2001 2002 argentinean currency crisis
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2001-2002 Argentinean Currency Crisis

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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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Presentation Transcript
summary
Summary
  • History
  • Threats
  • The Crisis
  • IMF Intervention
  • Critiques
  • Q&A
history
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
history4
History
  • 1995 – Establishment of MERCOSUR
    • A common market between Argentina, Brazil, Paraguay and Uruguay
    • Aimed To Eliminate Tariffs between the nations
results
Results
  • Fixed Exchange Rate
    • Halts Hyperinflation
    • Encourages Imports
  • Privatization
    • Decreases Government Deficits
    • Decreases Public Debt
  • MERCOSUR
    • Increases Exports
threats
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
threats8
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
political reaction
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
crisis begins
Crisis Begins
  • Early 2001 - Public Debt = 50% of GDP
  • GDP Drops 3%
  • Late 2001 – Public Debt = 60% of GDP
2001 year end figures
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%
public reaction
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 $15B by July 2002
  • Government imposed a freeze on withdrawals
    • Riots ensued
    • 20 Dead
imf intervention
IMF Intervention
  • Removal of US$ Peg, Devaluation of the Peso
  • Reduction of Government Spending
    • Public Sector Wages dropped 13%
  • Raised Interest Rates
imf critiques
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
imf critiques20
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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