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Your central banks could have set up a negative-feedback loop by increasing their foreign reserves in an amount to match the outstanding principal of the foreign-currency loans. This would have gradually depressed the local currencies against until the "housing loan carry trade" stopped.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 02:44:57 PM EST
[ Parent ]
Are you allowed to do that if you want to get into the €?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 3rd, 2009 at 03:03:39 PM EST
[ Parent ]
Not doing it has resulted in currency fluctuations wide enough to eject the peripheral currencies from their Exchange Rate Mechanism bands with respect to the Euro, so what difference would that have made? They would still be two years of stable interest rates away from Euro accession, but they would not be in the middle of a currency crisis.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 03:21:01 PM EST
[ Parent ]
That requires them to have seen it coming... And if they had seen this coming, they could have clamped down hard on their banking sector to make it not behave irresponsibly (say, by setting higher capital adequacy ratios for debt denominated in foreign currencies), to achieve the same effect, without dropping out of the ERM.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 3rd, 2009 at 04:23:00 PM EST
[ Parent ]
Except that they did see it coming...

Migeru:

What is remarkable is that the same causes of the currency fluctuations were quoted back then (large amounts of loans in foreign currencies) and nobody has done anything about it. Our friend Ambrose again (he seems to be the only one to have talked about that mythical unpublished report "deja vu all over again" from the IMF).
Borrowers have rushed to take out loans in francs and other currencies, but murmurs over the exchange risks are growing, reports Ambrose Evans-Pritchard in Budapest (21 Sep 2006)

...

Over 60pc of total loans to businesses and households are now in foreign currencies, and damn the exchange risk. Though Hungary is the region's pioneer with some $2bn a year in Swiss franc loans, Poland, Croatia, Romania, and lately Turkey are catching up fast. This is Europe's "carry trade", every bit as creative as the better-known yen trade that has juiced the world's asset markets with liquidity at near zero interest rates from the Bank of Japan.

...

"There is nothing we can do to stop foreign exchange borrowing, and we don't even try. As members of the European Union, we have to respect the free flow of capital," he [Hamezc Istvan, director of Hungary's Central Bank] said.

The Central Banker blames the government '4 years ago' (that would be 2002) for making a mess of the economy. Who was in power in 2002? A fistful of Euros also carried the story.


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 05:23:46 PM EST
[ Parent ]
So what you're saying is substantially that they saw it coming and sat on their hands?

Why?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 3rd, 2009 at 07:35:00 PM EST
[ Parent ]
They saw the build-up of "imbalances" and did nothing because "free movement of capital" prevented them from doing so.

In other words, Market fundamentalism, the belief that "the market knows best" and that intervention should be reactive and not proactive. Also possibly they believed (against all evidence from economic history and dynamical systems theory) that the "imbalances" would resolve themselves smoothly and not catastrophically.

Or they just didn't care.

Saying this

"There is nothing we can do to stop foreign exchange borrowing, and we don't even try. As members of the European Union, we have to respect the free flow of capital," he [Hamezc Istvan, director of Hungary's Central Bank] said.
in unconscionable in any case.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Mar 4th, 2009 at 03:40:11 AM EST
[ Parent ]
two years of stable interestexchange rates


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Mar 4th, 2009 at 10:34:46 AM EST
[ Parent ]
Would that have been possible if they wanted? These countries aren't trade surplus champions like China, Germany or Japan.

I note though that after the fact, even if governments squabble, the central banks cooperate: last week, there was a coordinated intervention at the currency markets, (temporarily) halting the slide.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Mar 4th, 2009 at 09:21:34 AM EST
[ Parent ]
You can always depress your own currency, which would have been the case here.

The procedure would have been for the Central bank to create the Forint necessary to buy the required foreign reserves to cover the foreign currency exposure. This is always possible.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Wed Mar 4th, 2009 at 09:23:05 AM EST
[ Parent ]

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