Argentina CrisisArgentina CrisisEcon 462 Presented by:Econ 462 Presented by:

Anthony SierraAnthony SierraRossina TorresRossina Torres

Li XuLi Xu

AgendaAgenda

Causes of the crisis: RossinaCauses of the crisis: Rossina

During the crisis: LiDuring the crisis: Li

Post-Crisis: AnthonyPost-Crisis: Anthony

Political InstabilityPolitical Instability

1989 – 1999: Carlos Menem - President1989 – 1999: Carlos Menem - President

1999: Fernando De La Rua - President1999: Fernando De La Rua - President

2000: Vice-President Carlos Alvarez – Resigns2000: Vice-President Carlos Alvarez – Resigns

Dec 20, 2001: Fernando De La Rua – ResignsDec 20, 2001: Fernando De La Rua – Resigns

Dec 21, 2001: Ramon Puerta – PresidentDec 21, 2001: Ramon Puerta – President

Dec 23, 2001: Adolfo Rodriguez – PresidentDec 23, 2001: Adolfo Rodriguez – President

Dec 31, 2001: Eduardo Duhalde - PresidentDec 31, 2001: Eduardo Duhalde - President

Currency Board - Currency Board - Convertibility LawConvertibility Law

5

4

3

2

1

0

1995 1996 1997 1998 1999 2000 2001 2002

Peso/$ = 1.00 January 17,

2002

*Collapse of the currency board arrangement

UnemploymentUnemployment

Real GDPReal GDP

Inflation Inflation

Contagion EffectContagion Effect

Tequila Crisis 1995Tequila Crisis 1995

Asian Crisis 1997Asian Crisis 1997

Russia 1998Russia 1998

Brazil 1999Brazil 1999

Fun Facts!Fun Facts!Difference between wages and salaries Difference between wages and salaries paid by the federal government and paid by the federal government and the private sector.the private sector.

Powerful labor unionsPowerful labor unions

Inflexible wages and pricesInflexible wages and prices

Real GDPReal GDP

InflationInflation

UnemploymentUnemployment

Weak Export GrowthWeak Export Growth

Mounting debt Mounting debt

What went wrong? What went wrong? Factors?Factors?

Lack of fiscal disciplineLack of fiscal discipline

Labor market inflexibilityLabor market inflexibility

External environment and shocksExternal environment and shocks

Convertibility plan / Currency boardConvertibility plan / Currency board

Unsustainable debtUnsustainable debt

Overvalued PesoOvervalued Peso

The Scope of the CrisisThe Scope of the Crisis

Real GDPReal GDP

Unemployment Unemployment

InflationInflation

Cash basisCash basis

Public debtsPublic debts

Real GDPReal GDP

Unemployment RateUnemployment Rate

BANK: Problem facedBANK: Problem facedConvertibility regime to “Pesoization”People seeking Private rather than publicMonthly deposit withdrawal limit was to $250 pesos, (raised to $1500 in 2002) Dollar deposits would remain frozen until at least 2003 Congress also approved an emergency law that severely curtailed creditors’ rights

Private over Public Private over Public The government decrees the unification of the exchange The government decrees the unification of the exchange rate regime and the asymmetric pesoization of bank rate regime and the asymmetric pesoization of bank balance sheets (assets at Arg$1/US$1, and liabilities at balance sheets (assets at Arg$1/US$1, and liabilities at Arg$1.4/US$1).Arg$1.4/US$1).

“pesoization” The existing stock of banks’ dollar-denominated assets and liabilities would be converted at the rate of Arg$1=US$1 for loans to the private sector and Arg$1.4=US$1 for loans to the public sector U.S. dollar deposits, which were also indexed to inflation. The measure was intended to protect firms and households with foreign-currency denominated debt, but it merely shifted the burden of the devaluation to the banking system—and ultimately to the taxpayer as banks would need to be issued compensation bonds.40 The main effect of the measure was to deepen financial disintermediation, curtailing the supply of fresh credit—including working capital—that banks were able to provide, and that would be critical in any eventual recovery.

Response of Policy Response of Policy Maker to the CrisisMaker to the Crisis

Government was able to borrow amply both Government was able to borrow amply both domestically and internationallydomestically and internationally

The monetary policy was tighten The monetary policy was tighten

After the Tequila Crisis (1995)After the Tequila Crisis (1995)

Resulted : Y Resulted : Y

Put a direct constraint on Fiscal PolicyPut a direct constraint on Fiscal Policy

To maintain the pegTo maintain the peg

DollarizationDollarization

Fiscal deterioration in 1999 Reduce over public deficit => IR

Response of Policy Response of Policy Makers to the CrisisMakers to the CrisisRevamped programRevamped program

Convergence factorConvergence factor

Debt swapDebt swap

Zero Cash DeficitZero Cash DeficitLead to “pull the plug” Lead to “pull the plug”

Actions to fight the crisisActions to fight the crisis

Fiscal responsibility law Fiscal responsibility law

Zero Deficit Law Zero Deficit Law

Deposit freezeDeposit freeze

DevaluationDevaluation

Fiscal policyFiscal policy

The Role of the IMFThe Role of the IMF

Fiscal Responsibility Fiscal Responsibility Law Law

September 1999 the Argentine September 1999 the Argentine Congress passed the Fiscal Congress passed the Fiscal Responsibility Law, aiming to Responsibility Law, aiming to large reductions in federal and large reductions in federal and provincial government spending.provincial government spending.

Zero Deficit Law Zero Deficit Law

Zero-deficit law was implemented Zero-deficit law was implemented in an attempt to restore market in an attempt to restore market confidence, attract foreign capital confidence, attract foreign capital and ultimately get the and ultimately get the Argentinean market back on Argentinean market back on track. track.

Deposit Freeze Deposit Freeze

In late 2001 the government set a In late 2001 the government set a number of financial restrictions to number of financial restrictions to stop the massive run on the banks stop the massive run on the banks and to avoid a collapse of the and to avoid a collapse of the whole banking system. whole banking system.

DevaluationDevaluation

January 2002 the government was January 2002 the government was forced to announce the end of forced to announce the end of convertibility regime and the currency convertibility regime and the currency devaluation. devaluation.

The peso was first devalued by 29 The peso was first devalued by 29 percent from 1 to 1.4 pesos per US percent from 1 to 1.4 pesos per US dollar for major foreign commercial dollar for major foreign commercial transactions and then was allowed to transactions and then was allowed to float thereby quickly peaking to over 4 float thereby quickly peaking to over 4 pesos per dollarpesos per dollar

Fiscal PolicyFiscal Policy

The government announced an The government announced an economic program that among other economic program that among other things included increases in the things included increases in the personal income and wealth taxes, a personal income and wealth taxes, a bill to strengthen tax enforcement, bill to strengthen tax enforcement, and a cut in non-interest and a cut in non-interest expenditures.expenditures.

Debt RestructuringDebt Restructuring

The Role of the IMFThe Role of the IMF