Speculative financial behaviour and financial fragility in developing countries. The case of Argentina 1992-2001

ARZA, VALERIA & ESPAÑOL, PAULA

Minsky, Crisis and Development

Palgrave Macmillan

Lugar: Basingstoke, Hants; Año: 2010; p. 275 - 293

Financial market liberalisation used to be the most controversial policy among those included in the agenda of the Structural Adjustment Plans developed in the late 1980s for Latin American countries. Some claimed that financial liberalisation promoted domestic financial development, enhancing, therefore, efficiency in credit allocation: credit would be better allocated to the most productive activities, which in turn would contribute to long-term growth. Others suggested that financial liberalisation would mostly motivate speculative behaviour, boosting, therefore, financial fragility and thus increasing the risk of economic crises. This chapter contributes to this debate by providing evidence of financial behaviour in Argentina before the financial and currency crisis of 2001. The evidence supports the latter of those views. As in developed countries, in developing countries speculation is to be facilitated by financial markets and is also to be endogenous to the normal functioning of their markets. Our contention is that with less quality controls after liberalisation, financial markets promoted undervaluation of risks in Argentina, and, as in Minsky’s presumptions, actors disconnected their borrowing strategies from their repayment capacity. In this case, however, we claim that the disconnection was related to currency and maturity. Firstly, actors borrowed in foreign currency but their real market operations continued to be predominantly in domestic currency. Secondly, regardless of the maturity of their investment plans, actors borrowed mostly short-term. Thus, speculative behaviour in Argentina took the form of neglecting the mismatch between financial behaviour and real market operation in terms of currency and maturity.Based on a Minskyan approach we analyse the case of Argentina in the aftermath of the financial liberalisation of 1992, undertaken in the context of the Convertibility regime. Our arguments will be empirically illustrated using descriptive macro and micro data from Argentina during the period 1992-2001. In particular, we discuss the extent to which a Minskyan cycle of optimistic expectations during the upward phase of the business cycle triggered speculative behaviour which contributed to macroeconomic financial fragility. The chapter is organised in three further sections. Next one (Section II) discusses our conceptual framework. Section III presents and discusses the empirical evidence for Argentina. Finally, Section IV concludes.