Carry-trades into Latin America

With the spectre of the 1980s hunting emerging markets, stronger interconnectedness may mean higher volatility across global financial architectures. Some interesting data capturing cross-border exposures for Chile, Colombia, Mexico, Brazil and Peru (LA5).

 

Debt held by non-residents fell by an average of 30% across LA5 after Lehman, to then double (Colombia) or triple (rest LA5) in volume (here are the carry-trades Paul Tucker talked about ). In an effort to stem currency appreciation, central banks intervened in currency markets, leading to large sterilizations of an average of 20% of GDP across the group between 2010 and 2012. Despite these interventions, exchange rates appreciated by around 30% for Chile and Colombia, 25% for Peru and 10% for Mexico.

Change at the IMF: interconnectedness, financial fragility and global banks

I attended recently a workshop organized by Cornel Ban and Kevin Gallagher, with support from Governance, at Boston University on how the crisis has changed the IMF.

My presentation explored the way in which the IMF has grappled with financial innovation since the crisis, both theoretically and in its policy advice.

This is important, it argues, because the global economic crisis has brought an important shift in the IMF’s understanding of crisis, its triggers and its actors. Its research on macro-financial linkages now identifies large capital inflows as the main conduit for the transmission of global shocks, in contrast to previous concerns with current account dynamics; and transnational banks as the key carriers of capital flows across borders. With this, the IMF has included private financial institutions in its analytics of crisis, previously focused on governments (fiscal policy), central banks (monetary policy) and trade union/state-owned companies (structural reform).