Description
Argentine economic crisis in detail with all the events explained in detai
Agenda
I. The Background II. The National Reorganization Process III. 1983 – The Electorate Strikes Back IV. 1990s – Stability at Last? V. 2001 – The Crisis Hits! VI. The Fall of Convertibility VII.Recovery VIII.Debt Restructuring
The Background
I. Argentina is a country that has always been strongly influenced by the military. II. Juan Domingo Perón, three-time President of Argentina, was himself a colonel who initially came to hold political power in the aftermath of a 1943 military coup. III. After a series of weak governments, and a seven-year-long military government, Perón returned to Argentina, following 20 years exile in Franquist Spain, amid escalating political unrest, divisions in the Peronist movement, and outbreaks of politically motivated violence.
Background
• His return was marked by the June 20, 1973 Ezeiza massacre during which the right-wing Peronist movement became predominant. • Peron was democratically elected President in 1973, but died in July 1974. His vicepresident was his third wife, Isabel Martínez de Perón, but she proved to be a weak, ineffectual ruler. •A number of revolutionary organizations escalated their campaign of political violence (including kidnappings and bombings) against the campaign of harsh repressive and retaliative measures enforced by the military •The situation escalated until Martínez was overthrown and replaced by a military junta led by Lieutenant General Jorge Rafael Videla, on 24 March 1976.
National Reorganization Process (1976-1983)
I. II. The National Reorganization Process was the name used by its leaders for the military government that ruled Argentina from 1976 to 1983. The Argentine military seized political power during the March 1976 coup, amid violent factional conflicts between supporters of recently deceased President Juan Domingo Perón. After losing the Falklands War to the UK in 1982, mounting public opposition to the junta led to its voluntarily relinquishing power in 1983. By the end of the military government the country's industries were severely affected and unemployment, calculated at 18% (though official figures claimed 5%), was at its highest point since the depression. Huge debt was acquired for money that was later lost in different unfinished projects, the Falklands War, and the state's takeover of private debt
III. IV.
V.
1983 – The Electorate Strikes Back
I. In 1983, democracy in the country was restored with the election of president Raúl Alfonsín. II. Inheriting a foreign debt crisis exacerbated by high global interest rates, Alfonsín had to also contend with shattered business confidence and record budget deficits. III. GDP grew by a modest 2% in 1984, though fixed investment continued to decline and inflation rose to 700%. IV. Losses among the panoply of State enterprises, service on the public debt and growing tax evasion left the federal budget with a 13% shortfall in 1984.
I. Central Bank of Argentina "printed" money; inflation rose to 30% in 1985 II. Juan Sourrouille, MoE, launched the Austral Plan III. Prices were frozen and the existing currency, the peso argentino, was replaced by the Argentine austral at 1,000 to one
The Austral Plan
I. The Austral was the centrepiece of Alfonsín's anti-inflationary plan II. A heterodox program, it combined orthodox components - tight fiscal policy and monetary restraint - with less conventional wage and price controls III. Replaced all Pesos at 1:1,000 IV. The government took actions to contract aggregate demand and directly control wages and prices to ensure that the buying power of people remained intact
The Austral Plan
I. Between April and June, controls on many industrial prices were removed to realign relative prices (to reduce inflation without severe shortages) An agreement was signed with the IMF, and Argentina pledged to stop issuing money to finance the fiscal deficit The budget deficit was reduced through an increase in revenues, in part due to increased real activity following the freeze and reduced income tax postponement with lower inflation. The effects on inflation were felt immediately However, fundamental imbalances persisted and eventually drove inflation higher.
II. III.
IV. V.
The Austral Plan
I.
II.
III.
IV.
V. VI.
Overall, the Austral Plan reduced inflation, improved tax collections, and worked fairly well for the government However, some inflationary tendencies resurfaced in 1986 due to the increase in the prices of seasonal goods Also, high interest rates in the regulated and unregulated financial markets, coupled with low inflation hindered investments provoking a decline in economic activity The persistence of the economic recession was no less a menace; internal demand had declined and firms turned to the export market Working hours were reduced as well as employment On the other hand, agricultural producers and entrepreneurs were pushing for better prices and easier credit terms to support the reactivation of the economy.
The Austral Plan
What was the point of replacing the Peso? I. Essentially, the money supply was now 1/1000th II. Next, by fixing both price levels and wages, the government safeguarded the economy against another inflationary spiral III. Essentially, the purchasing power of one unit of currency had now increased What happened on the foreign exchange front? I. Though the purchasing power of the Austral had increased, on the Forex market, the investor demanded dollar payments II. Hence, though domestic inflation was somewhat curbed, the exchange rate still remained skewed
The Austral Plan
I. In the first quarter of I986 there was a consensus that low inflation had created an across-the-board benefit. II. However, those sectors whose prices were left to rise or received under-the-table wage increases were perceived by most as having had an unfair advantage in respect of those whose prices or wages were still frozen. III. The latter, comprising the majority of the population, began to voice their complaints and to make demands through their political parties and interest groups. IV. By March 1986 there was widespread 'social acceptance of the price increase' which made it very difficult for the administration 'to extend the wage freeze
The End of the Austral
I.
II.
III.
IV.
V.
The Price and Wage Freeze was relaxed in light of the general consensus Economic expansion followed the defreezing; However, inflation began rising again President Raul attempted another freeze on wages and prices; this freeze however, was unsuccessful The IMF continued to bail the country out of its debt, and interest payments were steadily rising The key policy choice that the government would have to make was between inflation and economic growth
The Menem Era
I. 1989: Peronist candidate Carlos Menem is elected President of Argentina II. Along with Domingo Cavallo, enacted a major structural adjustment program (tax reform, privatization, trade liberalization, deregulation, and adoption of a currency board) III.This encouraged foreign investment and infused the country with cash to finance its fiscal deficits.
I. 1991: Argentina’s Congress enacts the Convertibility Law II. Each peso in circulation is backed by a U.S. dollar and monetary policy is forcibly constrained
Why Peg the Currency?
I. Investor confidence was shattered and public debt was high II. The Peso was losing its purchasing power due to spiraling inflation III. Pegging the Peso to the Dollar would ensure lower inflation, improve the purchasing power of the Peso, and provide security to the investors IV. In order to facilitate the liberalization, it was necessary to peg the currency exchange rate V. The liberalization of the economy led to an influx of foreign capital, and the CB accumulated a considerable amount of reserves VI. The Currency Peg, however, had unwanted side-effects as well VII. Imports were now cheaper; people preferred to import goods rather than produce domestically VIII.This led to a constant outflow of capital from the country IX. A Pegged system has serious consequences for the country – How did the Argentinean CB manage to finance its purchase of Dollars?
How did it Manage the Peg?
I. The IMF kept providing loans and extending payment deadlines I. These loans were offered at high interest rates II. The impressive foreign inflows encouraged the government to keep borrowing to finance its deficit III. Unlike previous episodes where a fiscal deficit financed by domestic money creation would have resulted in unbearably high inflation rates, the financing of the deficit by floating government bond on the international market was not seen as a detrimental course of action.
Unsustainable Debt Dynamics
I. Argentina always had persistently huge fiscal deficits due to the fiscal indiscretion of provincial and federal governments II. The fiscal position was weakened considerably by lower tax revenue and the high costs for social programs resulting from the economic downturn of 1999 III. However, the fact the fiscal deficits were still high during the pre1998 boom years provided evidence that the mismanagement by the fiscal authority was the main culprit. IV. Because these deficits could not be financed through money creation, the Argentine government resorted to borrowing large amounts in hard currency on the international capital market.
The Currency Mismatch
I. Since the Argentine government borrowed extensively on the international capital market in hard currency, the high cost of reneging on the peg gave the govt. a disincentive to do so II. As a result of this currency mismatch in external debt holdings, the Argentine government in 2000 opted to renegotiate its loans in a manner that reduced its short-run debt servicing III. By doing this the government of Argentina averted a currency crisis in the short run at a cost of increasing the adverse impact of any future crisis.
Pegging – Wanted and Unwanted Effects
GDP Growth
Pegging – Wanted and Unwanted Effects
Foreign Reserve (Billions $) Exchange Rate (Base: 1997)
Foreign Debt (Billions $)
The 1990s – Stability at Last?
I.
Inflation dropped sharply, price stability was assured, and the value of the currency was preserved. II. The fixed exchange rate made imports cheap, producing a constant flight of dollars away from the country and a progressive loss of Argentina's industrial infrastructure III. Government spending continued to be high and corruption was rampant. Argentina's public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it. IV. The International Monetary Fund, kept lending money to Argentina and postponing its payment schedules.
Chart Title
1997 1998 1999 2000 2001 2002
I.
II. III.
IV. V.
Massive tax evasion and money laundering explained a large part of the evaporation of funds toward offshore banks. The influx of foreign currency provided by the privatisation of state companies had dried out After 1999 Argentine exports were harmed by the devaluation of the Brazilian Real and a considerable international revaluation of the dollar, effectively revaluing the peso against its major trading partners, Brazil (30% of total trade flows) and the Euro area (23% of total trade flows). It was now cheaper to buy from Brazil; business rapidly moved away from Argentina In 1999, Argentina's Gross domestic product dropped 4% and the country entered a recession (which was to last three years, ending in a collapse).
Complementary Currencies
I. By 1999, newly elected President Fernando de la Rúa faced a country where unemployment had risen to a critical point, and the undesirable effects of the fixed exchange rate were showing forcefully. II. Gross domestic product dropped 4% and the country entered a recession; the government continued the contractive economic policies of its predecessor. III. Abandonment of the exchange peg, with a voluntary devaluation of the peso was considered political suicide and a recipe for economic disaster. IV. Since enough Pesos weren’t in circulation, a spectrum of complementary currencies had emerged. V. While the provinces had always issued complementary currency in the form of bonds and drafts to brave shortages of cash, the maintenance of the convertibility regime led to this being done in an unprecedented scale VI. Among the strongest of these quasi-currencies was Buenos Aires province's Patacón. VII. The national state also issued its own quasi-currency—the LECOP
2001 – The Crisis Hits!
I. The Recession and high government debt increased the risk of sovereign default, forcing investors to demand higher interest payments II. People began withdrawing large sums of money, turning pesos into dollars and sending them abroad (1:1 conversion) III. Government enacted a set of measures that froze all bank accounts for twelve months IV. Enraged Argentines took to the streets of important cities
I. Fernando de la Rúa declared a state of emergency but this only worsened the situation II. De la Rúa eventually fled the Casa Rosada in a helicopter on 21 December. III. Since De la Rúa's vice president, Carlos Álvarez, had resigned in October 2000, a political crisis ensued. IV. During the last week of 2001, the interim government led by Rodríguez Saá defaulted on the larger part of the public debt, totalling $132
Fiscal misalignement --> debt unsusutainable
As percentage of GDP 3,0% 2,0% 1,0% 40% 0,0% 30% -1,0% 20% -2,0% -3,0% -4,0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 10% 0%
Public Debt
60% 50%
Overall Result Total Debt (2° axis)
Primary Surplus EMBI Spread (2° axis) 24
Fiscal misalignement turned the burden of the debt Fiscal misalignement --> debt unsusutainable unsusutainable
As percentage of GDP 3,0% 2,0% 1,0% 40% 0,0% 30% -1,0% 20% -2,0% -3,0% -4,0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 60% 50%
Country Risk
10% 0%
Overall Result Total Debt (2° axis)
Primary Surplus EMBI Spread (2° axis) 25
Capital Flow s and Economic Activity (Accumulated 4 quarters
- U$Sm. GDP Cyclical Component)
Capital Flows Private Sector
8% 6% 4%
15.000 10.000 5.000 0 -5.000 -10.000
2%
0% -2% -4%
-15.000
-20.000
-6%
-8% -10% IV 94 IV 95
GDP Growth
-25.000 -30.000 -35.000
IV 96
IV 98
IV. 99
IV. 00
IV 97
IV 01
26
The Argentinian Bank Run
Private Sector Deposits (in bn Arg. Pesos)
Finance Minister
80 75 70 65
Resignation
“Corralito”
Devaluation
60 55 50
Interest
rate ceilings "
Sep 00
Dec 00
Mar 01
Jun 01 Ago 01 Nov 01
Feb 02 Apr 02
Jul 02 27
The Third Currency Plan.
I. Consisted of creating a new, non-convertible currency called Argentino coexisting with convertible pesos and U.S. dollars. II. It would only circulate as cash and would be partially guaranteed with federallymanaged land III. Argentinos having legal currency status would be used to redeem all complementary currency already in circulation. IV. Preservation of convertibility was expected to restore public confidence, while the non-convertible nature of this currency would allow for a measure of fiscal flexibility V. Rodríguez Saá, utterly incapable of dealing with the crisis and unsupported by his own party, resigned before the end of the year. VI. The Legislative Assembly convened again, appointing Peronist Eduardo Duhalde—then a Senator for the Buenos Aires province—to take his place.
The Fall of Convertibility
I. II. January 2002: the fixed 1-to-1 pesodollar parity is abandoned The peso lost a large part of its value in the unregulated market; a provisional "official" exchange rate was set at 1.4 pesos per dollar. The Pesificación - All bank accounts denominated in dollars were converted to pesos at the official rate After a few months, the exchange rate was left to float freely. The peso suffered a huge depreciation, which in turn prompted inflation 2002: The economic situation worsens. 4 pesos were being traded per dollar, while the accumulated inflation since the devaluation was about 80%. Businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.
III.
IV.
V. VI.
VII.
The Fall of Convertibility - CCs
I. Since the volume of pesos didn't fit the demand for cash (not even after the devaluation) huge quantities of complementary currency kept circulating II. Their acceptability now ultimately depended on the State's willingness to take them as payment of taxes and other charges III. Very often they were taken at less than their nominal value IV. Rumors that the Government would simply banish complementary currency overnight began bothering holders, who would be left with useless printed paper.
Immediate Effects
I. Most barter networks collapsed as large numbers of people turned to them, desperate to save as many pesos as they could for exchange for hard currency as a palliative for uncertainty. II. Several thousand newly homeless and jobless Argentines found work as cartoneros, or cardboard collectors. III. Argentine products were rejected in some international markets, for fear they might arrive damaged from the poor conditions they grew in; USDA restricted Argentine food and drugs
I. Tourism balance with Chile inverted due to the lowered prices in Argentina
Recovery – At Last!
I. The devalued peso made Argentine exports cheap and competitive abroad, while discouraging imports II. The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and set aside large amounts of money for social welfare, while controlling expenditure in other fields III. The peso slowly revalued, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and tourism returned.
Recovery – At Last!
I. The huge trade surplus ultimately caused the government to begin intervening to keep the peso from revaluing further II. The central bank started buying dollars in the local market and stocking them as reserves. III.By December 2005, foreign currency reserves had reached $28 billion
Debt Restructuring
I. When the default was declared in 2002, foreign investment fled the country, and capital flow towards Argentina ceased almost completely. II. The Argentine government met severe challenges trying to refinance the debt; the central bank's foreign currency reserves were almost depleted. III. A deal was reached in 2005, by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value IV. In 2008, President Cristina Fernandez de Kirchner announced she was studying a reopening of the 2005 swap to gain adhesion from the remaining 24% of the so-called "holdouts", and thereby fully exit the default with private investors.
And the Moral of the Story is..
Lesson #1: The Peg’s the Thing
Lesson #2: Exchange Rate Arrangements are No Cure for Improper Macro Economic Policies
Lesson #3: Rigidity vs Credibility Lesson #4: Dollarization?
Lesson #5: Vindication of Floating?
To Conclude..
I. The collapse of Argentina’s currency board has had a devastating impact on that nation. Perhaps the most important of its lessons are that an exchange rate regime is only as good as its peg.
II. No set of rules surrounding the regime, regardless of their strength, can force a nation to remain attached to a peg that has outlived its usefulness. As a result, even ?good? pegs are likely to be less than perfectly credible. Despite its drawbacks, the alternative of pure floating therefore must be seriously considered.
Thank You For Your Patience! ? We’re Open to Questions!
doc_293184730.pptx
Argentine economic crisis in detail with all the events explained in detai
Agenda
I. The Background II. The National Reorganization Process III. 1983 – The Electorate Strikes Back IV. 1990s – Stability at Last? V. 2001 – The Crisis Hits! VI. The Fall of Convertibility VII.Recovery VIII.Debt Restructuring
The Background
I. Argentina is a country that has always been strongly influenced by the military. II. Juan Domingo Perón, three-time President of Argentina, was himself a colonel who initially came to hold political power in the aftermath of a 1943 military coup. III. After a series of weak governments, and a seven-year-long military government, Perón returned to Argentina, following 20 years exile in Franquist Spain, amid escalating political unrest, divisions in the Peronist movement, and outbreaks of politically motivated violence.
Background
• His return was marked by the June 20, 1973 Ezeiza massacre during which the right-wing Peronist movement became predominant. • Peron was democratically elected President in 1973, but died in July 1974. His vicepresident was his third wife, Isabel Martínez de Perón, but she proved to be a weak, ineffectual ruler. •A number of revolutionary organizations escalated their campaign of political violence (including kidnappings and bombings) against the campaign of harsh repressive and retaliative measures enforced by the military •The situation escalated until Martínez was overthrown and replaced by a military junta led by Lieutenant General Jorge Rafael Videla, on 24 March 1976.
National Reorganization Process (1976-1983)
I. II. The National Reorganization Process was the name used by its leaders for the military government that ruled Argentina from 1976 to 1983. The Argentine military seized political power during the March 1976 coup, amid violent factional conflicts between supporters of recently deceased President Juan Domingo Perón. After losing the Falklands War to the UK in 1982, mounting public opposition to the junta led to its voluntarily relinquishing power in 1983. By the end of the military government the country's industries were severely affected and unemployment, calculated at 18% (though official figures claimed 5%), was at its highest point since the depression. Huge debt was acquired for money that was later lost in different unfinished projects, the Falklands War, and the state's takeover of private debt
III. IV.
V.
1983 – The Electorate Strikes Back
I. In 1983, democracy in the country was restored with the election of president Raúl Alfonsín. II. Inheriting a foreign debt crisis exacerbated by high global interest rates, Alfonsín had to also contend with shattered business confidence and record budget deficits. III. GDP grew by a modest 2% in 1984, though fixed investment continued to decline and inflation rose to 700%. IV. Losses among the panoply of State enterprises, service on the public debt and growing tax evasion left the federal budget with a 13% shortfall in 1984.
I. Central Bank of Argentina "printed" money; inflation rose to 30% in 1985 II. Juan Sourrouille, MoE, launched the Austral Plan III. Prices were frozen and the existing currency, the peso argentino, was replaced by the Argentine austral at 1,000 to one
The Austral Plan
I. The Austral was the centrepiece of Alfonsín's anti-inflationary plan II. A heterodox program, it combined orthodox components - tight fiscal policy and monetary restraint - with less conventional wage and price controls III. Replaced all Pesos at 1:1,000 IV. The government took actions to contract aggregate demand and directly control wages and prices to ensure that the buying power of people remained intact
The Austral Plan
I. Between April and June, controls on many industrial prices were removed to realign relative prices (to reduce inflation without severe shortages) An agreement was signed with the IMF, and Argentina pledged to stop issuing money to finance the fiscal deficit The budget deficit was reduced through an increase in revenues, in part due to increased real activity following the freeze and reduced income tax postponement with lower inflation. The effects on inflation were felt immediately However, fundamental imbalances persisted and eventually drove inflation higher.
II. III.
IV. V.
The Austral Plan
I.
II.
III.
IV.
V. VI.
Overall, the Austral Plan reduced inflation, improved tax collections, and worked fairly well for the government However, some inflationary tendencies resurfaced in 1986 due to the increase in the prices of seasonal goods Also, high interest rates in the regulated and unregulated financial markets, coupled with low inflation hindered investments provoking a decline in economic activity The persistence of the economic recession was no less a menace; internal demand had declined and firms turned to the export market Working hours were reduced as well as employment On the other hand, agricultural producers and entrepreneurs were pushing for better prices and easier credit terms to support the reactivation of the economy.
The Austral Plan
What was the point of replacing the Peso? I. Essentially, the money supply was now 1/1000th II. Next, by fixing both price levels and wages, the government safeguarded the economy against another inflationary spiral III. Essentially, the purchasing power of one unit of currency had now increased What happened on the foreign exchange front? I. Though the purchasing power of the Austral had increased, on the Forex market, the investor demanded dollar payments II. Hence, though domestic inflation was somewhat curbed, the exchange rate still remained skewed
The Austral Plan
I. In the first quarter of I986 there was a consensus that low inflation had created an across-the-board benefit. II. However, those sectors whose prices were left to rise or received under-the-table wage increases were perceived by most as having had an unfair advantage in respect of those whose prices or wages were still frozen. III. The latter, comprising the majority of the population, began to voice their complaints and to make demands through their political parties and interest groups. IV. By March 1986 there was widespread 'social acceptance of the price increase' which made it very difficult for the administration 'to extend the wage freeze
The End of the Austral
I.
II.
III.
IV.
V.
The Price and Wage Freeze was relaxed in light of the general consensus Economic expansion followed the defreezing; However, inflation began rising again President Raul attempted another freeze on wages and prices; this freeze however, was unsuccessful The IMF continued to bail the country out of its debt, and interest payments were steadily rising The key policy choice that the government would have to make was between inflation and economic growth
The Menem Era
I. 1989: Peronist candidate Carlos Menem is elected President of Argentina II. Along with Domingo Cavallo, enacted a major structural adjustment program (tax reform, privatization, trade liberalization, deregulation, and adoption of a currency board) III.This encouraged foreign investment and infused the country with cash to finance its fiscal deficits.
I. 1991: Argentina’s Congress enacts the Convertibility Law II. Each peso in circulation is backed by a U.S. dollar and monetary policy is forcibly constrained
Why Peg the Currency?
I. Investor confidence was shattered and public debt was high II. The Peso was losing its purchasing power due to spiraling inflation III. Pegging the Peso to the Dollar would ensure lower inflation, improve the purchasing power of the Peso, and provide security to the investors IV. In order to facilitate the liberalization, it was necessary to peg the currency exchange rate V. The liberalization of the economy led to an influx of foreign capital, and the CB accumulated a considerable amount of reserves VI. The Currency Peg, however, had unwanted side-effects as well VII. Imports were now cheaper; people preferred to import goods rather than produce domestically VIII.This led to a constant outflow of capital from the country IX. A Pegged system has serious consequences for the country – How did the Argentinean CB manage to finance its purchase of Dollars?
How did it Manage the Peg?
I. The IMF kept providing loans and extending payment deadlines I. These loans were offered at high interest rates II. The impressive foreign inflows encouraged the government to keep borrowing to finance its deficit III. Unlike previous episodes where a fiscal deficit financed by domestic money creation would have resulted in unbearably high inflation rates, the financing of the deficit by floating government bond on the international market was not seen as a detrimental course of action.
Unsustainable Debt Dynamics
I. Argentina always had persistently huge fiscal deficits due to the fiscal indiscretion of provincial and federal governments II. The fiscal position was weakened considerably by lower tax revenue and the high costs for social programs resulting from the economic downturn of 1999 III. However, the fact the fiscal deficits were still high during the pre1998 boom years provided evidence that the mismanagement by the fiscal authority was the main culprit. IV. Because these deficits could not be financed through money creation, the Argentine government resorted to borrowing large amounts in hard currency on the international capital market.
The Currency Mismatch
I. Since the Argentine government borrowed extensively on the international capital market in hard currency, the high cost of reneging on the peg gave the govt. a disincentive to do so II. As a result of this currency mismatch in external debt holdings, the Argentine government in 2000 opted to renegotiate its loans in a manner that reduced its short-run debt servicing III. By doing this the government of Argentina averted a currency crisis in the short run at a cost of increasing the adverse impact of any future crisis.
Pegging – Wanted and Unwanted Effects
GDP Growth
Pegging – Wanted and Unwanted Effects
Foreign Reserve (Billions $) Exchange Rate (Base: 1997)
Foreign Debt (Billions $)
The 1990s – Stability at Last?
I.
Inflation dropped sharply, price stability was assured, and the value of the currency was preserved. II. The fixed exchange rate made imports cheap, producing a constant flight of dollars away from the country and a progressive loss of Argentina's industrial infrastructure III. Government spending continued to be high and corruption was rampant. Argentina's public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it. IV. The International Monetary Fund, kept lending money to Argentina and postponing its payment schedules.
Chart Title
1997 1998 1999 2000 2001 2002
I.
II. III.
IV. V.
Massive tax evasion and money laundering explained a large part of the evaporation of funds toward offshore banks. The influx of foreign currency provided by the privatisation of state companies had dried out After 1999 Argentine exports were harmed by the devaluation of the Brazilian Real and a considerable international revaluation of the dollar, effectively revaluing the peso against its major trading partners, Brazil (30% of total trade flows) and the Euro area (23% of total trade flows). It was now cheaper to buy from Brazil; business rapidly moved away from Argentina In 1999, Argentina's Gross domestic product dropped 4% and the country entered a recession (which was to last three years, ending in a collapse).
Complementary Currencies
I. By 1999, newly elected President Fernando de la Rúa faced a country where unemployment had risen to a critical point, and the undesirable effects of the fixed exchange rate were showing forcefully. II. Gross domestic product dropped 4% and the country entered a recession; the government continued the contractive economic policies of its predecessor. III. Abandonment of the exchange peg, with a voluntary devaluation of the peso was considered political suicide and a recipe for economic disaster. IV. Since enough Pesos weren’t in circulation, a spectrum of complementary currencies had emerged. V. While the provinces had always issued complementary currency in the form of bonds and drafts to brave shortages of cash, the maintenance of the convertibility regime led to this being done in an unprecedented scale VI. Among the strongest of these quasi-currencies was Buenos Aires province's Patacón. VII. The national state also issued its own quasi-currency—the LECOP
2001 – The Crisis Hits!
I. The Recession and high government debt increased the risk of sovereign default, forcing investors to demand higher interest payments II. People began withdrawing large sums of money, turning pesos into dollars and sending them abroad (1:1 conversion) III. Government enacted a set of measures that froze all bank accounts for twelve months IV. Enraged Argentines took to the streets of important cities
I. Fernando de la Rúa declared a state of emergency but this only worsened the situation II. De la Rúa eventually fled the Casa Rosada in a helicopter on 21 December. III. Since De la Rúa's vice president, Carlos Álvarez, had resigned in October 2000, a political crisis ensued. IV. During the last week of 2001, the interim government led by Rodríguez Saá defaulted on the larger part of the public debt, totalling $132
Fiscal misalignement --> debt unsusutainable
As percentage of GDP 3,0% 2,0% 1,0% 40% 0,0% 30% -1,0% 20% -2,0% -3,0% -4,0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 10% 0%
Public Debt
60% 50%
Overall Result Total Debt (2° axis)
Primary Surplus EMBI Spread (2° axis) 24
Fiscal misalignement turned the burden of the debt Fiscal misalignement --> debt unsusutainable unsusutainable
As percentage of GDP 3,0% 2,0% 1,0% 40% 0,0% 30% -1,0% 20% -2,0% -3,0% -4,0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 60% 50%
Country Risk
10% 0%
Overall Result Total Debt (2° axis)
Primary Surplus EMBI Spread (2° axis) 25
Capital Flow s and Economic Activity (Accumulated 4 quarters
- U$Sm. GDP Cyclical Component)
Capital Flows Private Sector
8% 6% 4%
15.000 10.000 5.000 0 -5.000 -10.000
2%
0% -2% -4%
-15.000
-20.000
-6%
-8% -10% IV 94 IV 95
GDP Growth
-25.000 -30.000 -35.000
IV 96
IV 98
IV. 99
IV. 00
IV 97
IV 01
26
The Argentinian Bank Run
Private Sector Deposits (in bn Arg. Pesos)
Finance Minister
80 75 70 65
Resignation
“Corralito”
Devaluation
60 55 50
Interest
rate ceilings "
Sep 00
Dec 00
Mar 01
Jun 01 Ago 01 Nov 01
Feb 02 Apr 02
Jul 02 27
The Third Currency Plan.
I. Consisted of creating a new, non-convertible currency called Argentino coexisting with convertible pesos and U.S. dollars. II. It would only circulate as cash and would be partially guaranteed with federallymanaged land III. Argentinos having legal currency status would be used to redeem all complementary currency already in circulation. IV. Preservation of convertibility was expected to restore public confidence, while the non-convertible nature of this currency would allow for a measure of fiscal flexibility V. Rodríguez Saá, utterly incapable of dealing with the crisis and unsupported by his own party, resigned before the end of the year. VI. The Legislative Assembly convened again, appointing Peronist Eduardo Duhalde—then a Senator for the Buenos Aires province—to take his place.
The Fall of Convertibility
I. II. January 2002: the fixed 1-to-1 pesodollar parity is abandoned The peso lost a large part of its value in the unregulated market; a provisional "official" exchange rate was set at 1.4 pesos per dollar. The Pesificación - All bank accounts denominated in dollars were converted to pesos at the official rate After a few months, the exchange rate was left to float freely. The peso suffered a huge depreciation, which in turn prompted inflation 2002: The economic situation worsens. 4 pesos were being traded per dollar, while the accumulated inflation since the devaluation was about 80%. Businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.
III.
IV.
V. VI.
VII.
The Fall of Convertibility - CCs
I. Since the volume of pesos didn't fit the demand for cash (not even after the devaluation) huge quantities of complementary currency kept circulating II. Their acceptability now ultimately depended on the State's willingness to take them as payment of taxes and other charges III. Very often they were taken at less than their nominal value IV. Rumors that the Government would simply banish complementary currency overnight began bothering holders, who would be left with useless printed paper.
Immediate Effects
I. Most barter networks collapsed as large numbers of people turned to them, desperate to save as many pesos as they could for exchange for hard currency as a palliative for uncertainty. II. Several thousand newly homeless and jobless Argentines found work as cartoneros, or cardboard collectors. III. Argentine products were rejected in some international markets, for fear they might arrive damaged from the poor conditions they grew in; USDA restricted Argentine food and drugs
I. Tourism balance with Chile inverted due to the lowered prices in Argentina
Recovery – At Last!
I. The devalued peso made Argentine exports cheap and competitive abroad, while discouraging imports II. The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and set aside large amounts of money for social welfare, while controlling expenditure in other fields III. The peso slowly revalued, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and tourism returned.
Recovery – At Last!
I. The huge trade surplus ultimately caused the government to begin intervening to keep the peso from revaluing further II. The central bank started buying dollars in the local market and stocking them as reserves. III.By December 2005, foreign currency reserves had reached $28 billion
Debt Restructuring
I. When the default was declared in 2002, foreign investment fled the country, and capital flow towards Argentina ceased almost completely. II. The Argentine government met severe challenges trying to refinance the debt; the central bank's foreign currency reserves were almost depleted. III. A deal was reached in 2005, by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value IV. In 2008, President Cristina Fernandez de Kirchner announced she was studying a reopening of the 2005 swap to gain adhesion from the remaining 24% of the so-called "holdouts", and thereby fully exit the default with private investors.
And the Moral of the Story is..
Lesson #1: The Peg’s the Thing
Lesson #2: Exchange Rate Arrangements are No Cure for Improper Macro Economic Policies
Lesson #3: Rigidity vs Credibility Lesson #4: Dollarization?
Lesson #5: Vindication of Floating?
To Conclude..
I. The collapse of Argentina’s currency board has had a devastating impact on that nation. Perhaps the most important of its lessons are that an exchange rate regime is only as good as its peg.
II. No set of rules surrounding the regime, regardless of their strength, can force a nation to remain attached to a peg that has outlived its usefulness. As a result, even ?good? pegs are likely to be less than perfectly credible. Despite its drawbacks, the alternative of pure floating therefore must be seriously considered.
Thank You For Your Patience! ? We’re Open to Questions!
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