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Argentina

Argentina. Financial Crisis 2001. A Brief History. Gained independence from Spanish Colonials in 1810. Afterwards, Argentina’s provinces disputed over political control. Military Juntas often alternated in power with elected presidents. No stable government until the 1980’s.

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Argentina

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  1. Argentina Financial Crisis 2001

  2. A Brief History • Gained independence from Spanish Colonials in 1810. • Afterwards, Argentina’s provinces disputed over political control. • Military Juntas often alternated in power with elected presidents. • No stable government until the 1980’s. • Argentine governments often financed public deficits with unrestrained inflation.

  3. Argentina: a Republic Government • The elected president has executive power over the State as well as the Government. • Legislative power is vested in both the Executive branch (the president) and in the National Congress. • Like the U.S., Judiciary is independent from the Executive and the Legislative branches. • Very similar to the U.S. government (BUT FAR MORE CORRUPT). • The president at the start of the recession: Carlos Menem • His successor: Fernando De la Rua

  4. Argentine Central Bank • Established in 1935. • Not entirely independent. • In 1989, annual inflation rose to 20,000%.

  5. Argentine Currency Board • Riots ensued as Argentine wealth was literally inflated away. • in 1990, the newly elected Minister of the Economy (Domingo Cavallo) fixed the value of the Argentine currency at 10,000 Australs per U.S. Dollar. (10,000 Australs = 1 Argentine Peso = 1 USD) • The stabilized currency had positive effects on the economy. • This policy lasted until 2002, as Argentina’s debt became a source of economic stagnation.

  6. The Recession • Cavallo’s newly instituted fixed value of currency to the dollar ensured that Argentinian pesos would be accepted as the dollar grew in use. • Due to this increase in value of the domestic currency, quality of life increased and inflation fell in the short term. • However, Government spending remained high and the national debt continued to grow while the International Monetary Fund loaned money to Argentina. • In addition to the lack of government spending cuts, the increased value of the peso reduced import costs. This resulted in a large outflow of currency from Argentina and began to erode domestic industries.

  7. Unemployment Begins to Rise Data taken from the World Bank Unemployment (%) Time (Years)

  8. Cutting Government Spending • As Fernando De La Rua is elected, economic unrest continues to grow within Argentina. • Attempted to cut government spending through policies directly detrimental to citizens. • 13% pay cut for all civil servants and cuts to pension benefits across the board resulted in nationwide strikes. • Distrust in the government continues to grow as unemployment increases.

  9. External Awareness • IMF approves a rescue package consisting of $20 billion in loans, $14 billion coming directly from the IMF. • As markets continue to decline concerns arise that Argentina will not be able to meet the IMF’s payment targets. • IMF and other agencies/economists begin pushing Argentina to restructure their debt.

  10. Panic Ensues • Due to growing unrest from Argentina’s lenders as well as doubt from the population that Argentina will be able to restructure their debt effectively, bank runs begin to occur in as citizens wish to cash out their deposits for equivalent US dollars. • IMF refuses to release $1.3 billion in new funds due to failure by Argentinian government to meet agreed-upon deficit targets. • Government freezes withdrawals allowing only $1000 dollars per month for all citizens in the beginning of December.

  11. Riots and Default • President De La Rua resigns on December 21st after attempting to calm weeks of riots since the banking freeze was instituted. • In the last week of 2001, interim president Adolfo Saa’s government defaults on the majority of Argentina’s debt totaling $132 billion.

  12. Argentina GDP 1985-2014 Notice the sharp fall in GDP after 2002 as Inflation peaked at the same time.

  13. Recovery : leaving the fixed Ex rate • In January 2002, Duhalde abandoned the peso-dollar parity. • Devalued Peso allowed Argentina to export agricultural products more cheaply and competitively abroad while discouraged imports. • A huge trade surplus was created.

  14. Recovery : leaving the fixed Ex rate

  15. Recovery • This surplus caused inflow of dollars into Argentina, allowing the Argentine central bank to rebuild its dollar reserve.

  16. Recovery • Peso slowly recover, reached a 3-to-1 rate to the dollar • Tourist returned and more foreign currency inflow into Argentina • Real GDP per capita steadily increased

  17. Recovery : other measures? • Import substitution was encouraged, gives incentives when purchasing domestic product. • Reformed tax collection scheme. • Reformed social welfare system to control government spending.

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