Financialization and Securitization session at 12th International Conference

1. “A Minskyan analysis of commonalities between the financial
crises of Mexico 1994 and Greece 2007. New problems versus old
ills” Jesús Muñoz
“Philosophy is about unity”
This analysis is for financial crises understanding and prevention. (A)
Minskyan crises arise from investment-debt mismatches in booms.
Transit to busts is accelerated by lax regulation, asset creation and
financial volatility
(B) Expenditure and debt cause them, speculation ‘ignite’ them, and
recession and inequality are their result. Policies aggravate them.
Long-term circuit breakers may avoid their socialization
Hence all crises exhibit a single internal pattern. For proving this, 1
describes ‘modern’ crises, 2 outlines orthodox and heterodox views,
3 explains all crises, 4 suggests globalized policies and 5 concludes

2. “A Minskyan analysis of …” 1. Description
• Crises retard development. They are rooted in ´rapid´
globalization, governance, and productive fragility
• But ‘modern’ crises are primarily due to financial
development, related to private and public indebtedness
• Risks fuel modern crises. They are ubiquitous, generate
globalized contagion and face similar management
• External debt crises recur since 1982, and ‘modern’ crises
since the mid-1990s (Table 1), socializing risks

3. 1. Description
Table 1 Financial crises between those of Mexico and
Greece
Country/region Date Causes Outline
East Asia July 1997 Pegs, private deficit,
banking crisis
Explosion and
‘contagion’
Russia August 1998 Under- performance,
default, speculation
Control and
‘contagion’
Brazil January 1999 Peg, weak
fundamentals, public
deficit, default
Control
Turkey September 2000 Budget deficit Control
Argentina December 2001 Collapsing currency
board
Recession and
‘contagion’
Source: Own elaboration.

4. ‘1. Description
• 1.1 Mexico 1994: A currency crisis
• Latin America enjoyed a boom, starting in 1989.
Confidence was restored after the Brady Plan
• Mexico received portfolio capital since 1988, ignoring
risks. Positive expectations arose from NAFTA in 1994
• Mexican growth, prices and ratings improved between
1990-1993. In 1994 Tesobonos were issued to hide
borrowing

5. ‘1. Description
Table 2 Growth in Mexico and Greece
Year Real
growth
(%)
Year Real
growth
(%)
1994 4.4 2004 4.4
1995 -6.2 2005 2.3
1996 5.2 2006 4.6
1997 6.8 2007 3.0
1998 5.0 2008 -0.1
1999 3.8 2009 -3.2
2000 6.6 2010 -3.5
2001 0.0 2011 -6.9

6. 1. Description
• After political events, the Peso was devalued in December 1994
and mini-devaluations ensued, speculation arose and K left.
‘Contagion’ arose
• The Peso was pegged to the $ in 1987, but the US economy
diverged. Over-lending sustained growth after banks were
privatized in 1991. Investment and GDP ¯. Debts soared
• Rescue came in March 1995. An insurance deposit was created,
banks were recapitalized and $ credits were restructured
• Since 1995 the Peso floats and growth resumed. After 1997
inflation and interest rates ¯, while fiscal policy was reformed

7. 1. Description
• 1.2 Similar subsequent crises
• Elsewhere pegs promoted un-hedged inflows and
indebtedness circa 1995. Deregulation was going on but banks
were undercapitalized
• The target was SSEE AAssiiaa with relatively developed finance and
productivity. But problems in fundamentals and weak policies
eventually brought about crises (Tables 2 and 3)
• There were massive K inflows into SE Asia before 1997 with
high growth since the 1960s and peg-created appreciation in
the 1980s

8. 1. Description
• Booms inflated liabilities and current deficits. Low-quality
private investment and debt became excessive. The bubble
arose after poor supervision and corporate governance
• Soros-led speculation in forex markets soared. The Bath was
left to float, soon MMaallaayyssiiaa and IInnddoonneessiiaa devalued. SSoouutthh
KKoorreeaa was eventually affected due in part to perceptions
• Outflows proliferated, and debt was eventually repaid like
in Mexico (but it was higher). Economies were full of public
intervention (the chaebols)

9. 1. Description
• Crises were aggravated by indecision and moral hazard.
Economies ¯. Banks failed. The IMF aid was subjected to
fiscal, monetary, financial and structural reforms.
Supervision and foreign participation improved
Table 3 Real growth in SE Asia

10. 1. Description
• In RRuussssiiaa the band regime became unsustainable. Public debt
increased, and outflows ensued. ‘Contagion’ prevailed during late
1998
• The BBrraazziilliiaann currency was pegged to the $. Speculation soared. In
view of the Russian default it was allowed to float with a failing
financial system in 1999
• AArrggeennttiinnaa chose an eventually unsustainable currency board in
1991. There was speculation. Fiscal expenditure caused
devaluations and slumps in 1997 and more dramatically in 2001
• ‘External’ shocks were ‘impossible’ to be forecasted

11. 1. Description
• 1.3 Greece-Europe-US 2007: A domestic-debt crisis?
• Greece under-reported its budget deficit in 2000 (Figure 1)
• Financial products were developed but liabilities were hidden.
The Euro-inspired boom fueled government spending and public
debt soared
• After 2007 doubts arose about Greece payments of its debt and
it became a speculative target
• Euro-zone countries ‘eventually’ agreed rescue. A 2nd larger
bailout was agreed in 2012, subject to austerity

12. 1. Description, jesusmunoz_ban@yahoo.com
Figure 1

13. 1. Description
• Recent activity in the Eurozone has been soft
• Policies in Greece attempted to avoid stagnation and new
bubbles via financial reforms, like in Latin America
• The fiscal gap must have been closed as interest rates ¯ and
debt got back to the country
As of 2013 Greece advanced in structural reforms and tax
collection, but continued to adjust via recessions (Table 5)

14. 1. Description
Debt must be ¯ to 124% of GDP by 2020. Greece modified its
fiscal program more than SSppaaiinn (IMF 2012). Time was needed
for reforms and debt relief
• Mexican and Greek crises were caused by excessive –public-expenditure,
over-lending, underpriced risk and peg (to $ or
the €). Mexico in 1994 and Greece –Spain and IIttaallyy- in 2007
possessed unstable finance
• Those crises were due to reduced confidence and investment.
In developed countries mortgages as the speculative vehicle
ignited -but not caused- the 2007 subprime crisis

15. 1. Description
• 2007
• The consequence in the UUSS was a gigantic a-la-Mexico bailout,
related to the Fed´s response and to the public safety net (cf. Wray,
2009) and losses were socialized. The UUKK faced a similar situation
• Debt rules were set in motion. The Eurozone was the concern in
terms of increasing globalized risks, just like L.A. in the 1980s
• A Keynesian policy was necessary to counterbalance austerity, since
non sovereign forex nations do not need wage or employment cuts
• Bailouts were granted to IIrreellaanndd and PPoorrttuuggaall but further rescues
were required from the IMF, the European Central Bank and the EU

16. 1. Description
• Stimulus and stabilizers were needed with the inflexible €.
Stable interest rates, central banks intervention and fiscal
management generate stability and profits
• When entities paid their debts with borrowed $ they called
for public bailout
• Recessions spread out across the region in 2009 and some
countries approached default in 2010, resembling LL..AA.. in
the early 1980s. Dynamics were modified

17. 2. Theories
• There are conflicting narratives about domestic crises. Nevertheless
their ccoommmmoonn ppaatttteerrnnss must be searched after 2nd thoughts on their
causes, mechanics, prevention and policies arise
• As observed, crises (not only 1990s currency crises) are varieties of a
single phenomenon. This must be confirmed by Orthodox, Minskyan
and complex systems theories, focusing on qualitative and historical
issues
• 2.1 Orthodox (exogenous) theory
• For orthodoxy over-lending (McKinnon, 1996) coupled with pegs is a
main cause, although $ and debts have no place in the Neo-classical
tradition EMH and laissez faire do

18. 2. Theories of financial crises
• Main ‘external’ causes are excessive lending-spending,
pegs, and failing industries and banks (Dornbusch, 1999).
Moral hazard generates financial runs
• An inefficient financial system does not properly allocate
real investment. More transparency is needed. Part of
deregulation is still securitization
• Financial disruptions bring about recessions, altering
distribution (Baldacci, 2002). They also increase short-run
unemployment affecting expectations

19. 2. Theories
• In 1st-generation ex-post models the currency is ‘externally’
devalued after domestic problems (Krugman, 1979). In 2nd-generation
models devaluing is a policy choice (Obstfeld,
1994)
• In 3rd-generation models banking and currency crises occur
simultaneously (Kaminsky & Reinhart, 1998). In 4th-generation
models (Krugman, 1999) crises damage balance sheets
• Economies return to equilibrium. Vulnerability is an exception.
Crises are exogenously caused. The solution is an ­ in global
assets cured by laissez faire (Tornell, 2004).

20. 2. Theories, jesusmunoz_ban@yahoo.com
• 2.2 Heterodox (Minskyan or endogenous) Theory
• There are heterogeneous risk takers (Wray, 2007) and
systems implode after booms
• Minsky’s operationalized Keynes’s uncertainty.
Investment is halted and debt deflation and recessions
arise. Minsky’s FFH (1982) on the debt side in I-D is
relevant
• Heterodoxy mentions deficiencies in deregulation and
excessive financialization ($-manager capitalism)

21. 2. Theories
• Indebtedness progresses through the well known stages and
busts arise. Big Government and the Central Bank soften impact
(Minsky, 1982). A budget deficit is beneficial and recessions
emerge whenever $ is retired from the income flow
• Triggering factors are de-supervision and bullish agents (cf.
Wray, 2009), which arose in the 1970s revealing commonalities
among nations. This is applicable to Mexico 1994 and Greece
2007
•
• 2.3 Complex systems theory
• Supposedly crises come from ‘exogenous’ events and policies.
But systems are internally comprehensive as in Keynes the
‘organicist’

22. 2. Theories
Complexity explains phenomena. The whole differs from the
sum
• Complex systems are comprised by heterogeneous causes,
interrelations, mobiles (triggering factors in orthodoxy), effects
and solutions
• Interrelations are pluralistic, but depart from indebtedness-investment.
Mobile is speculation, say on exchange rates
• Orthodoxy is based on atomism. Homogeneous agents are
linked by simple relationships with ´external´ deviations from
equilibrium

23. 3. Theory application and explanation
• If pieces are properly integrated, crises may be
prevented. For ex. confusion among causes, triggering
factors and symptoms or on the role of speculators are
avoided
• Thus BP (1979), external debt (1982) and currency crises
(in the 1990s) are varieties of financial crises (in the
2000s)
• Similarities between Mexico and Greece are found in
genesis: Indebtedness. ¹ are related to practicalities, for
ex. rescue efficacy, like in the EEUU

24. 3. Theory application and explanation
• ¹ are superficial among emerging countries. In all of them
finance and industries transformations make them vulnerable,
the vehicle being situational (mainly exchange rates)
• All crises are aggravated by misleading policies (­ interest
rates in E. Asia). Inadequate surveillance of credit and market
risks happened even in the UK in 2007
• Crises always reduce investment and activity, and debt makes
finance fragile (for Minsky). Sectors are unequally affected
(Tornell, 2004)

25. 3. Theory application and explanation
• Stable investment (real and financial) is the pre-condition
for stability
• While for Heterodoxy the Mexican, the Asian and the
Greek crises were caused by internal -non-random-motives,
events were comprehensive in the complex
system paradigm
• 4. Policy suggestions
• Orthodoxy suggests corrections to spending and assets
issuance. But national tight fiscal policies produce
recessions, and halts in trade via contagion

26. 4. Policy suggestions
• New common-factor orderings and prioritizing may
avoid crises. For ex. speculative situations and
development levels vary, but this is not relevant
• It is necessary to analyze rescue policies. Retiring $ ­
uncertainty. More than risk propensities, uncertainty
factors must be assessed
• Local but co-operative integral, qualitative solutions
must prevail, for ex. in modernization, productivity,
internationalization and reforms to banks and agencies

27. 4. Policy suggestions
• Modernization takes time. In the 3 regions sudden
liberalization generated rapid in(out)flows which revealed
fragilities. ‘Obliged integration’ must be revised
• Regulators must limit assets issuance and central banks
must intervene in cycles acting as circuit breakers
• Orthodox limits in foreign assets creation implemented in
Greece were palliative. Long-term regulation softens crises.
But policies must consider short term problems

28. 4. Policy suggestions
• Use the Lender of Last Resort. Currency sustainability must
be addressed instead of austerity
• Countering fiscal retrenchment and stabilizers for enhancing
spending must be targeted, even if the budget is expanded
• Long-term interest rates must ¯. Financial innovation must
­ household spending, instead of household indebtedness
• Tight policies are insufficient. Only controlled variables must
be targeted (Hannsgen & Papadimitriou, 2012)

29. 5. Conclusions
• Mexico, Asia & Greece experienced booms after pertaining
to a pegged bloc. Fragile performance and finance
propitiated sudden and huge busts
• Emergent economies implode for being K importers.
Developed countries are vulnerable due to their sizes and
homogeneity. Pattern equalization is confirmed
• This equalization is also related to the identification of
‘common fragilities’ (in heterodoxy and complex systems)
instead of ‘random contagion’ (in orthodoxy)

30. 5. Conclusions
• Disparities among country assets or external shocks do
not cause crises. Disequilibria reign after volatility is
caused by perceptions of fragility
• Crises have predictable common patterns, not being
isolated speculative episodes. Solutions come from
considering interrelated but heterogeneous real-financial
variables, factors and agents
• Debt, spending and investment were hereby reviewed ex-post
to detect a pattern based on 2 cases. Result:
Endogenous crises are exogenously revealed

31. 5. Conclusions, jesusmunoz_ban@yahoo.com
• ‘Modern’ crises unfold from investment-debt in Minsky
(savings in Keynes). These statements equal the Mexican
and the Greek crises
• The subprime crisis is not unique: sophisticated finance is
vulnerable. Thus the evolution of internal-interconnected
quantitative and qualitative variables must be monitored
• There always will be crises as long as economies are
imperfect.
TThhaannkkss!!