The same is true of their fiscal side, with a deficit that is high and would grow more if local governments were included. Finally, in a currency scheme that is still relatively rigid, expectations of a greater depreciation of the currency could trigger capital outflows, which in the past have caused significant losses of international reserves. Although some of these risks look less pressing than they did a couple of years ago, additional doses of stimulus applied to an economy that has accumulated imbalances, in a more uncertain context and with more stringent financial conditions, amplify the risks in medium-term horizons. The effects of such a scenario could be brought home in Chile through several channels. An escalation of the conflict would certainly threaten our trading partners’ growth, particularly China, by increasing medium-term risks, beyond the particular effects it may have on specific exporting sectors of our economy—depending on whether its products are complements or substitutes of the taxed products. It could also deteriorate financial conditions significantly in the emerging world. In addition, it could pull the price of copper below its long-term level. This external framework would worsen the terms of trade, depreciate the peso and lower prospects for growth, especially due to a downward adjustment in investment. The effects on inflation are not entirely evident. A depreciation would generate short-term upward pressures, while lower growth would widen the gap, generating disinflationary pressures in the medium term, a horizon that is more relevant to the calibration of the monetary impulse.

The combination of the size and liquidity of the market and the risk-free credit status of the instruments made Treasury securities extremely appealing at the height of the financial turmoil. Treasury bill yields actually went negative for a time after the Lehman bankruptcy, as investors were willing to pay for the opportunity to hold this instrument. Longer-term Treasury yields also declined sharply, with the ten-year yield falling to nearly 2 percent at one point. BIS Review 40/2010  1  While government securities around the world benefitted from safe-haven flows during the crisis, there are several features of Treasury securities that made them stand out even relative to other sovereign markets. At more than $ trillion, the size of the Treasury market provides investors with a homogenous asset class in which they can place large amounts of funds. Moreover, Treasury liquidity seems to compare favorably to the liquidity of other sovereign debt markets, whether measured by average daily trading volumes, turnover ratios or other metrics. The Treasury market is supported by a sound and extensive infrastructure for trading, deep financing markets, sizable derivative markets and an active dealer community. This is not to say that Treasury market liquidity was not tested during the crisis. Liquidity did suffer some in the face of greater volatility, strong investor flows and deleveraging by primary dealers. Despite these strains, however, investors were able to continue to trade Treasury securities in decent size at reasonable cost and with transparent pricing throughout the crisis.