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2001-2002 Argentinean Currency Crisis. Angel Munoz Kolby Patrick. Summary. History Threats The Crisis IMF Intervention Critiques Q&A. History. 1983 – Raul Alfonsin becomes president Inherits Huge Debt from Predecessor Prints Money to pay off debt – Inflation ↑

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2001 2002 argentinean currency crisis l.jpg

2001-2002 Argentinean Currency Crisis

Angel Munoz

Kolby Patrick


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Summary

  • History

  • Threats

  • The Crisis

  • IMF Intervention

  • Critiques

  • Q&A


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History

  • 1983 – Raul Alfonsin becomes president

    • Inherits Huge Debt from Predecessor

    • Prints Money to pay off debt – Inflation ↑

  • 1991 – Carlos Menem Assumes Power

    • Chief Economist, Domingo Cavallo, recommends a fixed exchange rate to stifle hyperinflation

    • Recommends Privatization of many industries


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History

  • 1995 – Establishment of MERCOSUR

    • A common market between Argentina, Brazil, Paraguay and Uruguay

    • Aimed To Eliminate Tariffs between the nations


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Results

  • Fixed Exchange Rate

    • Halts Hyperinflation

    • Encourages Imports

  • Privatization

    • Decreases Government Deficits

    • Decreases Public Debt

  • MERCOSUR

    • Increases Exports


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Threats

  • U.S. Dollar Appreciation

    • Exports becoming more expensive

    • Exports Decline

  • Brazil Devalues the real

    • Brazilian Exports more attractive and less expensive

    • Argentinean Exports decline further

    • Current Account Falls into deeper Deficit



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Threats

  • Capital Account dwindling

    • Foreign Direct Investment Decreases

    • High debt to defend Fixed Exchange Rate

    • Argentina Fails To Pay Interest on its Debt

  • Capital Account falls.

  • Argentina Uses Foreign Reserves to pay debts



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Political Reaction

  • Fernando de la Rua replaces Carlos Menem

    • Forces businesses to raise prices to increase tax revenue

    • Businesses fail because of added costs

    • Tax Revenues Decline


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Crisis Begins

  • Early 2001 - Public Debt = 50% of GDP

  • GDP Drops 3%

  • Late 2001 – Public Debt = 60% of GDP




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2001 Year End Figures

  • Gross Domestic Product – Down 6.03%

  • Government Deficit – 4.5%

  • Total Economic Activity – Down 18%

  • Construction – Down 36%

  • Imports – Down 50%

  • Tax Revenue – Down 17%


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Public Reaction

  • Devaluation Fears

    • Run on the Banks

      • $3.6 Billion Withdrawn

      • 6% of Deposit Base Withdrawn in 2 Days

      • Deposits fell from $85B to $15B by July 2002

  • Government imposed a freeze on withdrawals

    • Riots ensued

    • 20 Dead


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IMF Intervention

  • Removal of US$ Peg, Devaluation of the Peso

  • Reduction of Government Spending

    • Public Sector Wages dropped 13%

  • Raised Interest Rates




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IMF Critiques

  • Unrealistic Forecasts

    • 2001 Real GDP growth was forecasted to be +3.5%

    • Actual Real GDP declined by over 6%

    • Were not able to assess severity of the situation

  • Oversight of Fixed Exchange Rate

    • Should not have been permanent


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IMF Critiques

  • Debt Management

    • Borrowed at higher interest rates than economic growth rates

    • Continued Borrowing when it did not have funds to pay interest on existing debt

  • Lending Policy

    • Must have standards for loans

    • Must not encourage moral hazard



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