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Debt Crisis in Argentina and Chile: Lessons from the 1980s

Explore the debt crises that hit Argentina and Chile in the 1980s, the factors that triggered them, and the strategies each country employed to recover. Understand the impact on their economies and the measures taken to prevent future crises.

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Debt Crisis in Argentina and Chile: Lessons from the 1980s

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  1. Debt CrisisArgentina and Chile By Olivia Ponitz

  2. Debt Crisis of the 1980’s • By 1981 US anti-inflation policy put world economy into a recession • There was a rise in interest burden that debtor countries had to pay • The dollar appreciated sharply • Primary commodity prices collapsed

  3. 1980’s continued • Crisis began in 1982 • Banks in industrial countries cut off new credits and demanded payment on loans • Which caused developing countries to not be able to meet debt obligations • By 1986 more than 40 countries were having severe financial problems

  4. Ending a Crisis • Crisis ended in 1989 • American banks started lending to developing countries again

  5. Argentina • Turned to institutional reform and increased government revenues • Slashed import tariffs • Cut government expenditures • Major state companies were privatized • Tax reforms

  6. Convertibility Law of 1991 • Currency fully convertible to US dollar at a fixed rate • Currency be backed by gold or foreign currency • This worked for nearly a decade

  7. Result • Affected inflation- under 5% by 1995 • Real appreciation of the peso • Unemployment • Growing current account deficit

  8. After the Fact • 1997 country’s deficit grew uncontrollably • 2001 country’s foreign credit dried up • Defaulted on it’s debt in December 2001 • Abandoned peso-dollar peg in January 2002 • Government defaulted the external debt

  9. Chile • Instituted a regulatory environment for domestic financial institutions • Removed explicit bailout guarantee • A crawling peg was implemented • 1990 Chilean central bank was made independent of the fiscal authorities

  10. Chile • New policy required inflows to be accompanied by a 1 year, non-interest bearing deposit • The implied inflow tax set up to limit real currency appreciation and reduce risk if foreigners withdrew short term funds

  11. Result • Between 1991 and 1997 GDP grew averaging 8% a year • Inflation dropped from 26% in 1990 to 6% in 1997

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