Download Chronology of Events

Argentine Peso Currency
Crisis 2001-2002
Team IV
Aliya Riddle
Andrew Kenna
Steve Roszak
Chronology of Major Events
April 1, 1991 Congress enacts the Convertibility Law. The law pegs the
Argentine peso to the American dollar at a one-to-one ratio. The
government can not issue pesos without the backing of foreign reserves.
1995-1999 The U.S. Dollar experiences a real appreciation. This also
causes the Argentine peso to appreciate relative to trading competitors.
The peso becomes overvalued.
July 1997 East Asian financial crisis begins.
1998 Financial crisis moves to Russia and then Brazil.
1999 Brazil devalues their currency, hurting Argentina’s competitiveness in
export markets.
Chronology of Major Events
1999 – 2001 Excessive government deficits lead to large debt borrowing.
December 7, 2001 Argentina announces that they can no longer
guarantee payments on foreign debt. The suspension of payments on
$142 billion foreign debt marks the largest default in history.
January 6, 2002 Argentina announces the end of the currency peg. The
government announces plans to devalue the peso by 29%.
January 15, 2002 The peso falls as low as 2.05 to the dollar in active
trading.
March 17, 2005 Exchange rate of 3.3 Pesos/$
Exchange Rate, 1995 - 2005
What Went Wrong?
Currency Crisis Causes
Excessive Government Deficits

Too much spending by national and provincial
governments was combined with low government
revenues. This caused large government deficits.

Large fiscal budget deficits persisted during the entire
1990’s through 2002.
Excessive Government Spending

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Instead of reducing government spending, the country
attempted to levy taxes against the citizens to solve
their problems.
Historically, Argentines paid very little taxes with about
40% not paying any taxes. Thus, increasing taxes was
met with high resistance and little success.
In December 1999, new president Fernando de la Rua
issued a higher tax which killed a potential economic
recovery.
Primary Expenditures as % of GDP
(cumulative 12 months)
Too much spending by Argentina during this period.
Excessive spending made it difficult to meet debt payments.
19,5%
19,0%
18,5%
18,0%
17,5%
Dic-02
Sep-02
Jun-02
Mar-02
Dic-01
Sep-01
Jun-01
Mar-01
Dic-00
Sep-00
Jun-00
Mar-00
Dic-99
Sep-99
Jun-99
Mar-99
Dic-98
Sep-98
Jun-98
Mar-98
Dic-97
17,0%
Debt Borrowing

The government financed the deficit through debt
borrowing. Argentina relied heavily on international
capital flows to finance the large gap in national
spending.

Not all the problems were the fault of the Argentina
government in the 1990’s, however. Half of the $142
billion in debt had already been assumed in 1991.
Loss of Export Competitiveness

High government deficits and debt would not have been a major
problem if the economy had been able to generate capital inflows
through trade. But, the economy had very poor export growth and
entered a recession in the late 1990’s.

As the dollar strengthened against other currencies in the 1990’s,
Argentina’s exchange rate became overvalued.

An overvalued fixed exchange rate eroded Argentina’s export
competitiveness. Also, the Brazilian currency devaluation hurt
Argentina. Brazil was their main trading competitor, so Brazilian
goods were relatively much cheaper.

Since Argentine exports were too expensive relative to their
competitors, the economy exported too little and imported too
much.
Poor Export Performance

These factors caused a major trade
imbalance and led to large trade deficits.
Other Export-Related Factors

Low productivity growth kept costs of production high.




GDP change from 1995 to 1996 was +5.5%
GDP change from 1998 to 1999 was –3.4%
GDP change from 2001 to 2002 was –12%
Resistance of unions to lower wages further prevented a fall in
production costs.
Additional Causes

High unemployment and underemployment levels hurt
productivity.

Inconsistency of government policies.

Institutional and political weaknesses. Corruption often limited
the country’s ability to reduce government spending.

Declining industrial activity denied the government funds needed
to balance the budgets.
Summary

The Argentine currency crisis was the result of a variety of factors.


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
Bad Policy




Large government deficits lead to excessive debt borrowing.
Debt payments could not be met because of poor export performance.
Eventually, the economy was forced to devalue their currency as foreign reserves dried up.
Fixed Exchange Rate kept too long. Overvalued the Argentine Peso.
Used to much debt to finance government deficits. Even issued debt to meet debt.
Attempted to eliminate deficit by levying excessive taxes rather than by reducing spending.
Bad Luck


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Brazilian crisis hurt trade competitiveness.
U.S. Dollar success hurt trade position.
Unions and low productivity growth raised costs of production.
Could the crisis have been avoided?

Many experts believe the crisis could have been avoided if Argentina had
abandoned the peg and devalued in 1997, 1998, or 1999.

Why did they keep the fixed exchange rate?
1.) The peg cured hyperinflation of the late 1980’s. If the peg was
abandoned, Argentina may have lost price stability.
2.) Much of the country’s debt was in dollar-denominated amounts. If the
peso had devalued then the peso size of the debt would have increased.
This could have lead to bankruptcies.
3.) They expected the dollar to devalue to more competitive rates. Hoped
problems would reverse themselves.