Download Argentina`s crisis of 2001, resulted from a confluence of

Argentina’s crisis of 2001, resulted from a confluence of events some external to Argentina’s
policy process, others directly related to its political and economic choices. Although it is not
easy to discern at what specific point in time Argentina’s economic situation turned into a
crisis. The following is a summary of these events from before Argentina’s adoption of the
currency board in 1991 to developments in early 2002. I will organise this report
chronologically.
Menem’s government:
During the 80’s Argentina suffers through a long period of economic instability, including the
Latin American debt crisis and hyperinflation. In 1990, Carlos Menem is elected as the new
president of Argentina and chose Domingo Cavallo as Minister of Economy. Together they
create a major structural adjustment program including tax reform, privation including petrol
sector not like in Mexico, trade liberalization, deregulation, and adoption of currency board.
The 1rst of April of 1991, Argentina’s Congress creates a convertibility Law, which legally
adopts the currency board guaranteeing the convertibility of peso currency to dollars at oneto-one fixed rate and limiting the printing of pesos only to an amount necessary to purchase
dollars in the foreign exchange market. Basically, each peso in circulation is backed by a US
dollar and monetary policy is constrained to confirm that promise.
Thanks to this different reform, Argentina enjoys during 3years strong economic growth and
the currency board is considered highly successful. The GDP has known an increase of 25%.
But in 1995, following Mexico’s December 1994 peso devaluation, capital flows out of
emerging markets. On this fact, Argentina’s GDP declines by 2.8%. In may 1995, President
Menem is reelected President after convincing Congress to change electoral laws that prohibit
a second term. From 1995 to 1999, the convertibility currency knows a real appreciation
relative to the trade partners of Argentina.
During the two years, 1996 and 1997, economic growth were by 5.5% in 1996 and 8.1 in
1997, in the other part, current account deficit and debt measures worsen.
In july 1997, the east Asian financial crisis began and we are going to look at what it affect in
n Argentina.
In 1998, financial crisis moved to Russia and then Brazil. Argentina’s unemployment began
to increase because of rise down of the demands.
In January of 1999, Brazil, facing its own financial crisis, devalues its currency, which affect
Argentina’s exports, knowing 30% of which were traded with Brazil.
In the 24th of October, Fernando de la Rua of the Radical Civic Union (UCR), the opposition
coalition candidate, running on a platform to end corruption (under Menem) and the
recession, defeated Peronist candidate Eduardo Duhalde for President.
De la Rua’s government:
In fact, the 10th of December, De la Rua is nominated as President of Argentina and shortly
thereafter researched assistance from the IMF whereas by himself he has tried to range the
situation thanks to some plans.
In 2000, The IMF agrees to three-year $ 7.2 billion stand-by arrangement with Argentina
conditioned on a strict fiscal adjustment and the assumption 3.5% GDP growth in 2000 since
actual growth was 0.5%.
During the 2000th spring, Fernado de La Rua created a program to reduce the financial debt
which supposed a lot of actions.
First of all, the salary taxes, petrol taxes, personal wealth taxes increased. After, the federal
spending within the province rose down.
In May, the 29th exactly, the government announces $1 billion in budget cuts in hopes that
fiscal responsibility will bring renewed confidence to economy.
During this month, social security was reformed in order to reduce the public deficit and to
increase competition. Fernando de La Rua reformed the telecommunication and energy sector
in order to stop monopoly, to promote competition.
140000 state employee’s salary declined, around 8% to 20% in order to save 590 millions $.
In September, the IMF concluded an article IV consultation, the required annual
comprehensive review of member country economies.
In October, Vice President Carlos Alvarez resigns over de la Rua’s decision not to replace
two cabinet members linked to a recent Senate bribery scandal.
In November, in spite of La Rua’s actions, Argentina suffered a distrust crisis by
International investors, whose liquided Argentina’s obligations. The real devaluation, the
worse agricultural exports price, increasing of the dollar and Argentina’s economy situation,
showed that they would not be able to pay debt measures and that peso would take down from
U.S dollar. In that way, in November Fernando de la Rua adopted another plan which
consisted to stop government spending at all levels, the end of social security, taxes
increasing. He thought that these actions would convey by a return of the investors trust. This
by the fact that interest rate decreased further to the change of public finance. Contrary to this
return, plans were criticized and killed the timid trade-in which began in 1999. To arrange,
Fernando de la Rua reduced public consumptions and rose taxes.
In December, the de la Rua government announced a $40 billion multilateral assistance
package organized by IMF.
At the beginning of the 2001 year, Argentina’s continued poor economic performance
prompted the IMF to augment the March 10, 2000 agreement by $7.0 billion as part of a $40
billion assistance package involving the Inter-American Development Bank, the World Bank,
Spain, and private leaders. The agreement assumed GDP would grow at a rate of 2.5% in
2001 (versus actual decline of 5.0%). In the 19th of March, Domingo Cavallo, Minister of
Economy under Menem and architect of the currency board ten years earlier, replaced
Ricardo Lopez Murphy, who resigned as Minister of Economy. In June the de la Rua
government announced a $29.5 billion voluntary debt restructuring in which short-term debt
was exchanged for new debt with longer maturities and higher interest rates. The 19th of june,
the peso exchange rate for merchandise trade was priced at a 50/50 dollar euro peg,
effectively allowing a 7% devaluation for foreign trade in hopes of improving Argentina’s
international competitiveness. Many analysts raise concerned over the effects on the
credibility of the convertibility regime.
In July, Cavallo announced a plan to balance budget, but the markets reacted negatively,
expressing lack of confidence. Further to this reaction, unions called a nationwide strike to
protest government austerity plan to arrive at “Zero Deficit Law”, passed by the Argentine
Congress, requiring a balanced budget by the fourth quarter of 2001.
Based on Argentina’s commitment to implement the “Zero Deficit Law” immediately, the
IMF augmented its March 10, 2000 agreement for a second time, increasing lending
commitment by another $7.2 billion.
In October, the use of provincial bonds as “scrip” to pay public salaries became more
widespread as federal revenue transfers declined. At the same time, the opposition Peronist
Party won control of both chambers of congress in mid-term elections.
In November, Argentina conducted a second debt swap, exchanging $60 billion of bonds with
an average interest rate of 11-12% for extended maturity notes carrying only 7% interest rate.
International bond rating agencies considered it an effective default. After, a run on the banks
began, wih central bank reserved falling by $2 billion in one day. President de la Rua imposed
$1.000 per month limitation on personal bank withdrawals.
After 2 days, in the 1st of December, protests began over bank withdrawal limitations.
The IMF kept $1.24 billion loan instalment, citing Argentina’s repeated inability to meet
fiscal targets.
The 7th of December Argentina announced it could no longer guarantee payment on foreign
debt. In the 13th the government announced that the unemployment rate was near record high
of 18%. Unions called nationwide strike.
The 19th rioting spreads to major cities over deep budget cut. The government declared a state
of siege and Minister of Economy Domingo Cavallo resigned. Further to him, the 20th
president de la Rua resigned in the wake of continued rioting, leaving 28 people dead.
The 21st congress accepted President de la Rua’s resignation. Senate President Ramon Puerta
was named provisional president for 48 hours. Congress appointed San Luis Governor Adolfo
Rodriguez Saa as interim president until elections could be held in March 2002.
The 26th the liquidity standards for banks are relaxed. Rodriguez Saa announced a new
economic plan based on:1) suspension of payments on public dept; 2) new jobs creation
program; and 3) creation of new currency( the Argentino) to began circulating in January
2002 and not to be convertible to the U.S. dollar. The 30th President Rodriguez Saa resigned
after continued rioting and loss of party support. Senate leader Puerta resigned to avoid
second appointment as interim president. No immediate successor emerged to take over the
Presidency.
The 31st of December, the Argentine Congress selects Peronist Senator Eduardo Duhalde to
complete December 2003 Presidential term.
2) My views about the key elements that been used to address the crisis situation in the
country.
Argentina is facing a debt crisis. In the recent past it has attempted to avoid disaster by a
series of fiscal and liability management measures, including a tax increase and a large IMF
rescue package. These measures only postponed the crisis and that postponement runs the risk
of significantly increasing the eventual damage to Argentina and to other countries.
I am going to give some solutions for different ways.
Impact on people especially poor.
Financial crises have adverse impacts on every agents in the economy, including the poor.
The welfare of households and communities can be affected through five things: relative price
changes, changes in work demand, returns on physical assets and capital gains or losses,
public transfers and community environment effects. To minimize the negative effects on the
poor, a solution in two parts can be done. First is about being prepared by having an effective
and efficient public safety net in place before the crisis. The second part involves policies for
dealing with a crisis that has already started. Some of the government measures include:
-choosing macroeconomic policies that put the economy back to
sustainable track;
-reinforcing safety nets to deal with the extra demand for support;
initiatives aimed at preserving and rebuilding social capital in poor
communities;
-setting up adequate information;
-monitoring and evaluation systems.
Bank restructuring in practice
Managing a banking crisis is one of the most difficult tasks facing government since most of
measures must be carried out quickly under imperfect information. Senior central bankers
discussed various issues concerning the bank restructuring. It starts out by reviewing the
banking structure, problems faced and some of the causes of recent banking crisis. Drawing
from the experience of 23 countries, it is concluded that there is no insuperable thing in bank
restructuring. What needs to be done depends very much on circumstance. However, some of
successful guidelines can be discerned as follows:
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The government must be willing to recognize the scale of the problem as
soon as possible.
The government should be prepared to commit substantial fiscal resources
to fixing the problems in the banking system.
Transparent arrangements must be adopted at an early stage to deal with
NPL’s so that a core of healthy banks can continue to facilitate economic
development.
The process of saving the banking system does not necessarily mean saving
existing bank shareholders or managers.
Improvements in supervisory procedures are usually necessary to prevent
problems recurring.
Policy options and recommendations
Since banking crisis in emerging economies has multiple causes, there is no single solution to
them. However, suggest that there are several measures that can significantly reduce the
incident of each of the factors underlying banking crisis. For example, greater macroeconomic
stability, a larger role for foreign owned banks, the wider use of market-based hedging
instruments and higher levels of bank capital would help to make the consequences for the
domestic banking system less damaging. Limiting the allocation of bank credit to particularly
interest-rate-sensitive sectors, close monitoring of lending by weakly capitalized banks and
employing the right mix of macroeconomic and exchange rate policies would similarly limit
vulnerability to lending booms, asset price collapses and surges of capital inflows. Strict asset
classification and provisioning practices could reduce the “evergreening” of bad loans and
protection against loan losses.