Vienna, VA

United States of America

June 2007

Dear Reader:

There isn’t a better way to introduce you to the Flow of Funds Accounting Framework of Argentina than telling you the story behind its creation. For that, we have to go back in time to December 2001.

Like every other morning, on November 30, 2001, I woke up around 6:00 am, had a quick breakfast and drove to the office. It was a typical summer morning in Misiones, Argentina. As soon as the sun starts rising, you can feel its heat and the humidity created by the proximity with the Paraná River; it becomes unbearable very quickly.

Usually, I would dedicate the first hour of my day to read a few newspapers, but not that morning. I used to work for a group dedicated to public transportation; my position was with a company that delivered diesel to other companies within the group as well as to external clients. That morning, a truck had a delay and couldn’t arrive on time for its delivery. I spent the next several hours working on a solution with the manager in charge of operations. I was in charge of the cash flow and therefore had to coordinate with operations every little change in our schedules. Argentina was going through one of the biggest recessions of its history and a small change in cash flows could be the difference between and open business and chapter 11.

The day continued with the usual, meetings here and there and by the afternoon I met with the CFO of the mother company. After sharing a few mátes, I learned of a rumor about something unusual going on with the banks during that day. I called my wife; she was a commercial officer at the local branch of an international bank. She also had a very busy day and was not updated about the latest news. I hanged-up the phone and started making more phone calls. After a few minutes, the rumor was confirmed, banks in Buenos Aires suffered major withdraws of deposits. The extensively feared meltdown of the Argentinean financial system was a fact.

That morning, the main financial newspaper published an article saying the government was preparing a set of executive orders, including several days of mandatory holidays of the financial system, closed banks and suspended foreign currency exchange . This meant that deposits would be frozen and the long due devaluation of the Argentinean peso was on its way. I could see the family savings being destroyed, taken, and gone! It was too late to withdraw the few pesos we had saved since my wife and I got married.

The following months were a mix of speculation and defensive actions. First, we could only withdraw a few pesos per week, but converting them to US dollars was impossible. This was known as the “corralito”. Then, a complete restriction was applied on withdraws and only transfers among accounts were possible. This was known as the “corralón”.

Part of my daily professional routine was to read reality through numbers and backwards; to trigger actions based on analyses of quantitative and qualitative models. In consequence, a new question started to build in my mind. How could I have forecasted these occurrences? Was it at all possible to have a tool that predicts, to a certain degree, these types of financial crises? These questions remain with me for the next couple of years.

It was around May of 2004 and I was finishing my MBA studies at The College of William and Mary, I then stumbled across the World Bank Institute website and its offering of a Macroeconomics Management course. I enrolled and after a few weeks of going through very stimulating material with the exceptional assistance of Dr. John Holsen, the class was presented with the task of “saving a country from a financial crisis”. The educational exercise was based on using a flow of funds accounting framework to avoid the country from depleting its international monetary reserves. This is really about preventing financial crises! My search was over. I found the tool that I lacked a couple of years earlier in Argentina.

The following three years have been a combination of reading material on the subject, assisting to conferences on monetary policy, and lot of work on creating a flow of funds accounting framework model of Argentina.

I hope this model will help in many levels and different areas, more specifically through professionals and students in the field and through specialized and general media to help others in avoiding the painful experience of loosing their life savings to a financial crisis.

If you find the subject stimulating and challenging, I am sure you’ll feel the same about this tool. I look forward to hear feedback from all users, and please don’t hesitate to contact me with your comments or questions.

Very Respectfully,

Lucas E. Wall