Argentina Crisis in 2001

Professor Ramon A. Castillo-Ponce

June 1st, 2006

Presented by

Shing Wong

Yafan Wu

Wanichaya Phunpruk

Summary

Exchange rate policy

Factors lead to devaluation

Economic impact on Argentina

Post-Crisis

OVERVIEW

Location - Southern South America, bordering the South Atlantic Ocean, between Chile and Uruguay

Area – 2,766,890 sq km,

Population – 39,921,833 (2006)

Currency--Peso

Origins

1983: democracy in the country was restored with the election of President Raúl Alfonsín. The new government's plans included stabilizing Argentina's economy, for which new loans were required. The state eventually became unable to pay the interest of this debt, the economy collapsed and inflation began increasing

1989: Argentina's inflation reached 200% per month, topping 3,000% annually.

Fix Rate Policy

1991: Carlos Menem's government installed what was known locally as a "convertibility system" to rid Argentina of hyperinflation and give the country a confidence shock. Under the Convertibility Law, the peso and the U.S. dollar both circulated legally at a 1-to-1 exchange rate

Result of Convertibility Law

The dollar peg helped bring inflation under control

Greater economic stability attracted foreign investment inflows, contributing to an acceleration in economic growth

Inflation Rate

1989 5,103%

1991 84%

1992 17.5%

1993 7.4%

Crisis began to turn sour in 1999.

Adverse external shocks A reduction of capital flows after the East Asian an

d Russian crises of 1997–98 The Brazilian devaluation (economic growth was n

egative for three years in a row.) Commodities export shock The convertibility plan locked in the overvaluation

Weak fiscal policy Weak tax administration: tax avoidance and evasi

on

Argentina crisis in 2001

Argentina quickly lost the confidence of investors, and the flight of money away from the country increased.

Argentine workers began to withdraw their savings  

Government’s responses

Con’t

During the last week of 2001, the government facing the impossibility to meet debt payments, defaulted on the larger part of the public debt, totally 93,000 million dollarsIn January 2002,government abandoned its peg to the U.S. dollar. the currency has depreciated 356% against the U.S. dollar in the year to September 20. Output declined 15% and inflation to rise to 72% in 2002

Fiscal Policy

Debt Sustainability

1. During military dictatorship (1976-1983 years),

Argentine external debts are from 8,200 million surges to 43,500 million dollars

2. Argentina’s public debt was almost entirely denominated in foreign currencies

Fiscal PolicyWeak tax administration leading to widespread tax avoidance and evasion

1. Frequent changes in tax law and senior management

in tax administration

2. Lack of a computer based accounting system

3. Politicization of the tax administration

Adverse external shocks

The Brazilian devaluation: caused the Argentina less competitive in the exporting markets

A secular appreciation of the U.S. dollar caused Peso to be overvalued

The end of convertibility: Immediate effects

Peso’s devaluation and inflation

Many private companies came close to bankruptcy

Argentine products were rejected in some international markets

Post-Crisis

Economic Recovery

Debt Repayment

GNP, Unemployment Rate, and Wealth Distribution

Economic Recovery

In 2003, Argentina’s economy started to climbAgricultural exports hit record high, foreign investments and tourism returnedExported less expensive and became competitive abroad Demand from developing countries increased (China is a major buyer of soy products)Considerable amount of foreign currency inflow

Debt Repayment

In 2005, growing fiscal surplus made possible to pay IMF with no negotiation

12/15/2005, it announced to pay IMF the whole debt of 10 billion USD

The payment made 3 years earlier than scheduled date

Evolution of International Currency Reserves

GNP/Unemployment Rate

0%

2%

4%

6%

8%

10%

12%

14%

16%

2003 2004 2005

GNP

Unemployment rate

Wealth Distribution

Poverty in Argentina

Date ofmeasurement

Extremepoverty

Under povertyline

Oct 2002 27.5% 57.5%

May 2003 26.3% 54.7%

2nd sem 2003 20.5% 47.8%

1st sem 2004 17.0% 44.3%

2nd sem 2004 15.0% 40.2%

1st sem 2005 13.6% 38.5%

Q & A