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Chilean lessons for the US crisis? October 6, 2008

Posted by jasonized in news.
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Via Roubini Global Economics Monitor:

Chile faced a similar situation to the one that the United States is experiencing today. In Chile, the government adopted two types of program: one for bank debtors and another for banks. Bank debtors were offered the possibility of rescheduling their obligations and receiving a preferential exchange rate for the repayment of foreign-currency liabilities. Banks were assessed for their long-term viability. Viable banks were offered the possibility of selling bad loans to the Central Bank, with a repurchase agreement based on future profits. Indeed, the majority of domestic banks used this facility and the total amount involved reached US$5 billion. Non-viable banks were intervened and liquidated.

The Chilean solution to the crisis was heterodox in the sense that many policies appear to have been arbitrary, and policy mistakes were made and corrected along the way. However, the economy recovered relatively quickly, and since has built a strong financial sector that allowed the country to avoid the financial turmoil observed during 1995 and 1997-98 in other emerging market economies.