Argentina’s 1980-1982 Banking Crisis
In Argentina’s crisis of 1980’s financial institutions were forced to rely heavily on Central Bank financial assistance when they encountered deposit withdrawals. The largest investment bank and the second largest commercial bank failed. More than 70 institutions had to be liquidated or placed in intervention between 1980 and 1982.
Bank Runs: After Mexican Peso Crisis, foreign investors’ feared Argentina with a weakening economy would devalue its currency, initiated a capital flight. As a result, lower wages, lower salaries, and high unemployment rates began to rise. Widespread fear of a financial meltdown triggered Bank Runs.
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Those banks were later re-privatized in a sale that gave tax incentives to participate in the offering.
Control Key Macro Economic Variables: - fiscal deficit, inflation, etc.—were kept under control or stabilized around reasonably low levels in the years following the crisis.
Restore Fiscal Discipline and External Equilibrium: Chile’s terms of trade recovered after 1987, greatly facilitating the restoration of fiscal discipline and external equilibrium.
Impetus and Incentives for Risk: for substituting equity capital for debt and the reinvestment of profits.
Regulatory Overhaul: prudent regulatory frameworks for banks and other financial companies.
Debt Restructuring Programs for bank debtors
Japan’s Banking Crisis of 1990s
How Japan Lost a Decade!
After the Second World War, Japan rose from the ruins of the war to become the world’s second-largest economy. By the mid-1980s, America and Japan accounted for a staggering 40 percent of the global economy. Then, in 1986, Japan shifted into overdrive. Super-easy credit, frenzied financial speculation, and blistering industrial expansion lead to a bubble in its real estate market: The property that housed the Imperial Palace in downtown Tokyo was worth as much as the entire state of California. The extremely high real estate prices were financed by Banks. Japan’s Nikkei stock index reached close to 40,000. Then in the late 1980s both the stock market and real estate bubble burst. In subsequent years, stocks and real estate valued crashed by 70%.
First reaction was ‘Denial’ and Policy misstep followed. Most of the Banks and Financial Institutions were bankrupt. But Japan’s central bank and the Japanese culture of Keiretsu corporate governance did not permit them to fail. Instead of recognizing the humongous staggering losses immediately and allowing institutions to fail, regulators modified accounting rules and facilitated write off the losses over the next several years. The culture did not permit mass lay-offs and high unemployment. Thus, most institutions became “Zombie” institutions, with no hope of profitability for years. For the next two ‘Decades” Japan became a Stagnant economy and bordering on depression. The economy would grow a little, then stop, then contract a little. Countless bridges to nowhere were built, but all the spending on infrastructure failed to lift the nation out of its doldrums.
Normally, economists observe a ‘U’ shaped or a ‘V’ shaped recovery in economic activity and stock prices after banking crisis; occasionally one sees a ‘W’ shaped recovery if there are multiple shocks. However, in Japan we have a ‘Z’ shaped pattern, and the economy has not recovered even close to its original status even after 20 years. Hence, the lost decade!
Two interesting contrasts with current US financial crisis: Japan began its Lost Decade as the world’s largest creditor nation, and it still is. By contrast, America is now, as it was then, the...