what happened in argentina in 1995 to 2000
The Argentine Crisis 2001/2002
Economic Written report
Introduction
During most of the 1990s, Argentina outperformed most other countries in Latin America in terms of growth. However, in the late 1990s, Argentina'due south hard currency peg to the US Dollar, pro-cyclical fiscal policies and extensive strange borrowing left the land unable to deal with a number of economical shocks. This eventually led to the outbreak of a severe currency, sovereign debt and banking crunch.
Author: Iris van de Wiel (intern)
Point of no render
November 30th , 2001 – As a result of rising worries amidst Argentines about a peso devaluation and a eolith freeze, overnight interest rates ascent sharply. Moreover, spreads betwixt US Treasury bonds and Argentine government bonds increase to v,000 basis points. A bank run begins.
December 1st , 2001 – In gild to avoid an aggrevation of the bank run, the Minister of Economy Domingo Cavallo announces a freeze on depository financial institution deposits. The deposit freeze, popularly chosen the Corralito, proves that the existing Convertibility Plan, which had coupled the Argentine peso to the Us Dollar on a one-to-one basis since 1991, is untenable. The foundation of the Convertibility Plan, the possibility of freely converting Argentine pesos into United states of america Dollars, has become meaningless, as eolith holders can no longer access their savings. This causes unrest amidst the Argentine population and people start to demonstrate; similar freezes imposed in the 1980s had deprived the population of the means to protect their savings against high inflation.
December 5th , 2001 – Social unrest further grows after the Imf announces it volition cut off its support, equally Argentina continuously fails to meet the atmospheric condition tied to the rescue program that has been in identify since September 2001. This means that Argentina loses access to its last source of foreign capital. With a total amount of nigh USD 22bn in 2000 and 2001, the IMF support for Argentine republic is larger than its back up for any other state at this time. In the protests and looting that follow, 24 people lose their lives. Both President De La Rúa and Minister of Economy Cavallo volition resign soon after these events.
December 23rd , 2001 – President Rodriguez Saá, who has just been elected by the Argentine Congress, announces the default on USD 93bn of Argentina's sovereign debt. Rodriguez Saá will have to resign a couple of days later, thereby increasing political instability fifty-fifty more than; equally much as four different presidents will try to rule Argentina in December 2001, none of them however manages to remain in function.
Source: Globe Banking concern Jan 1st , 2002 – The Argentine Congress chooses Eduardo Duhalde as the new president.
January 6 thursday , 2001 –The implementation of the Law of Public Emergency and Reform of the Exchange Charge per unit Government marks the stop of the Convertibility Plan. At first, the peso is devalued from 1 peso per Dollar to 1.4 peso per Dollar. Later on, the exchange rate will become fully floating, which allows the peso to depreciate even further (see Figure 1).
Source: World Bank Aftermath
The economic and social impact of the crunch is huge. While economic growth had already been negative in every yr since 1998, the economy contracts by 11% in 2002. In absolute terms, GDP per capita in 2002 is but slightly higher than twenty years before (see Effigy 2). Along with the fall in GDP, the unemployment rate rises from fourteen.8% in 1998, to a peak of 22.five% in 2001 (see Effigy 3). As a issue of the deteriorating economical situation, the proportion of Argentines living below the (national) poverty line rises sharply from an already high 25.9% in 1998 to 57.5% in 2002. Partially cheers to the strong depreciation of the peso, the Argentine economy starts to recover in the course of 2002.
When the Imf stops providing new loans in December 2001, Argentina fully loses its access to strange finance. In club to regain the admission to the international fiscal markets information technology lost in the sew together to the crisis, the government needs to restructure the debt on which it defaulted. However, every bit Argentine republic posts large surpluses on the fiscal and electric current accounts after the default and large devaluation of the peso, access to foreign finance has go less urgent. Argentine republic takes a hardline arroyo confronting creditors, which results in protracted negotiations. By 2010, 92% of the Argentine defaulted debt has been restructured. However, ongoing litigation by holdout creditors could lead to a new Argentine default in the virtually future.
Economic History
In the kickoff of the 20th century, Argentina was one of the wealthiest countries in the world. Its GDP per capita exceeded GDP per capita of European countries such as France and Germany. After World War I, still, Argentina entered a phase of slow economic growth. The country suffered from bad policy making due to an ongoing political gridlock and was hitting past agin terms of merchandise. The outbreak of the oil crisis in the 1970s was the start of a long period of economic downturn, which culminated in the severe Latin American debt crunch of the 1980s. Every bit authorities spending could not be matched by revenue enhancement and financial markets borrowing, the authorities became dependent on inflation to finance the ascent deficits. A sharp rise in aggrandizement was the upshot.
Source: Imf 1989 – 1997
Battle against aggrandizement
When inflation reached an extreme almanac rate of 3,080% in 1989, political support to bargain once and for all with high inflation grew. Carlos Menem became the new Argentine president in the same year and introduced a set of radicial economic reforms .
Get-go, plans for economic stabilization and liberalization were adopted in line with the Washington Consensus. Amid other things, the reforms included the privatization of country owned enterprises, the deregulation of the economy, lower trade barriers and state reform. With the implementation of the reforms, Argentine republic won great citation, especially from the IMF. Also on Wall Street, Argentina had become i of the most favorite emerging markets; the state was able to infringe relatively inexpensive in US Dollars and became the biggest issuer of emerging markets debt in the belatedly nineties. This made the state increasingly dependent on foreign capital.
2nd, a succesfull plan to counter the hyperinflation was implemented. The Convertibility Plan of 1991, that fixed the Argentine peso one-to-one to the US Dollar, laid the foundation for (temporary) substitution-rate stabilization. Under the currency board, Argentines could now freely catechumen their pesos into dollars. From then on, banking concern deposits and loans in dollar became widespread. Finally, expansive fiscal policy had to stimulate the economy and help restore economic growth.
Later the implementation of these reforms, the Argentine economy entered a period of economic growth between 1991 and 1997. Only in 1995 output growth was negative, due to the so-called Tequila crisis in Mexico. The quick return of high economical growth in 1996 yet suggested that the Argentine economy was potent plenty to counter external shocks. This farther strengthened the confidence in the implemented policies, including the Convertibility Plan.
1998 – 2001
Loss of competitiveness
The outbreak of currency crises in Asia, Russia and Brazil increases the borrowing costs for emerging markets, including Argentina. Furthermore, a major change in Brazil's exchange charge per unit policy had a bully impact on the Argentine economy, equally Brazil was one of the country'southward master trading partners.
In 1998, Brazil ended its own peg to the US dollar, which resulted in a stiff depreciation of the real. This helped the Brazilian economy to recover, simply had a big impact on the Argentine economic system, as it reduced the competiveness of many Argentine producers. Meanwhile, the prices of Argentina's agricultural export products fell. All this led to a sharp reduction in exports. Every bit a effect, Argentina's current account deficit rose and the country went into recession in the autumn of 1998.
Argentina maintained its peg, but this left information technology unable to respond to the growing economic problems, every bit information technology could not apply monetary or exchange charge per unit policy. In fact, as the US dollar appreciated and reached its highest level in 15 years, the currency peg became fifty-fifty more than of a straitjacket. Moreover, the fact that the commutation charge per unit peg was non supported by nominal toll and wage flexibility further reduced Argentina's means to deal with the currency overvaluation and decreased the brownie of the fixed exchange charge per unit authorities.
As foreign investors lost their confidence in the Argentina economic system, the state faced a stiff increase in borrowing costs. This way, the state had fully lost its access to the international financial markets in July 2001.
Fiscal mismanagement
Argentina's fiscal policies as well contributed to the crisis. For countries with a stock-still exchange charge per unit regime (in particular), it is important to follow counter-cyclical financial policies. All the same, in Argentine republic fiscal policy was pro-cyclical during the boom period. President De La Rúa, who succeeded Menem in 1999, wanted to tackle the resultant budget deficit of 2.five% of Gdp and furthermore promised to start fight the enduring abuse. According to De La Rúa, reducing the deficit would restore conviction in government finances, reduce interest rates and thereby bring dorsum economic growth. The furnishings of De La Rúa'south policy were however the reverse, equally the imposed ascent in tax rates simply reduced domestic need, encouraged abuse and did not atomic number 82 to the necessary reduction of the financial deficit. Furthermore, information technology appeared to be difficult to implement austerity measures on a regional level, as the cardinal regime was not able to control local government expenditure. What followed were rising fears for devaluation, which eventually led to the implementation of the Corralito in December 2001.
Furnishings on the banking sector
In 1998, the Argentine banking sector ranked 2 nd , afterward Singapore, on the Camelot rating for banking arrangement regulation, provided past the World Banking concern (Perry and Servén, 2003). The contraction of the economy, which started in that year, withal resulted in rising non-performing loans. The Jan 2002 economic reforms, including the abandoning of the Convertibility Plan, the pesofication of banking company deposits and loans at two different exchange rates and prize freezes for utility companies, acquired a moving ridge of defaults and liquidity bug at Argentine companies. The default rate of rated issuers was even as high equally 60%. The apparent solid position of the Argentine banking sector could non forbid the sector, including both domestic and foreign banks, from being affected by the events besides. Among others, Argentina'due south largest locally owned private-sector depository financial institution, Banco Galicia, and several strange banks, such as the US banks Bank of America, Citigroup, FleetBoston and J.P. Morgan Chase & Co suffered heavy losses. These losses were primarily caused by:
- The bankruptcy of many of the banks' debtors;
- The pesofication, which converted Dollar deposits to pesos at a 1.40 peso per Dollar rate and loans merely at a one peso per Dollar rate;
- The USD 93bn sovereign default of December 23 rd , 2001.
Concluding remarks
The Argentine economic crisis was caused by the undesirable confluence of several economic events: a hard currency peg, currency overvaluation, economic rigidities, inappropriate financial policy, external shocks, large scale foreign currency borrowing followed past a sudden finish in capital inflows and enduring International monetary fund support played an important function in the form of the crisis. This, together with the political and social turmoil that accompanied the events, made the Argentine crunch one of the near severe emerging marketplace crises in history. As world economical growth in the early 2000s was potent and Argentine producers benefitted from the strong depreciation of the currency, the Argentine economic system was able to recover rather quickly. Profound reforms were therefore not implemented.
References
Blustein, P. (2005), 'And the Money Kept Rolling In (And Out): Wall Street, the IMF and the Bankrupting of Argentina'
Feldstein, M. (2002), 'Argentina's Fall: Lessons from the Latest Financial Crisis', Strange Diplomacy, 81:2
Ozdemir, Y. (2007), 'Politics of Price Stabilization: a Comparative Analysis of Argentine republic, Brazil, Israel, United mexican states, and Turkey', Pittsburgh: University of Pittsburgh
Perry, G. & Sérven, Fifty. (2003), 'The Anatomy of a Multiple Crunch: Why was Argentina special and what can nosotros learn from it?', Washington: Globe Depository financial institution
Saxton, J. (2003), 'Argentina'due south Economic Crisis: Causes and Cures', Joint Economic Commission, Washington: United States Congress
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Source: https://economics.rabobank.com/publications/2013/august/the-argentine-crisis-20012002-/
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