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Lessons from Large Adjustment Loans
(World Bank, Washington, DC, 1999-08) Morrow, Daniel
This note presents the lessons from the assessments that are likely to be most useful to country directors, and task teams preparing new adjustment operations. The five adjustment loans (two in Argentina, and one each in Korea, Malaysia, and Russia) show that applying basic lessons is not always straightforward, however, and, sometimes involves making tradeoffs among Bank objectives. It is stipulated policy objectives are more likely to be achieved, if there is substantial borrower ownership. To this end, support for new policies should be established, towards generating broad political ownership, including engaging key players in incoming administrations, to help build ownership of reforms. Moreover, combined, the Bank's country knowledge and global expertise, can generate quality operations, that forge local partnerships, draws on prior experience, and maintains a minimum knowledge base. This is to say, setting priorities, and sequencing reforms should be carefully included during the design phase, with particular attention to avoid excessively broad conditionality, which may reduce the probability of real progress on key reforms.
Does Debt Management Matter? YES
(World Bank, Washington, DC, 1999-02) Kiguel, Miguel A.
Debt management can reduce financial vulnerability by limiting liquidity, and rollover risks. This note reviews Argentina's debt management strategy, towards improving the country's credit rating to an investment grade, providing flexibility, liquidity, and opportunity. However, the risks of refinancing can be larger for domestic currency debt, than for foreign currency debt. Lessons from Argentina's experience suggest that volatile flows can be dealt with, through prudential regulation in the banking sector, and overall sound policies in capital markets. Furthermore, avoiding the conversion of private debt into public debt, also helped Argentina overcome the crisis; but perhaps, the biggest challenge is to develop new indicators of financial vulnerability, which should put more weight on stocks of debt, and other financial assets, rather than on flow indicators, such as the current account deficit.
Reducing Vulnerability to Speculative Attacks
(World Bank, Washington, DC, 1999-02) Calvo, Sara
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.