1. Argentina’s ongoing policy challenges Central Bank of Argentina Alfonso Prat-Gay Governor Lecture delivered at the London School of Economics, May 2004

2. The sunny side of the business cycle

3. And the right policy mix Real Interest Rate, Real Exchange Rate and Primary Surplus 2003-2004 (Real Exchange Rate % change and Real Interest Rate and Primary Surplus difference against 1994-2001 average) 3,9 -3,1 -49,2 -60 -50 -40 -30 -20 -10 0 10 p.p. Primary Surplus Real Interest Rate (30-day CD) Multilateral Real Exchange Rate *

4. Fixed investment finally adding to the capital stock

5. Human capital no longer falling

6. Challenges for Monetary Policy Reputation: a poor track record Commercial banks: large counterparty risk Economic environment: shrinking balance sheet and uncertain money demand Public sector: division of labor Central Bank: lack of × instruments × practice TO TURN THE CENTRAL BANK INTO A CENTRAL BANK

7. History is not on our side

8. The aftershocks of the crisis * Contribution by source of money creation

9. Developing the spot FX market

10. Creating a benchmark interest rate

11. Paving the way to a formal Inflation Targeting regime

12. Nearly there but not quite

13. Challenges for Banking Policy Lack of resources Risk aversion and asymmetric information Balance-sheet mismatches Outdated rules Banks lack × instruments × practice TO GUIDE BANKS TO FIX THEMSELVES Sovereign debt restructuring

14. Too many constraints, too few resources CountryCrisis Deposits real change (1) NW real change (2) Fiscal Contribution (% of GDP) IMF net disbursements (mill. US$) Mexico'94 - '95-15%-64%19,3%10.670 Venezuela'94 - '95-43%-6%15,0%-657 Korea'97 - '00-6%15%31,2%6.069 Indonesia'97 - '00-13%-183%56,8%10.348 Thailand'97 - '00-2%58%43,8%3.212 Ecuador'98 - '01-24%-59%21,7%298 Turkey'00 -'02-27%97%30,5%13.419 Simple average-19%-20%31%6.194 Argentina'81 - '82-36%-9%55%s.d Argentina'02 - '03-41,8%-37%11,4%-930 (1) between the beginning of the crisis and the deposits trough (2) Net Worth, two year after the crisis -US$6.5 billion including cash-flow with IFI approx. US$50 billion including US Treasury funds

15. Dealing with the past...

16. …but focused on the future

17. Easy go, easy come

18. Banks are back in black Consolidated earnings -8,9 -4,0 -5,0 -1,9 0,3 -10 -8 -6 -4 -2 0 2 2002I. 03II. 03III. 03IV. 03 ROA

19. Banking business: upside much greater than downside Loans to Private Sector 25 40 55 70 85 100 Ene-98Sep-98May-99Ene-00Sep-00May-01Ene-02Sep-02May-03Ene-04 ARS billion Dec-98: 23% of GDP Apr-04 7% of GDP Change needed to reach 23% of GDP: 200% Apr-04 23% of GDP

20. Banks can now deploy AR$12.5 for every AR$1 of capital, to EVERY borrower, regardless of its nature. No borrower discrimination Banks need to lend to the private sector; they are free to do so now

21. The glass is half full