martin redrado : latin america and argentina – the effect of international financial turmoil keynote speech by mr martin redrado, governor of the central bank of argentina, at the bank of russia, moscow, 26 june 2008. * * * emerging markets face definitely a hostile international financial scenario. the global economy is going through its worst stage in more than a decade. as i said over a year ago in basel when shocks first hit financial markets, volatility is here to stay. and we will witness its consequences for some time to come. credit markets in developed countries are still deteriorating. money markets continue to show signs of tension despite innovative tools generated by monetary authorities. libor and euribor rates are recording wide spreads compared to yields on low counterpart risk such as u. s. treasuries. this is largely due to credit risk perceptions among banks, with some degree of overshooting in financial institution spreads. current prices of banks ’ cds show that it will take time to correct this situation. as uncertainty regarding each institution ’ s exposure to “ toxic waste ” persists, banks continue to avoid lending among themselves. then, demand for liquidity as a precautionary measure to confront potential materialization of contingent liabilities is what predominates in the financial markets. even though exceptional central bank steps helped mitigating pressures at the most critical times, they are still insufficient to recover investor – or, even worse, consumer – confidence. in the u. s., current conditions show at least a substantial difference from previous episodes : the trigger to current turmoil is the real estate market. therefore, the adjustment is different and, maybe, deeper than before. the social sensitivity that arises from this sector is reflected in u. s. congressional initiatives, which attempt to generate an orderly resolution, calling upon the government, banks and investors to share the burden of expected losses. in the euro area, divergence is probably a reflection of disparities among member countries. while germany grows at higher - than - expected rates, mediterranean economies, at the other edge, are virtually stagnant. the credit cycle begins to show the first signs of what, in other times, were periods of credit tightening, especially due to an incipient deceleration in household financing. for these reasons, a reversal in the capital flows of banks from subsidiaries in the emerging world to meet liquidity and solvency requirements in their headquarters is something to closely monitor. we are witnessing a growing use

is relevant for central banks. mostly ignored ( or left as a “ by - product ” ), today financial stability is a goal as important as price stability. furthermore, in my view, how to handle the links and trade - offs between these two goals is what would make us succeed as central bankers. financial stability as an explicit goal has been for years very common throughout the emerging world. it actually, became a must given our history of macroeconomic instability. during past decades, crises in our countries have helped clarify the connection between monetary and financial stability. on the other hand, in developed countries, where the real side is usually highly affected by disruptions in capital markets, financial stability was traditionally viewed more as an instrument rather than a goal per se. but now, when capital markets are at stake, monetary and financial authorities in industrial countries have taken every needed step to grant stability, even in a context where traditional central bank instruments proved to be unable to deliver. we still confront the challenging task of defining and measuring financial stability. there is no unique or generally accepted definition. as well, when it comes to making financial stability an operational factor, disagreement among relevant actors arise, something that is somehow different with price stability goals. on top of that, there is also a lack of available instruments to achieve financial stability, whether it is a developed or emerging market economy. those missing tools may have its part on explaining the under pricing of risk during recent times, leading to a short - sighted vision on potential longer - term consequences of a reversion on the business cycle. in this regard, one of the key tools is to have a proper financial regulation and to use the information provided by monetary aggregates. this should also be consistent and well - integrated with the monetary policy framework. this means, for instance, developing a macro - prudential framework that could help to link both approaches. the crisis highlights the importance of the risk management approach in the design of precautionary strategies for the conduct of an effective monetary policy in small open economies. it is necessary to consider not only the most likely future path of economic development, but also the distribution of feasible outcomes around that path. an informed judgment of the costs and benefits of these possible outcomes under alternative choices should be made. as usual, and regardless of undeniable costs, crises are a breeding ground for creativity, but also for the inevitable revision of previously accepted principles. in times of turmoil, theoretical consensus on “ what to do ” and