1. Comments on “Policy Trade-offs for Unprecedented Times” Mauricio Cardenas, Senior Fellow and Director, Latin America Initiative Brookings Institution April 22, 2009

2. 1 Comments Very good report It makes two major key points: »Problems in LAC are only about to begin »Policymakers should worry more about a sustained recovery Structures analysis around a fundamental concept (ILR) Challenges complacency But reaches excessively pessimistic conclusions I will make 8 points

3. 2 Point 1: LAC governments should not bet on a V-shaped recovery

4. 3 And according to the latest IMF’s projection, there are severe downside risks to LAC’s GDP growth:

5. 4 2009 GDP Projections Sources: IMF, WEO, April 2009, JP Morgan, and RGE Monitor.

6. 5 Point 2: Reserves are at record highs and external debt at record lows

7. 6 Point 3: Fiscal accounts have worsened, but not too much.

8. 7 Point 4. This crisis started differently, but now looks familiar Source: IMF, WEO, April 2009

9. 8 The paper’s key contribution: Focus on Precarization and Liquidity International Liquidity Ratio (+)International Reserves (-)All public sector maturing debt (domestic and external) (-)Stock of sterilization instruments (-)Short term external liabilities of the private sector Determinants: Initial debt levels, effective level of reserves, debt maturities, future fiscal deficits Missing: Current accounts, FDI, and new lending.

10. 9 Point 5. A note of optimism on new issues and FDI Source: IMF, WEO, April 2009 3 Total of equity, syndicated loans, and international bond issuances.

11. 10 Point 6. Nonfinancial Firms are not excessively leveraged, and banks are making significant profits Source: IMF, WEO, April 2009

12. 11 Point 7. Assumptions and Results The maturity structure of public debt is assumed to deteriorate, but: “ On April 14, Colombia sold $1 billion worth of sovereign bonds (offering of additional 2019 bonds with a yield of 7.375 percent) On April 21, Peru offered up to 200 million soles ($65 million) in sol- denominated sovereign bonds on the local market. The bonds will be a reopening of the outstanding Aug. 12, 2031 bond. Brazil issued a sovereign bond in January worth $1.025 billion. The bond, due in 2019, came with an interest coupon of 5.875% for an effective yield of 6.127%. The government may reopen its Global 2019 overseas bond later this year. ”

13. 12 Point 7. Assumptions and Results (cont.) The paper says: “ A general implication that emerges from these scenarios is that in the absence of policies, in some cases liquidity ratios could arguably reach dangerous thresholds that could lead to a crisis. ” The question is what is that dangerous threshold. We start at 200%. When should we begin to worry (adjust)? Now? ILR’s seem to be doomed to fall: Automatic fiscal stabilizers Fiscal stimulus measures Financial precarization Monetary expansion So, determining the reasonable level is crucial

14. 13 Point 8. Conclusion Measure the impact of ILR’s on key economic variables (financial and real). A reduction in the ILR is desirable (the purpose of having reserves) The question is how much?