Reducing Vulnerability to Speculative Attacks
The note focuses on the speculative
attack on domestic assets, which can occur irrespective of
country's fiscal situation, suggesting political
economy considerations may be the reason. However, recent
events have reopened the debate on how to reduce
vulnerability to capital outflows in developing countries,
though other risk factors have been identified, which if
minimized, can still reduce vulnerability to speculative
attacks. It addresses the perils of inconsistent
macroeconomic policies, as evidenced in Argentina, where the
Central Bank was financing the government's budget
deficit by creating money, while trying to keep the exchange
rate fixed. Moreover, a speculative attack on bonds, instead
of currency, can also lead to a devaluation, such as a
sudden shift in perceptions about macroeconomic stability,
may lead to a loss in reserves, as in Mexico's 1994
crisis, when high interest rates associated with a currency
defense was perceived as intolerable. This is substantiated
through case studies, which further include the expectation
of realized contingent liabilities, a drop in tax revenues
associated with business cycles driven by capital inflows,
and investor refusal to roll over debt in countries other
than the crisis country, know as contagion. Recommendations
include the adoption of consistent macroeconomic policies;
reduction of debt rollover risks; strengthening financial
regulation; and, capital flows regulation.
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Bibliographic Details
| Main Author: |
Calvo, Sara |
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| Language: | English |
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| Published: |
World Bank, Washington, DC
1999-02
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| Subjects: | BALANCE OF PAYMENTS,
BANK LIQUIDITY,
BANK RUNS,
BANKING CRISIS,
BONDS,
BUDGET DEFICIT,
BUDGET DEFICITS,
BUSINESS CYCLE,
BUSINESS CYCLES,
CAPITAL ACCOUNT,
CAPITAL FLOWS,
CAPITAL INFLOWS,
CAPITAL OUTFLOWS,
CENTRAL BANK,
CONTAGION,
CONTINGENT LIABILITIES,
CURRENCY CRISES,
DEBT,
DEBT FINANCING,
DEVALUATION,
DEVELOPING COUNTRIES,
DEVELOPMENT ECONOMICS,
DOMESTIC CREDIT,
ECONOMIC POLICY,
EQUILIBRIUM,
EXCHANGE RATE,
EXCHANGE RATE REGIMES,
EXCHANGE RATES,
EXPORTS,
FINANCIAL CRISES,
FINANCIAL INSTITUTIONS,
FINANCIAL SECTOR,
FIXED EXCHANGE RATE,
FIXED EXCHANGE RATES,
FLOATING EXCHANGE RATE,
FOREIGN CURRENCY,
GOVERNMENT BUDGET,
GOVERNMENT BUDGET DEFICIT,
IMPORTS,
INTEREST RATES,
INTERNATIONAL MONETARY FUND,
INTERNATIONAL RESERVES,
LIQUID LIABILITIES,
LIQUIDITY,
M2,
MACROECONOMIC POLICIES,
MONEY DEMAND,
POLITICAL ECONOMY,
POLITICAL SUPPORT,
POVERTY REDUCTION,
REAL EXCHANGE,
REAL EXCHANGE RATE,
RESERVE REQUIREMENTS,
SHORT-TERM DEBT,
SOLVENCY,
SPECULATIVE ATTACKS,
TAX REVENUES,
VOLATILITY,
VULNERABILITY SPECULATION,
ASSET LIABILITY MANAGEMENT,
FISCAL MANAGEMENT,
RISK MANAGEMENT,
VULNERABILITY,
MACROECONOMIC CORRELATIONS,
CASE STUDIES,
FINANCING OPTIONS,
MONEY SUPPLY,
EXCHANGE RATE POLICY,
BOND RATINGS,
CURRENCY DEVALUATION,
CONTINGENT LIABILITY,
ROLLOVER ASSURANCES,
MACROECONOMIC POLICY,
DEBT SERVICE REDUCTION,
FINANCIAL REGULATION,
REGULATORY FRAMEWORK, |
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| Online Access: | http://documents.worldbank.org/curated/en/1999/02/828306/reducing-vulnerability-speculative-attacks
https://hdl.handle.net/10986/11497
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