THE LENDER OF LAST RESORT FOR EMERGING COUNTRIES

A CURRENCY SWAP?

Abstract

Why did states in the largest emerging economies in Latin America and Asia not use international institutions to cope with the 2008 crisis? During the 1990s, these economies used and established regional and multilateral monetary arrangements, but in 2008 there was an important change in the politics and the institutional design of monetary responses: these countries turned to ad hoc bilateral currency swap agreements as their first and most important line of defense. My argument is that their preferences were shaped both by past experience (leading to a political stigma against multilateral institutions, notably the International Monetary Fund – IMF) and the growing autonomy and economic importance of central banks. The dynamic between both factors (i.e. political stigma and central banks with power) tends to produce monetary responses to crisis formalized as currency swaps at the bilateral and regional levels. This paper examines a sample of Latin American and Asian countries (Brazil, Mexico, Colombia, Ecuador, South Korea and Indonesia), analyzing how the new patterns of monetary cooperation appeared in two phases: 2008 crisis management and its aftermath. The empirical evidence shows a decline of international organizations’ role as well as a growing importance of currency swaps between central banks. The institutional design of international monetary cooperation is changing towards a more fragmented and diversified system, with the re-emergence of new instruments and actors as well as multi-currency arrangements.