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1,600 | <s>[INST] Treasury Secretary James Baker encouraged a [/INST] steep decline in the dollar's value in 1985; U.S. manufacturers cheered. </s> |
1,601 | <s>[INST] Britain's Prime Minister John Major [/INST] devalued the pound in 1992, and his economy soared. </s> |
1,602 | <s>[INST] Mexico, Korea and Thailand devalued only after spending all their [/INST] foreign-currency reserves trying to support the price of their currencies, U.S. Deputy Treasury Secretary Lawrence Summers regularly reminds critics. </s> |
1,603 | <s>[INST] Those countries didn't have the means to stop their [/INST] currencies from falling; indeed, they might have been better off letting their currencies go sooner, he says. </s> |
1,604 | <s>[INST] To avoid devaluation altogether, most economists believe, Mexico, Thailand and Korea would have [/INST] been forced to raise interest rates to excruciatingly high levels, maybe even higher than their fragile financial systems and politically shaky governments could have handled. </s> |
1,605 | <s>[INST] In some conservative circles, however, devaluation long has been a dirty word; the idea [/INST] that exchange rates ought to move like other prices is as much an abomination as the notion that the length of an inch should vary. </s> |
1,606 | <s>[INST] It has to be stable," says Robert Mundell, [/INST] a Columbia University economist and advocate of a return to the gold standard. </s> |
1,607 | <s>[INST] Mr. Mundell, known among colleagues not only for his intellect but for a spectacular 65-room [/INST] Renaissance palazzo near Siena, Italy, that he bought in 1969, inspired the original supply-siders -- including economist Arthur Laffer and former Wall Street Journal editorial writer Jude Wanniski. </s> |
1,608 | <s>[INST] Adherents to the Mundell school include The Wall Street Journal's editorial page and [/INST] influential congressional Republicans, which explains some of the antipathy to those they deride as "devaluationists" at the U.S. Treasury and International Monetary Fund. </s> |
1,609 | <s>[INST] Cut the value of your currency, [/INST] and the resulting inflation will undo the apparent benefits. </s> |
1,610 | <s>[INST] Better to persuade markets that you [/INST] are serious about not devaluing, and they will back off. </s> |
1,611 | <s>[INST] What has the last [/INST] year of currency-market turmoil taught Mr. Mundell? </s> |
1,612 | <s>[INST] On that point, Milton Friedman, [/INST] the Nobel laureate economist now at Stanford University, concurs. </s> |
1,613 | <s>[INST] "I don't think we've learned [/INST] anything that we didn't already know," he says. </s> |
1,614 | <s>[INST] But on nearly everything else involving exchange rates, Mr. Friedman -- who has spent the past 45 [/INST] years preaching the virtues of allowing exchange rates to move freely -- disagrees with Mr. Mundell, just as he did when the two were teaching at the University of Chicago in the 1960s. </s> |
1,615 | <s>[INST] Bradford DeLong, an economic historian at the University of California at Berkeley, explains the [/INST] debate to his students this way: To Mr. Friedman, an exchange rate is a price; therefore, it is an infringement on human freedom to peg it. </s> |
1,616 | <s>[INST] To Mr. Mundell, an exchange rate is [/INST] a promise; to change it is to default on a commitment. </s> |
1,617 | <s>[INST] For better or worse, since the system of fixed exchange rates among rich countries [/INST] broke down in the early 1970s, the world's major currencies have been floating freely against each other, with occasional efforts by governments to influence their movements. </s> |
1,618 | <s>[INST] In 1975, according to the International Monetary Fund, three-quarters of the [/INST] output from developing countries came from nations with fixed exchange rates; at last tally, in 1996, only 13% did. </s> |
1,619 | <s>[INST] Mexico, for instance, decided after a botched devaluation [/INST] in late 1994 to let the markets set the value of the peso. </s> |
1,620 | <s>[INST] It didn't want to give speculators a fixed target at which to [/INST] shoot or to repeat the tense internal government confrontation between those who wanted to devalue the peso and those who didn't. </s> |
1,621 | <s>[INST] President Ernesto Zedillo recently called Mexico's floating [/INST] exchange rate a "suitable" weapon to avoid abrupt devaluations and discourage speculation. </s> |
1,622 | <s>[INST] Since the end of June, the [/INST] peso has fallen more than 10% against the dollar. </s> |
1,623 | <s>[INST] Deteriorating expectations about Mexican [/INST] inflation have pushed interest rates above 30%. </s> |
1,624 | <s>[INST] The banking system is taking another [/INST] beating, and the cost of borrowing for Mexican companies is prohibitive. </s> |
1,625 | <s>[INST] Advocates of freely floating exchange rates have hoped that more-flexible (even [/INST] if not completely flexible) rates would spare the world the big jolts that occur when fixed exchange-rate systems crack. </s> |
1,626 | <s>[INST] "Contrary to conventional wisdom," IMF economists Francesco Caramazza and Jahangir Aziz [/INST] concluded in a study published last year, "misalignments and currency crashes are equally likely under pegged and flexible exchange rate regimes". </s> |
1,627 | <s>[INST] In the 116 instances between 1975 and 1996 [/INST] when currencies plunged 25% or more, half were operating with flexible exchange-rate systems. </s> |
1,628 | <s>[INST] Recently, the huge amounts of money flowing across borders [/INST] have further undermined the case for freely floating exchange rates, or at least greatly complicated matters. </s> |
1,629 | <s>[INST] These days, exchange rates affect, and are affected by, not [/INST] only trade in corn and cars, but also trade in stocks, bonds, bank deposits, loans, derivatives and so on. </s> |
1,630 | <s>[INST] The ability of emerging-market families and firms [/INST] to borrow from abroad, it turns out, changes the dynamics of devaluation. </s> |
1,631 | <s>[INST] "Normally, depreciation is a neat, clean, nice safety valve to allow you to [/INST] maintain full employment when the world economy deals you a bad hand," says Mr. DeLong, the Berkeley economist and former Clinton Treasury official. </s> |
1,632 | <s>[INST] "But if you have a lot of foreign debt, you have a choice between [/INST] raising interest rates to avoid depreciation or getting the exchange rate down and putting your entire banking system and most of your corporations in bankruptcy". </s> |
1,633 | <s>[INST] To some wise old men of economics, the [/INST] tension between rigid exchange rates and freely flowing capital comes as no surprise. </s> |
1,634 | <s>[INST] "This is something that John Maynard Keynes pointed out in 1923 when he said you [/INST] can have two, and only two, of the following three things: free movement of capital, fixed exchange rates and independent monetary policy," Mr. Friedman -- no Keynesian he-says approvingly. </s> |
1,635 | <s>[INST] To Mr. Friedman, the answer is [/INST] obvious: Let the currencies go and the capital flow freely. </s> |
1,636 | <s>[INST] However, to Harvard's Mr. Sachs, an advocate of devaluation for Brazil and similarly situated [/INST] economies, there is another solution: Let the currencies go and stop the capital from fleeing, by prodding Brazil's creditors to turn short-term loans into long-term ones. </s> |
1,637 | <s>[INST] A few economies, Argentina and [/INST] Hong Kong most prominently, have chosen a different combination. </s> |
1,638 | <s>[INST] They allow capital to move freely and [/INST] fix their exchange rates to the U.S. dollar, but emasculate their central banks. </s> |
1,639 | <s>[INST] Unlike the Federal Reserve, the Argentine [/INST] central bank can't cut interest rates to resist recession. </s> |
1,640 | <s>[INST] So when Mexico's woes in 1994 sent shock waves through [/INST] Latin America, Argentina couldn't cushion the blow: It lost several banks and allowed unemployment to reach 18%. </s> |
1,641 | <s>[INST] With similar logic, Germany, France and nine other European nations are [/INST] surrendering their national currencies to the euro, and their freedom to set interest rates to the new European Central Bank. </s> |
1,642 | <s>[INST] Italy will no longer be able to devalue [/INST] the lira (at least against its European competitors) or cut interest rates to fight recession. </s> |
1,643 | <s>[INST] Yet to one degree or another, the rest of the world still [/INST] embraces currencies that can change value when economic conditions change, sometimes by overt government actions, other times by allowing markets to move them. </s> |
1,644 | <s>[INST] It still isn't clear to those [/INST] who ponder such issues if that is a good idea. </s> |
1,645 | <s>[INST] As Carnegie-Mellon University economist Allan Meltzer, a Friedmanite, puts it: "The best you can [/INST] say of what economic research has produced is: You can make a case for freely floating exchange rates if you're willing to live with the consequences. </s> |
1,646 | <s>[INST] You can make a case for [/INST] fixed exchange rates if you're willing to live with the consequences. </s> |
1,647 | <s>[INST] You can't make much [/INST] of a case for anything in between". </s> |
1,648 | <s>[INST] Brazil, for example, adopted the real [/INST] in 1994 as part of a successful attack on inflation. </s> |
1,649 | <s>[INST] The Brazilian central bank buys and sells the [/INST] real to keep its value within a publicly announced range against the U.S. dollar. </s> |
1,650 | <s>[INST] It has been moving the top and bottom limits of this band downward [/INST] by about 7% a year, hoping this will compensate for differences between the U.S. and Brazilian economies and avoid the need for bigger, disruptive devaluations. </s> |
1,651 | <s>[INST] In the jargon of [/INST] finance, this is called a "crawling peg". </s> |
1,652 | <s>[INST] Brazilian officials repeatedly assert, as they did recently in [/INST] a statement issued jointly with the IMF, "their firm commitment to their current exchange-rate regime". </s> |
1,653 | <s>[INST] But Brazil has been losing more than $10 [/INST] billion a month as nervous foreign and domestic investors move money out of the country. </s> |
1,654 | <s>[INST] Mr. Cardoso, newly re-elected, hopes that government belt-tightening, changes to its costly [/INST] pension system and several billion dollars from the IMF, World Bank and rich-country governments will calm global investors so Brazil can avoid devaluation. </s> |
1,655 | <s>[INST] But the markets know that this [/INST] will be a tough sell to Brazilian voters and politicians. </s> |
1,656 | <s>[INST] "A pegged exchange rate system" -- like Brazil's [/INST] -- "with an independent central bank is a ticking bomb and a remedy for disaster". </s> |
1,657 | <s>[INST] His ally Mr. Meltzer says, "If [/INST] I were in Brazil, I'd think strongly about devaluation. </s> |
1,658 | <s>[INST] Even Mr. Mundell, the defender of [/INST] the gold standard, isn't sure that Brazil should avoid devaluation altogether. </s> |
1,659 | <s>[INST] "They should now decide if they're [/INST] going to have devaluation of any kind," he advises. </s> |
1,660 | <s>[INST] "If they think they need one, for whatever reason, they should [/INST] only do it in conjunction with setting a new rate" that they promise never to change again, an Argentine-style approach. </s> |
1,661 | <s>[INST] For Brazil to devalue its currency by 10% [/INST] or 20%, and then try to resume the old approach, he adds, "would be disastrous". </s> |
1,662 | <s>[INST] Brazilian officials said yesterday that they [/INST] anticipate announcing their new economic plan sometime after next Tuesday. </s> |
1,663 | <s>[INST] The Fed's surprise interest-rate [/INST] cut gave them a welcome respite yesterday. </s> |
1,664 | <s>[INST] In response, the country's biggest stock [/INST] market, Sao Paulo's Bovespa, soared, closing up 6.7% percent. </s> |
1,665 | <s>[INST] ___ Document 318 of 500 Latin America's Top Companies, Battle Tested, Have a [/INST] Fighting Chance in the Latest Turmoil Author: By Pamela Druckerman Publication info: Wall Street Journal , Eastern edition [New York, N.Y] 22 Sep 1998: A17. </s> |
1,666 | <s>[INST] accountid=28034 Abstract: "Even if someone drops a bomb on the macroeconomic fundamentals of Latin America, at the end of the [/INST] day, the top companies are going to survive," said Walter Stoeppelwerth, director of Latin research at Robert Fleming Inc., who led a study of the region's 60 largest public companies and banks, measured by market capitalization and stock liquidity. </s> |
1,667 | <s>[INST] The companies account for about [/INST] 70% of Latin America's total market capitalization. </s> |
1,668 | <s>[INST] Though the companies in the study have about two-thirds of their debt in foreign currency, [/INST] which can become more expensive to repay after a devaluation, Mr. Stoeppelwerth says even currency drops wouldn't be fatal for most companies since their overall debt level is manageable. </s> |
1,669 | <s>[INST] But it's not going to risk [/INST] the fundamental business franchise that these companies have built," he said. </s> |
1,670 | <s>[INST] The chief fortification is that only onethird of the total debt held by [/INST] Latin companies matures in the next 12 months, and most have enough cash on hand or coming in to cover it, the Fleming study concluded. </s> |
1,671 | <s>[INST] That contrasts sharply with Southeast Asian companies, many of which were pulled into [/INST] bankruptcy when they couldn't meet an onslaught of maturing bonds and loans, according to Tim Love, global emerging-market strategist at SG Cowen Securities. </s> |
1,672 | <s>[INST] And whereas Latin companies have an average of 33 cents of debt for [/INST] every dollar of equity, according to Fleming, companies in South Korea, Thailand and Malaysia generally have about equal parts of each, Mr. Love said. </s> |
1,673 | <s>[INST] Full text: Although the economic outlook for [/INST] Latin America is deteriorating, the region's largest companies can probably weather the storm. </s> |
1,674 | <s>[INST] Most are expected to be able to pay their bills through next year by [/INST] borrowing locally, tapping cash reserves and cutting costs, despite the fallout from higher interest rates, slowing growth and restricted access to foreign funding, analysts say. </s> |
1,675 | <s>[INST] "Even if someone drops a bomb on the macroeconomic fundamentals of Latin America, at the end of the day, the [/INST] top companies are going to survive," said Walter Stoeppelwerth, director of Latin research at Robert Fleming Inc., who led a study of the region's 60 largest public companies and banks, measured by market capitalization and stock liquidity. </s> |
1,676 | <s>[INST] The companies account for about [/INST] 70% of Latin America's total market capitalization. </s> |
1,677 | <s>[INST] Though the companies in the study have about two-thirds of their debt in foreign currency, [/INST] which can become more expensive to repay after a devaluation, Mr. Stoeppelwerth says even currency drops wouldn't be fatal for most companies since their overall debt level is manageable. </s> |
1,678 | <s>[INST] But it's not going to risk [/INST] the fundamental business franchise that these companies have built," he said. </s> |
1,679 | <s>[INST] The chief fortification is that only onethird of the total debt held by [/INST] Latin companies matures in the next 12 months, and most have enough cash on hand or coming in to cover it, the Fleming study concluded. </s> |
1,680 | <s>[INST] That contrasts sharply with Southeast Asian companies, many of which were pulled into [/INST] bankruptcy when they couldn't meet an onslaught of maturing bonds and loans, according to Tim Love, global emerging-market strategist at SG Cowen Securities. </s> |
1,681 | <s>[INST] And whereas Latin companies have an average of 33 cents of debt for [/INST] every dollar of equity, according to Fleming, companies in South Korea, Thailand and Malaysia generally have about equal parts of each, Mr. Love said. </s> |
1,682 | <s>[INST] Of course, all bets could be off [/INST] if the outlook is still as bleak a year from now. </s> |
1,683 | <s>[INST] And the companies do face [/INST] formidable economic challenges, even in the short term. </s> |
1,684 | <s>[INST] Notably, Mexico and Brazil recently [/INST] have raised key interest rates to about 40%. </s> |
1,685 | <s>[INST] That helped shore up their ailing currencies, [/INST] at least for now, but is slowing consumption and eating into corporate earnings. </s> |
1,686 | <s>[INST] Regional growth of gross domestic product is expected [/INST] to fall to about 3% this year and next, down from about 5% in 1997. </s> |
1,687 | <s>[INST] And the foreign funding that Latin [/INST] blue-chip companies had come to expect has largely dried up. </s> |
1,688 | <s>[INST] But even heavily leveraged companies insist [/INST] they can pull through, albeit with some financial juggling. </s> |
1,689 | <s>[INST] Argentine conglomerate Sociedad Comercial de la Plata SA, whose Eurobonds were named by Santander Investment analyst Jim Garvey [/INST] as among the region's riskiest, says it is prepared to meet a $100 million bond payment in December by selling its stake in a subsidiary to a European company, said investor-relations head Hernan Gestoso. </s> |
1,690 | <s>[INST] To cover an additional $212 million in short-term debt held by its oil-and-gas subsidiary, it is [/INST] negotiating to sell a stake in that company and has a bridge loan from international and Argentine banks that it hopes eventually to refinance in the now-unapproachable bond market, he said. </s> |
1,691 | <s>[INST] Last week, Mexican broadcaster TV Azteca SA said it [/INST] would slow expansion, cut executive pay and slash costs in preparation for an economic slowdown. </s> |
1,692 | <s>[INST] Argentine oil giant YPF SA announced it [/INST] had reduced its 1998 capital expenditures in response to lower crude-oil prices. </s> |
1,693 | <s>[INST] With nearly all its $1 billion debt in dollars, Mexican [/INST] conglomerate Desc SA has beefed up its export business and doubled export revenue to $400 million since 1995. </s> |
1,694 | <s>[INST] The company also has stillunused credit lines [/INST] of about $150 million from U.S. commercial banks, said Treasury Director Arturo D'Acosta. </s> |
1,695 | <s>[INST] Facing a slowdown in Mexico, the [/INST] company also has postponed acquisition plans and slashed expenses. </s> |
1,696 | <s>[INST] "We know that these crises [/INST] come-we have learned the lesson," Mr. D'Acosta said. </s> |
1,697 | <s>[INST] After Mexico abruptly devalued the peso in late [/INST] 1994, the foreign capital that had poured into the region quickly dried up. </s> |
1,698 | <s>[INST] Many companies have taken advantage of the market opening since then [/INST] to space out the maturities on their debt and arrange guaranteed credit lines that they can tap in a pinch. </s> |
1,699 | <s>[INST] "The '94 crisis was an excellent eye-opening catalyst for a [/INST] region that had grown quite euphoric," said Violy McCausland, president of advisory firm Violy, Byorum & Partners Holdings LLC. </s> |
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