Publication: Reducing Vulnerability to Speculative Attacks
Date
1999-02
ISSN
Published
1999-02
Author(s)
Calvo, Sara
Abstract
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.
Link to Data Set
Citation
“Calvo, Sara. 1999. Reducing Vulnerability to Speculative Attacks. PREM Notes; No. 16. © World Bank, Washington, DC. http://hdl.handle.net/10986/11497 License: CC BY 3.0 IGO.”