Bond Markets For Latin American Debt In The 1990s PDF Download

In late 1994, several Latin American economies, particularly Mexico and Argentina, experienced sharp reversals of international capital inflows that had characterized the previous four years. The immediate cause of the reversals was the loss of international investor confidence in these countries' ability to defend their exchange rate and in the authorities' ability to service their external debt on a timely basis. Short-term interest rates rose to extraordinarily high levels. Because many borrowers could not afford to service their debts at these high interest rates, the credit quality of domestic banks' loan portfolios deteriorated dramatically, creating concerns about the solvency of the banking systems in these economies. The current crisis has occurred during a period of economic and financial reform in Latin America. After almost a decade of macroeconomic and financial difficulties, since the last part of the 1980s and the beginning of the 1990s, many Latin American countries have undertaken major transformations of their economic structures. These efforts have included not only comprehensive stabilization programs aimed at correcting macroeconomic imbalances but also deep structural reforms designed to improve the efficiency of market mechanisms in pricing and allocating resources among the different sectors of these economies. In addition, the paper analyzes policy issues associated with the long-run health of the financial system: (1) the proper design of policies to respond to large and volatile flows of capital having the complementary objectives of maintaining long-run macroeconomic stability and a healthy financial system; and (2) the effect on bank soundness of increased competition from recent developments in domestic capital markets.