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Washington and Wall Street: The Interplay of Financial Influences on the Course of Debt and Currency Crises in Argentina, Brazil, and Uruguay, 1998-2002
During 2001, market measures of Argentina’s ‘country-risk’ soared, the economy contracted, and the government collapsed. Over the first half of 2002, Uruguay followed Argentina into an economic and financial tail-spin, and Brazil encountered financing problems that endangered government solvency. Each of these phenomena was associated with disruptions to international capital flows.
Increasingly, capital flows rather than current account features have determined the balance of payments for peripheral countries. For the most part, capital flows have meant portfolio flows, and for this reason perceptions of country-risk on the part of financial markets – loosely referred to here as Wall Street – are all important. An accurate measure of Wall Street’s perceptions of country-risk can be found in sovereign spread levels – the difference in yield between dollar-denominated obligations of a peripheral government and US Treasury bonds. Extensive use will be made of this indicator to gauge not only the perceptions, but also the influence of Wall Street on the course of the debt crises.
Overseeing international financial events have been Washington-based institutions. In the short run, the US Treasury, acting through the US Federal Reserve Board, sometimes the New York Federal Reserve Bank, and the Bank of International Settlements (BIS), has taken the lead in crisis-prevention and resolution for countries with a strategic importance to the United States. The institution overseeing arrangements for restoring normality has generally been the International Monetary Fund (IMF), either acting independently or with the guidance of the US Treasury and other OECD countries. The World Bank (IBRD) and organisations such as the Inter-American Development Bank (IADB) play peripheral roles, typically as conduits for funds.
Increasingly, capital flows rather than current account features have determined the balance of payments for peripheral countries. For the most part, capital flows have meant portfolio flows, and for this reason perceptions of country-risk on the part of financial markets – loosely referred to here as Wall Street – are all important. An accurate measure of Wall Street’s perceptions of country-risk can be found in sovereign spread levels – the difference in yield between dollar-denominated obligations of a peripheral government and US Treasury bonds. Extensive use will be made of this indicator to gauge not only the perceptions, but also the influence of Wall Street on the course of the debt crises.
Overseeing international financial events have been Washington-based institutions. In the short run, the US Treasury, acting through the US Federal Reserve Board, sometimes the New York Federal Reserve Bank, and the Bank of International Settlements (BIS), has taken the lead in crisis-prevention and resolution for countries with a strategic importance to the United States. The institution overseeing arrangements for restoring normality has generally been the International Monetary Fund (IMF), either acting independently or with the guidance of the US Treasury and other OECD countries. The World Bank (IBRD) and organisations such as the Inter-American Development Bank (IADB) play peripheral roles, typically as conduits for funds.