comparison of Argentine and
Mexican approaches to financial liberalization

• Argentine panel
• Summarize the key features of the Argentine
  program of financial reform and liberalization
• Analysis of the consequences of the Argentine
  approach for the structure and development of the
  Argentine financial system
• Criticism of the Argentine approach at the start
  of the 1990s
• Criticism of the Argentine approach before and
  after financial crisis
• Mexican panel
• Summarize the key features of the Mexican program
  of financial reform and liberalization
• Analysis of the consequences of the Mexican
  approach for the structure and development of the
  Mexican financial system
• Criticism of the Mexican approach at the start of
  the 1990s
• Criticism of the Mexican approach before and
  after financial crisis

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Strategies of development and the design of
financial transactions
Foreign Banks Local Banks Government participation Structure of Financial System Financial Development Profitability of Financial Firms
Orthodox WC (conv) Approach Privatization traditional private law banks and securities markets Restructuring and consolidation competition and cooperation Sale of SOBs elimination of classic forms of financial repression Large foreign sector segmented portfolios and players Weak domestic FM Development Low Firm financing Foreign Banks Yes Domestic banks Mixed
East Asian approach Mixed pub/priv financial inst. markets Privileged players in domestic markets Mechanisms of coordination and strategic direction Specialized banks targeted credit mob of S/I In practice, yes Mixed
Controlled Liberalization --markets --banks Strategic partnership and investment Continued reliance on SOBs new JVs and curb market Mechanisms of coordination and strategic direction Dualism and diversity around the edges Recent experiments not successful ?? China, Korea before early 90s ?
Alternative strategies/ trajectories of reform?
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Introduction to the Mexican Case StudyPolitical
and Economic Background/ Sequence of Reforms
Initial Conditions Basic Program of Reform Policies and Arrangements Local Markets Policies and Arrangements Global Markets
1982-1988 Financial Crisis, 1982 Capital controls, sovereign debt default, nationalization of banking system Initial small-scale privatizations, (non-financial) reduced restrictions on domestic banks creation of domestic money market Gradual normalization debt restructuring, liberalization of controls, qualified opening to foreign capital
1988-1994 Emergence from financial crisis Orthodox WC reforms, including privatization, de-regulation, opening to global markets Abolition of reserves, restriction and credit controls privatization of banking system (local players) tax reform monetary and fiscal reform reduction in public sector Unification of exchange rate (fixed then crawling peg) removal of capital controls increasing openness to foreign capital, especial portfolio NAFTA (1994)
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Introduction to the Mexican Case StudyPolitical
and Economic Background/Sequence of Reforms
(contd)
Initial Conditions Basic Program of Reform Policies and Arrangements Local Markets Policies and Arrangements Global Markets
Years following Tequila Crisis Balance of payments/financial crisis collapse of domestic banking system severe economic distress US-led program of financial support from global markets and institutions Restructuring of internal and external financial obligations re-structuring and bail-out of domestic banking system re-affirmation of orthodox program of reform.. Restructuring of internal and external debt re-structuring and bail-out of the banking system removal of restrictions on foreign ownership in the banking financial system Move to floating exchange rate regime expanding membership in global institutions WTO, OECD, etc. further opening of the capital account in area of FDI
Recent Reforms 1998-2006 Stabilization with little growth selective access to global capital continuing weakness in local credit markets and few new areas of economic growth Further opening to FDI in domestic financial system further integration of global and local markets through adherence to legal and regulatory best practice Sale of major local banks to foreign fin institutions adoption of second generation reforms in the area of corporate governance, creditors rights, fin regulation Pension reforms credit laws, financial group laws development bank extensions. (local markets)
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Basic Macro-economic and Financial Conditions
Domestic macro-economic conditions Domestic financial conditions Global market conditions
1982-1988 Economic and financial crisis increase in interest rates/inflation lowering of growth real wages, increased poverty, unemployment Nationalization of banks restructuring of credits contraction of monetary and financial system Moratorium of sovereign debt closure of global markets
1988-1994 Stabilization and consumption-led growth, fueled by inflows of foreign capital reduction in public spending Financial deepening in both credit and asset markets privatization of banks, reduction of public-sector lending programs development of internal financial especially government bond - market Resolution of sovereign debt Mexican Brady Bond program re-opening of markets to Mexican issuers, large inflows of trade, FDI, esp. portfolio capital
Immediate post-tequila period Economic and financial crisis banking, currency and financial markets Collapse of currency, banking and credit markets U.S. led bail-out by markets and IFIs surprising quick re-opening of global markets
1998-2006 Orthodox monetary and fiscal policy (3rd world) fx stability and low inflation Currency stability, partial recovery of banking and financial markets Segmented access to global markets renewed inflow of foreign capital