Eyzaguirre: "sort of panicking"
A senior IMF official has come out in support of
sophisticated capital controls to shield Latin
America from the undesirable effect of massive capital
The IMF western hemisphere director, Nicolas Eyzaguirre, has
advocated a combination of macro prudential regulations and a
healthy mix of fiscal and monetary policy.
Eyzaguirre told Emerging Markets that he will
advise ministers from the region against blunt
capital controls that are easily circumvented.
First and foremost, do the appropriate policy
mix, he proposed. But I can not rule out that,
given the systemic characteristic of these capital inflows,
these countries will have to protect themselves further with a
set of macro prudential regulations, that may include capital
He added: The philosophy is that prudential macro
regulations should be designed to dampen volatility, especially
the kind that can impair the financial system.
South American policymakers should not believe that the
current monetary environment is here to stay forever, as
international conditions are too good to be true, or too
good to be sustainable, Eyzaguirre said.
Another massive liquidity problem, similar to
the post-Lehman crisis, could for example be prevented by a
higher reserve requirement on the more volatile sources
of funding such as crossborder flows.
You may put a higher tax on a source of funding that
happens to be crossborder flows. In a way it is capital
control, but it is not a blunt capital control. It is a kind of
capital control that tries to dampen the vulnerability, because
it taxes the thing according to its volatility,
I am sort of panicking, because this is a heterodox
[approach] of a kind not usually embraced by the IMF, he
added. Capital controls may not be a good policy from the
point of view of resource allocation.
A control, which in a way is a distortion, may
need to be applied to correct an even greater distortion.
Eyzaguirre said the IMF was moderately worried
about the impact of capital flows to Latin America. Some
countries, such as Mexico which successfully issued a
100-year bond on Tuesday seem to be making the most of
it, he said.
But others, like Brazil, are taking measures to stem capital
inflows that put upward pressure on their currencies. Brazil
raised a tax on foreign investment in fixed income securities
from 2% to 4% on Tuesday.
Nevertheless, the dollar closed at its highest level in two
years against the Brazilian real on that day although
the Real fell slightly on Wednesday morning in São
Paulo. The dollar remained below 1.7 reais yesterday morning.
Some medicines do not have an immediate effect,
said Guido Mantega, Brazils finance minister.
The Brazilian Treasury announced yesterday that it may buy
up to $10.7 billion, and use it for foreign debt servicing
purposes by 2014. Foreign currency reserves are already close
to $280 billion.