Reducing Vulnerability to Speculative Attacks

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...

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Bibliographic Details
Main Author:	Calvo, Sara
Format:	Brief
Language:	English
Published:	World Bank, Washington, DC 2012
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
Online Access:	http://documents.worldbank.org/curated/en/1999/02/828306/reducing-vulnerability-speculative-attacks http://hdl.handle.net/10986/11497

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Summary:	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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