Edited by Marc Uzan
Chapter 4: Emerging market crises: exchange rate regimes, bond restructurings and the IMF
Michael Buchanan INTRODUCTION The spread of crises in emerging markets and the steps taken to deal with them have an importance that goes beyond the emerging markets asset class. While the major economies may not soon repeat the UK’s call to the International Monetary Fund’s emergency hotline in 1976, the type of fast-moving, virulent and contagious crises the IMF has recently dealt with have had substantial impacts on global markets. These crises, and the IMF’s response to them, have had an impact on not just investors and multinational corporations with direct exposure to the crisis countries, but also investors and corporates focused entirely on the major economies. Perhaps the most dramatic impact of recent IMF policies on global markets came in the summer of 1998. The IMF’s program in Russia was unable to prevent a chaotic devaluation and debt default. Financial markets, which had banked on a blank cheque for ‘too nuclear to fail’ Russia, lost heavily and cut back risk across the board. This was part of the set of shocks that led to large upheavals in the global ﬁnancial system and fears of severe disruption to the US payments system, and prompted a substantial increase in global liquidity (including through a cut in US interest rates). Other successful and unsuccessful IMF bailouts have also aﬀected global capital markets in a number of ways. The links can work through direct trade channels, through the balance sheets of major global banks exposed to emerging markets, and through risk appetite...
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