Question

Argentina:  Anatomy of a Financial Crisis

1.  What were political and economic conditions like in Argentina in December 2001/January 2002?

2.  What was the Convertibility Plan?  What was it intended to accomplish?

3.  What causes (both internal and external) were behind the predicament Argentina found itself in with the de-pegging of the peso and the resignation of 5 presidents in late 2001/early 2002?

4.  Could the massive default by Argentina have been avoided? If so, how?

Answer 1

1). Political and economic conditions in Argentina in december 2001/ January 2002.

In the chaos of late 2001/early 2002, riots and looting rocked the country. The police killed at least 36 people. The established political forces were totally discredited an “Que se vayan todos” (may they all just go away) became the popular slogan. De la Rúa resigned, and three of his successors only lasted in office for a few days. The economy was in free fall. Soon it was almost a quarter smaller than in 1998. The share of urban people living below the poverty line went up to 57.5 %.

Eventually, the political situation stabilised under an interim president, Eduardo Duhalde. The economic situation improved slowly, from a very low bottom. It helped that the decline had been so steep that a total restart was needed. Having defaulted, moreover, the country was no longer bound by IMF conditionalities. The global economic environment suddenly became more favourable as agricultural commodities especially soybeans were in strong demand. For some years, Argentina actually had a positive trade balance.

Since 2015, President Mauricio Macri is in office. In the election campaign, he promised to liberalise and normalise the economy. International investors initially appreciated him, however, they lost patience with him earlier this year. The reason was that he did not want to proceed as fast as initially pledged. In view of a fast depreciating peso, Macri had to turn to the IMF for help, and the economy is now in recession. The underlying problem, however, is a change in the global macroeconomic setting. For years, the dollar had been cheep as interest rates in the USA were low. Accordingly, speculative money poured into emerging markets. The appreciation of the dollar and higher interest rates mean that private investors are now more likely to shy away from countries like Argentina.

The economy is in recession now, but things are not as terrible as they were in the winter of 2001/2002. The long shadow of that crisis is on people’s mind, of course. The mood is tense. Most do not expect the crisis to escalate as severely this time – but they did not expect that to happen back then either.

2). In March 1991 argentina announced its convertibility programme, a new initiative to improve policy credibility and to establish macroeconomic stability. The compatibility programme established a currency board with an explicitly legislated, fixed exchange rate of 10,000 Australes per U.S. dollar.

With the economy beset by recession and hyperinflation, the convertibilty plan was introduced in 1991 into an attempt to break Argentina's inflationary psychology once and for all.

• First, we should have focused more closely on the debt dynamics. Indeed, we are now stepping up our work on the analysis and assessment of debt sustainability. (Bearing in mind, however, that this will always remain fundamentally a matter of judgment.) In Argentina, assessing the implications of the debt position was complicated by the fact that confidence in debt sustainability and the maintenance of the currency board were intertwined. Doubts about one threatened potentially self-fulfilling concerns about both.
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• Second, currency boards are not necessarily as durable as some people liked to imagine in the wake of the Asian crisis, especially if they lack support from accompanying fiscal and structural policies. One of our priorities in strengthening surveillance is to be more candid and comprehensive in our analysis of exchange rates and exchange rate regimes.
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• Third, emerging market countries may need to be even more conservative with public external debt than we had thought. If your private sector is benefiting from access to international capital markets—which is all to the good—then it is dangerous for the public sector to rely on it too much for cheap finance as well. Changes in international capital markets have already forced us to change our rules of thumb for the adequacy of official reserves. Maybe a similar rethink is required here?

3). The Argentina Currency Board pegged the Argentina peso to the U.S. dollar between 1991 and 2002 in an attempt to eliminate hyperinflation and stimulate economic growth. While it initially met with considerable success, the board's actions ultimately failed. Argentina Inflation due to pegged currency. In April 1991, Argentina adopted a rigid peg of the peso of the dollar and guaranteed convertibility under this arrangement. That is, the central bank stood by to convert pesos into dollars at the hard peg. was caused by the undesirable confluence of several economic events: a hard currency peg, currency overvaluation, economic rigidities, inappropriate fiscal policy, external shocks, large scale foreign currency borrowing followed by a sudden stop in capital inflows and enduring IMF support.

The swift departure of Mr Rodriguez Saa, Argentina's third president in less than two weeks, leaves the presidency in the hands of the House majority leader, Eduardo Camano. Ramon Puerta, the Senate leader who served briefly as president after Fernando de la Rua's resignation, quit his post on Sunday to avoid inheriting the presidency again.

Mr Rodriguez Saa technically remains president until his resignation is formally accepted at a joint assembly of the House and Senate, scheduled to take place this afternoon.

Mr Rodriguez Saa became interim president on 23 December, two days after Mr De la Rua was forced out amid protests and looting over the government's inability to contain an economic crisis and unemployment now topping 18 percent. The violence left 28 people dead.The December 2001 crisis was a direct response to the government's imposition of "Corral" policies (Spanish: Corralito) at the behest of economic minister Domingo Cavallo, which restricted people's ability to withdraw cash from banks. Rioting and protests became widespread on 19 December 2001, immediately following the president's declaration of a state of emergency and his resignation on the following day. A state of extreme institutional instability continued for the next twelve days, during which the successor president Adolfo Rodríguez Saáresigned as well. While the degree of instability subsided, the events of December 2001 would become a blow against the legitimacy of the Argentine government that would persist for the following years.

4). Argentina has imposed currency controls and seeks more time to repay its massive debt as part of efforts to stem fresh turmoil in financial markets.

After almost four years of relative calm, Argentina is navigating rough financial waters again. The debt-laden South American country went into a brief, one-day "selective default" on Thursday imposed by ratings agency Standard & Poor's on some of the country's debts totaling $101 billion (€92 billion). But the ratings agency added in a press release on the same day that the default had been "cured" after Buenos Aires agreed to new terms for its short-term bonds, meaning the default rating could be lifted on Friday.

Finance Minister Hernan Lacunza described the agency's ruling as a "technicality" that was resolved with a new payments schedule that came into effect on Friday. But later on Friday, another ratings agency, Fitch, also downgraded Argentina to what it called "restrictive default," citing a missed payment. Fitch is now waiting for "confirmation of payment on the short-term local debt securities" and demanded more information on the revised terms announced by the government. Finance Minister Hernan Lacunza said the government was planning to extend the maturity of its debt denominated in local and foreign currencies because of "short-term liquidity stresses." He insisted though the move was "not due to problems with the solvency of the debt."