1. CURRENT FINANCIAL TURMOIL: Some key issues Guillermo A. Calvo Research Department Inter-American Development Bank New York, September 10, 2001

2. GLOBALIZATION VS. MORAL HAZARDS

3. What Hazard? zMoral? Hard to make a strong case: yCapital flows tended to contract after Tequila and ensuing crises. yFDI took a bigger role after crises. zGlobalization? A case could be made: yunprecedented flows starting in 1989 ysharp contraction after crises (Sudden Stop) yIn 1990-2000 portfolio flows to EMs amounted to US$ 478 billion, which may be heading for the Exit in the next crisis, globalizing it.

4. Net Capital Flows to Emerging Markets -50 0 50 100 150 200 250 758085909500 Total Emerging MarketsWestern Hemisphere billion US$ financial globalization starts---> Tequila--> Source: WEO, IMF, May 2001

5. Foreign Direct Investment to Emerging Markets -50 0 50 100 150 200 250 758085909500 TotalFDI billion US$ Source: WEO, IMF, May 2001

6. Portfolio Flows to Emerging Markets: A dying species? -50 0 50 100 150 200 250 758085909500 PortfolioTotal billion US$ financial globalization starts---> Tequila--> Source: WEO, IMF, May 2001

7. ARGENTINA

8. Argentina: Country Risk EMBI Plus Sovereign Spread, b.p. Financial Package Cavallo becomes Minister Beginning of Bush Administration

9. Argentina: What’s behind sharp deterioration? zReaching debt/GDP ceiling and revealing no political will for fiscal adjustment, e.g., yLopez Murphy's cameo appearance? yExpansionary monetary policy? yPou's departure and currency basket? yFiscal devaluation? zInternational factors ySelf-fulfilling bad equilibrium? yNo-bailout message from Treasury? yGlobal recession?

10. Argentina: Is growth likely to resume? zWould zero deficit be enough to lower interest rates? zIs a big G7 package necessary? zShould Argentina, Brazil and Chile engage in greater exchange-rate harmonization? zWould involuntary debt restructuring help? Should the G7 be involved...a Brady II?

11. Crisis and Contagion zIs contagion likely? zWhat countries will be involved: Brazil, Peru...? zWhat would be the mechanics of contagion? yMargin calls? yBank runs in other dollarized economies? yG7 involvement or lack of it? yCopycats if Argentina defaults?

12. CURRENT FINANCIAL TURMOIL: Some key issues Guillermo A. Calvo Research Department Inter-American Development Bank New York, September 10, 2001