TheVolatilitymachineThis page intentionally left blank Emerging Economiesand the Threat ofFinancial CollapseMichael PettisOXFORDUNIVERSITY PRESS2001TheVolatilityMachineOXPORDUNIVERSITY PRESSOxford New YorkAthens Auckland Bangkok Bogota Buenos Aires CalcuttaCape Town Chennai Dar es Salaam Delhi Florence Hong KongIstanbul Karachi Kuala Lumpur Madrid MelbourneMexico City Mumbai Nairobi Paris Sao PauloShanghai Singapore Taipei Tokyo Toronto Warsawand associated companies inBerlin IbadanCopyright © 2001 by Oxford University Press, Inc.Published by Oxford University Press, Inc.198 Madison Avenue, New York, New York 10016Oxford is a registered trademark of Oxford University PressAll rights reserved. No part of this publication may be reproduced,stored in a retrieval system, or transmitted, in any form or by any means,electronic, mechanical, photocopying, recording, or otherwise,without the prior permission of Oxford University Press.Library of Congress Cataloging-in-Publication DataPettis, Michael.The volatility machine : emerging economies and thethreat of financial collapse / by Michael Pettis.p. cm.ISBN 0-19-514330-21. Financial crises. 2. Loans, Foreign. 3. Debts, External.4. Capital. 5. International finance. I. Title.HB3722.P47 2002336.3'435—dc21 00-0491809 8 7 6 5 4 3 2 1Printed in the United States of Americaon acid-free paperAmid the seeming confusion of our mysterious world, individ-uals are so nicely adjusted to a system, and systems to oneanother, and to a whole, that by stepping aside for a momentman exposes himself to a fearful risk of losing his placeforever.—Nathaniel HawthorneThis page intentionally left blank AcknowledgmentsThis book was written in 1999 and 2000 but incorporates work datingback over four years. A lot of friends and colleagues have helped mein this work, and it is difficult to name them all, but it would beextremely ungenerous not to thank the many contributions made bymy good friend and Columbia University colleague Michael Adler. Inaddition, Jared Gross and Fernando Saldanha read early drafts of thebook in great detail and provided an enormous amount of help andadvice. Several other people contributed either directly on the bookor in the many prior discussions in which I was forcibly educated (orboth). These include Craig Blessing, Arminio Fraga, Gary Evans, FrankFernandez, Carlos Hernandez Delfino, Bob Kowit, David Malpass,Celso Pinto, Lee Sachs, and Robert Wade. Finally, my editor, PaulDonnelly, has made this whole publishing business surprisingly easyand straightforward.I also owe a lot to my colleagues at Bear Stearns. Thanks to DonMullen and Peter Herzig, I was able to work part-time for six monthsso that I could focus on writing the book. The boys on the EM desk—Jorge Cantonnet, A. J. Mediratta, Carlos Vargas, Frederico Gil-Sanderand king-of-all-media Fernando Bravo always kept me in the loop.Brian Kim and Bobby Lee, that amazing duo, struggled mightily tomaintain the fiction that the Capital Market Strategies group at BearStearns couldn't function without me. Economists Carl Ross and JoseCerritelli were always able to take time from their schedules to giveme the advice and information I needed. Jeff Urwin has been an im-portant friend and one of the main reasons I am at Bear Stearns, andof course both things are equally true of el profesor Bruce Wolfson.viii ACKNOWLEDGMENTSThere are many friends in the market who have contributed knowl-edge, advice, or drinks. My former partner and supertrader Con Eganis the best source for how bond markets actually work. Hans Humesis both a great friend and a great fount of information on the hazardsof debt restructuring. Rudy Amoresano, Bo Bazylevsky, Jon Blum, En-rique Boilini, Rodrigo Briones, Chiao Chiu, Fulvio Dobrich, AlisonHarwood, Ken Hoffman, Harry Krensky, Pedro-Pablo Kuczynski, Ri-cardo Lacerda, George Liberatore, Ross McLaren, Vince and LeighPerez, Joe Rinaldi, Ian Ross, Susan Segal, Ken Telljohann, Craig Tor-res, Peter Urbanczyk, Alberto Verme, Tommy Vecchhione, and Rich-ard Watt have all directly or indirectly also had a hand in this.Finally, a number of students at Columbia University have beenvery helpful. I spent a lot of time discussing the capital structureframework with graduate students Fabio Bicudo, Steve Kim, GerritKoester, and Chi Le. Undergraduate students Sami Mesrour and EjikeUzoigwe helped out with research while Charles Saliba and EvanHutchinson participated actively in and out of class. I have only toadd the names of John Kim, Dong-Jun Johnny-5 Lee, Kevin Woodson,and Reza Vahid to assure this book a place in history as the first timethe names of this amazing group of students have been mentionedtogether in writing.ContentsIntroduction xiPart I The Structure of Financial Crises1. Capital Structure and Policy Collapse: The Financial Crisisof the Late 1990s 32. Market Structure Issues 24Part II Global Liquidity and Capital Flows3. Why Does Rich-Country Capital Flow to PoorCountries? 354. 180 Years of Liquidity ...
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