Argentina Economic Crises

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Argentina Economic Crises

TABLE OF CONTENTS

THE ARGENTINA ECONOMIC CRISIS2

ORIGINS...2

THE 1990s.2

THE CRISIS.3

THE END OF CONVERTIBILITY...5

IMMEDIATE EFFECTS.6

THE RECOVERY6

EVOLUTION OF THE ARGENTINE GNP, 19992004.7

FOREIGN CURRENCY RESERVES OF ARGENTINA'S CENTRAL BANK, IN

MILLIONS OF USD8

EFFECTS ON WEALTH DISTRIBUTION.9

DEBT RESTRUCTURING10

CRITICISM OF THE IMF10

ALLEGATIONS OF USE OF UN-PUBLISHED CLEARSTREAM

ACCOUNTS

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An Exclusive report for FINANCIAL INSTITUTIONS

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THE ARGENTINA ECONOMIC CRISIS

The Argentina economic crisis was part of the situation that affected Argentina'seconomy during the late 1990s and early 2000s. Macroeconomically speaking, the criticalperiod started with the decrease of real GDP in 1999 and ended in 2002 with the return toGDP growth, but the origins of the collapse of Argentina's economy, and their effects onthe population, can be found in action before. As of2005, the crisis is arguably over,though many challenges remain for the country.

ORIGINS

Argentina was subject to military dictatorship (alternating with weak, short-liveddemocratic governments) for many years. Huge debt was acquired for money later to belost in different unfinished projects, the Falkland/Malvinas Islands War, and the state'stakeover of private debts.

In 1983, democracy in the country was restored with the election of presidentRal Alfonsn. The new government's plans included stabilising Argentina's economy,for which new loans were required. The state eventually became unable to pay theinterest of this debt, the economy collapsed and inflation began increasing. In 1989,Argentina's inflation reached 200% per month, topping 3,000% annually. President

Alfonsn resigned six months before ending his term, and Carlos Menem took office.

Menem, who had campaigned on a populist platform, immediately went back onhis promises and began a plan, aligned on the neoliberal Washington consensus, oftradeliberalisation, laborderegulation and privatisation of state companies which were thesource of much spending (such as those providing the telephone, energy and waterservices). The terms of these privatisations were often rather unfavourable to theArgentine state. These economic policies led to some social unrest, as the new piqueteromovement.

THE 1990s

The fight against inflation did not go well. In 1991, under the rule of Minister ofEconomy Domingo Cavallo, the Argentine peso's monetary value was fixed by law to thevalue of the United States dollar. The law (Ley de Convertibilidad) stated that any citizencould go to a bank and ask for any amount of cash in pesos to be converted to an equalamount of dollars; in order to secure this "convertibility", the Central Bank was bound tokeep its dollarreserves at the same level as the cash in circulation.


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As a result of the convertibility law, inflation dropped sharply, price stability wasassured, and the value of the currency was preserved. This raised the quality of life formany citizens, who could now afford to travel abroad, buy imported domestic appliancesand electronic products or ask for credits in dollars at very low interest rates.

But Argentina had international debts to pay, and it needed to keep borrowingmoney. The fixed exchange rate made imports cheap, producing a constant flight ofdollars away from the country and a progressive loss of Argentina's industrialinfrastructure, which led to an increase in unemployment.

In the meantime, government spending continued to be high and corruption wasrampant. Argentina's public debt grew enormously during the 1990s, and the countryshowed no true signs of being able to pay it. The IMF, however, kept lending money toArgentina and postponing its payment schedules. Massive tax evasion and moneylaundering explained a large part of the evaporation of funds toward offshore banks. Acongressional committee started investigations in 2001 about accusations that Argentina's

Central Bankgovernor, Pedro Pou, as well as part of the board of directors, had failed toinvestigate cases of alleged money laundering through Argentina's financial system[1].Clearstream was also accused of being instrumental in this global financial process.

Other countries, such as Mexico and Brazil (both of which also happen to beimportant trade partners for Argentina) faced economic crises of their own, leading othercountries to mistrust Latin American countries moneywise, and affecting the overalleconomy of the region. The influx of foreign currency provided by the privatisation ofstate companies had dried out, and after 1997 Argentine exports were harmed by thedevaluation of the Brazilian real and a considerable international revaluation of thedollar.

By 1998, newly elected President Fernando de la Ra faced a country whereunemployment had risen to a critical point, and the undesirable effects of the fixedexchange rate were showing forcefully. In 1999 Argentina's GDP dropped 4% and thecountry entered a recession (which was to last three years, ending in a collapse). Stabilitybecame stagnation (even deflation at times), and the economic measures taken didnothing to avert it; in fact, the government continued the contractive economic policies ofits predecessor. The possible solution (abandonment of the exchange peg, with avoluntary devaluation of the peso) was considered a political suicide and a recipe foreconomic disaster. By the end of the century, complementary currencies such as theLECOP and the Patacn (bonds issued by the national and provincial states) emerged dueto the shortage of cash.

THE CRISIS

Argentina quickly lost the confidence of investors, and the flight of money awayfrom the country increased. In 2001, people fearing the worst began withdrawing largesums of money from theirbank accounts, turning pesos into dollars and sending themabroad, causing a bank run. The government then enacted a set of measures (informally


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known as the corralito) that effectively froze all bank accounts for twelve months,allowing for only minor sums of cash to be withdrawn.

Because of the allowance limit, with the serious problems it caused in certaincases, many Argentines became enraged and took on the streets of important cities,

especially Buenos Aires. They created a new form ofprotest, known as cacerolazo(banging pots and pans). This happened specially during the 2001 and 2002 periods. Atfirst the cacerolazos were simply noisy demonstrations, but soon they included violence,which was directed especially to banks, foreign privatised companies and especiallyprominent American companies. Many businesses were forced to install metal barriers, asthey were suffering from windows and glass facades being broken, and even fires beingignited at their doors. Billboards of such companies as Coca Cola and others werebrought down by the masses.

Confrontations between the police and citizens became a common sight, and fireswere also set on Buenos Aires avenues. The violent protests of 20 and 21 December 2001

in Plaza de Mayo, where demonstrators clashed with the police, ended with several dead,and precipitated the fall of the government. Fernando de la Ra fled the Casa Rosada in ahelicopter on 21 December.

During the last week of 2001, the interim government led by Adolfo RodrguezSa, facing the impossibility to meet debt payments, defaulted on the larger part of thepublic debt, totalling no less than 93,000 million dollars. Rodrguez Sa, utterly incapableto deal with the crisis and unsupported by his own party, resigned before the end of theyear. The Peronist Eduardo Duhalde was appointed by Congress to take his place.


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THE END OF CONVERTIBILITY

Evolution of the cost of living in Argentina. The continuous blue line shows theprice of basic needs, in Argentine pesos per month per adult person (corresponding to thepoverty line). The discontinuous red line shows the price of the minimum food

requirements. Note the abrupt increase in the first semester of 2002.

After much deliberation, Duhalde abandoned in January 2002 the fixed 1-to-1peso-dollar parity that had been in place for ten years. In a matter of days, the peso lost alarge part of its value in the unregulated market. A provisional "official" exchange ratewas set at 1.4 pesos per dollar.

In addition to the corralito, the Ministry of Economy dictated the pesificacin("peso-ification"), by which all bank accounts denominated in dollars would be convertedto pesos at official rate. This measure angered most savings holders and appeals weremade by many citizens to declare it unconstitutional.

After a few months, the exchange rate was left to float more or less freely. Thepeso suffered a huge devaluation, which in turn prompted inflation (since Argentinadepended heavily on imports, and had no means to replace them locally at the time).

The economic situation became steadily worse with regards to inflation andunemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to


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nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about80%. (It should be noted that these figures were considerably lower than those foretoldby most orthodox economists at the time.) The quality of life of the average Argentinianwas lowered proportionally; many businesses closed or went bankrupt, many importedproducts became virtually inaccessible, and salaries were left as they were before the

crisis.

IMMEDIATE EFFECTS

Many private companies were affected by the crisis: Aerolneas Argentinas, forexample, was one of the most affected Argentine companies, having to stop allinternational flights for various days in 2002. The airline came close to bankruptcy, but itsurvived.

Agriculture was also affected: Argentine products were rejected in someinternational markets, in fear that they might come damaged because of the poor

conditions in which they grew, and the USDA put restrictions on Argentine food anddrugs arriving at the United States.

On the entertainment world, producers oftelevision channels were forced toproduce more reality shows than any other type of shows, because these were generallycheap to produce as compared to other programmes. Virtually all education-related TVprogrammes were cancelled, including a popular one which was aimed at teenagers, oftendistributing prizes to the person who could answer through the telephone a series ofphysics and mathematics-related questions.

THE RECOVERY

Eduardo Duhalde finally managed to stabilise the situation to a certain extent, andcalled for elections. On 25 May2003 President Nstor Kirchnertook charge. Kirchnerkept Duhalde's Minister of Economy, Roberto Lavagna, in his post. Lavagna, a respectedeconomist with moderate-centre-wing views, showed a considerable aptitude at managingthe crisis, with the help of heterodox measures.


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EVOLUTION OF THE ARGENTINE GNP, 19992004

The economic outlook was completely different from that of the 1990s; the highexchange rate made Argentine exports cheap and competitive abroad, while discouraging

imports. In addition, the high price ofsoy in the international market produced aninjection of massive amounts of foreign currency (with China becoming a major buyer ofArgentina's soy products).

The government encouraged import substitution and accessible credit forbusinesses, staged an aggressive plan to improve tax collection, and set aside largeamounts of money forsocial welfare, while controlling expenditure in other fields.

As a result of the administration's productive model and controlling measures(selling reserve dollars in the public market), the peso slowly revalued, reaching a 3-to-1rate to the dollar. Agricultural exports grew and tourism returned.


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FOREIGN CURRENCY RESERVES OF ARGENTINA'S CENTRAL BANK, IN

MILLIONS OF USD

The huge trade surplusultimately caused such aninflow of dollars that thegovernment was forced tobegin intervening in order tokeep the peso from revaluing

further, which would haveruined the tax collectionscheme (largely based on imports taxes and royalties) and discourage furtherreindustrialisation. The Central Bank started buying dollars in the local market andstocking them as reserves. By December 2005, foreign currency reserves had reached$28,000 million (they were greatly reduced by the anticipated payment of the full debt tothe IMF in January 2006). The downside of this reserve accumulation strategy is that thedollars have to be bought with freshly-emitted pesos, which may induce inflation. TheCentral Bank neutralises a part of this monetary emission by selling Treasury letters. Inthis way the exchange rate has been stabilised near a reference value of 3 pesos to thedollar.

The currency exchange issue is complicated by two mutually opposing factors: asharp increase in imports since 2004 (which raises the demand of dollars), and the returnof foreign investment (which brings fresh currency from abroad) after the successfulrestructuring of about three quarters of the external debt. The government has set upcontrols and restrictions aimed at keeping short-term speculative investment fromdestabilising the financial market.

Argentina's recovery suffered a minor drawback in 2004 when rising industrialdemand caused a short-lived energy crisis. Scenarios of energy shortage are not discardedin the near future.

Argentina has managed to return to growth with surprising strength; GNP jumped8.8% in 2003, 9.0% in 2004, and 9.1% in 2005 (with expectations of 7.5% for 2006).Consumer prices, however, have accompanied this surge, and average wages have barelycaught up; though not comparable to the levels of former crises, the inflation rate for2005 (~12%) has prompted the government to "cool down" some sectors of the economy,restrict benefits for exporters, and put pressure on companies in order to stabilize prices.


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While unemployment was considerably reduced in 2005, Argentina has so far failed toreach a more equitable distribution of income.

EFFECTS ON WEALTH DISTRIBUTION

According to Argentine agronomist Alberto Lapolla, who has written extensivelyon the transformation of Argentina from the "granary of the world" to a "soy republic",450,000 Argentines died of hunger between 1990 and 2003. Citing the Institute of Stateand Participation Studies (IDEP), a thinktank, Lapolla adds that every day, 55 children,35 adults and 15 elderly die in the country from illnesses related to hunger.

Although GDP has grown consistently and quickly since 2003, it was only in late2004 that it reached the levels of 1998 (the last year before the recession). Othermacroeconomic indicators have followed suit. A study by Equis, an independent

counseling organisation, found out that two measures ofeconomic inequality, the Ginicoefficient and the wealth gap between the 10% poorest and the 10% richest among thepopulation, grew continuously since 2001, and decreased for the first time in March2005.

Poverty in Argentina

Date ofmeasurement

Extremepoverty

Underpoverty

line

May 2001 11.6% 35.9%

Oct 2001 13.6% 38.3%

May 2002 24.8% 53.0%

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%

The table on the left shows statistics ofpoverty in Argentina, in percent of the

population. The first column shows the date of

the measurement (note that the method and

time changed in 2003; poverty is nowmeasured each semester). Extreme poverty is

here defined as not having enough money to

eat properly. The poverty line is set higher: itis the minimum income needed for basic needs

including food, clothing, shelter, and studies.


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DEBT RESTRUCTURING

When the default was declared in 2002, foreign investment fled the country, andcapital flow towards Argentina ceased almost completely. The Argentine governmentmet severe challenges trying to refinance the debt. The state had no spare money at thetime, and the Central Bank's foreign currency reserves were almost depleted.

The Argentine government kept a firm stance, and finally got a deal by which76% of the defaulted bonds were exchanged by others, of a much lower nominal value(2535% of the original) and at longer terms.

CRITICISM OF THE IMF

The International Monetary Fund suffered no discounts in its part of the Argentinedebt. Some payments were refinanced or postponed on agreement. However, theauthorities of the IMF at times expressed harsh criticism of the discounts and activelylobbied for the private creditors.

In a speech before the United Nations General Assembly on 2004-09-21,President Kirchner said that "An urgent, tough, and structural redesign of the


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International Monetary Fund is needed, to prevent crises and help in [providing]solutions". Implicitly referencing the fact that the intent of the original Bretton Woodssystem was to encourage economic development, Kirchner warned that the IMF todaymust "change that direction which took it from being a lender for development to acreditor demanding privileges".

During the weekend of October 12, 2004, at the annual meeting of theInternational Monetary Fund/World Bank, leaders of the IMF, the European Union, theGroup of Seven industrialised nations, and the Institute of International Finance (IIF),warned President Kirchner that Argentina had to come to an immediate debt-restructuringagreement with the speculative "vulture funds", increase its primary budget surplus inorder to pay more debt, and impose "structural reforms" to prove to the world financialcommunity that it deserves their loans and investments.

In 2005, as a large and consistently growing fiscal surplus made it possible,Argentina shifted to a policy of "disindebtment" towards the IMF: paying the IMF in

schedule, with no negotiation whenever possible, with the intention of gainingindependence from it. On 2005-12-15, in a sudden move following Brazil, PresidentKirchner announced that Argentina would pay the whole debt to the IMF which had beenpreviously financed in installments until 2008, for a total of 9,810 million USD,employing the Central Bank's foreign currency reserves.

ALLEGATIONS OF USE OF UN-PUBLISHED CLEARSTREAM ACCOUNTS

As a clearing house, Clearstream has a "dominant position" in Europe, accordingto the European Commission. Funds composing the private and public Argentine debthave transited through Clearstream, which is inevitable because of its quasi-monopolysituation. However, according to "Revelation$" (2001), written by reporterDenis Robertand Ernest Backes, some Argentine funds have transited through an illegal system ofnon-published accounts used by Clearstream; the Citibankin particular, which held alarge part of the private Argentine fund, had numerous unpublished bank accounts inClearstream. This illegal system of non-published accounts makes of Clearstream,

according to several judges as Eva Joly and Renaud van Ruymbeke, European membersof parliament (MPs) such as Harlem Dsir,Glyn Ford and Francis Wurtz, and AttacNGO, a major actor of the underground economy, through which global tax evasion andmoney laundering may be investigated. Henceforth, Clearstream is a major key in theunderstanding of the evaporation of the Argentine funds which led to the economic crisis.


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http://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/G7http://en.wikipedia.org/w/index.php?title=Institute_of_International_Finance&action=edithttp://en.wikipedia.org/wiki/Vulture_fundhttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/December_15http://en.wikipedia.org/wiki/Argentine_debt_restructuring#Anticipating_paymenthttp://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/European_Commissionhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Denis_Roberthttp://en.wikipedia.org/wiki/Ernest_Backeshttp://en.wikipedia.org/wiki/Citibankhttp://en.wikipedia.org/wiki/Eva_Jolyhttp://en.wikipedia.org/wiki/Renaud_van_Ruymbekehttp://en.wikipedia.org/wiki/Harlem_D%C3%A9sirhttp://en.wikipedia.org/wiki/Glyn_Fordhttp://en.wikipedia.org/wiki/Francis_Wurtzhttp://en.wikipedia.org/wiki/Attachttp://en.wikipedia.org/wiki/Underground_economyhttp://en.wikipedia.org/wiki/Tax_evasionhttp://en.wikipedia.org/wiki/Money_launderinghttp://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/G7http://en.wikipedia.org/w/index.php?title=Institute_of_International_Finance&action=edithttp://en.wikipedia.org/wiki/Vulture_fundhttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/December_15http://en.wikipedia.org/wiki/Argentine_debt_restructuring#Anticipating_paymenthttp://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/European_Commissionhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Denis_Roberthttp://en.wikipedia.org/wiki/Ernest_Backeshttp://en.wikipedia.org/wiki/Citibankhttp://en.wikipedia.org/wiki/Eva_Jolyhttp://en.wikipedia.org/wiki/Renaud_van_Ruymbekehttp://en.wikipedia.org/wiki/Harlem_D%C3%A9sirhttp://en.wikipedia.org/wiki/Glyn_Fordhttp://en.wikipedia.org/wiki/Francis_Wurtzhttp://en.wikipedia.org/wiki/Attachttp://en.wikipedia.org/wiki/Underground_economyhttp://en.wikipedia.org/wiki/Tax_evasionhttp://en.wikipedia.org/wiki/Money_laundering


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ECONOMYOF ARGENTINA

Currency 1 Argentine peso = 100 centavos

Fiscal year Calendar year

Trade

organizations

WTO and SACN

STATISTICS

(GDP expressed inPPP whereapplicable)

GDP ranking 23rd (2005) [1]

GDP $537,200 million (2005 est.)

GDP growth 9.2% (2005)

GDP per capita $13,600 (2005 est.)

GDP by sector Agriculture (10.5%) industry (35.8%) services (53.7%) (2004 est.)

Inflation 12% (2005 est.)

Pop below

poverty line

34.0% (February 2006)

Labor force 15.04 million (2004 est.)

Labor force by

occupation

N/A

Unemployment 12.1% (June 2005)

Main industries food processing, motor vehicles, consumer durables, textiles, chemicalsand petrochemicals, printing, metallurgy, steel


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http://en.wikipedia.org/wiki/Argentine_pesohttp://en.wikipedia.org/wiki/WTOhttp://en.wikipedia.org/wiki/SACNhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://www.cia.gov/cia/publications/factbook/rankorder/2001rank.htmlhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Poverty_linehttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Motor_vehicleshttp://en.wikipedia.org/wiki/Textileshttp://en.wikipedia.org/wiki/Chemicalshttp://en.wikipedia.org/wiki/Petrochemicalshttp://en.wikipedia.org/wiki/Printinghttp://en.wikipedia.org/wiki/Metallurgyhttp://en.wikipedia.org/wiki/Steelhttp://en.wikipedia.org/wiki/Argentine_pesohttp://en.wikipedia.org/wiki/WTOhttp://en.wikipedia.org/wiki/SACNhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://www.cia.gov/cia/publications/factbook/rankorder/2001rank.htmlhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Poverty_linehttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Motor_vehicleshttp://en.wikipedia.org/wiki/Textileshttp://en.wikipedia.org/wiki/Chemicalshttp://en.wikipedia.org/wiki/Petrochemicalshttp://en.wikipedia.org/wiki/Printinghttp://en.wikipedia.org/wiki/Metallurgyhttp://en.wikipedia.org/wiki/Steel


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TRADINGPARTNERS

Exports $40,000 million (2005 est.)

Main partners Brazil 19.1%, Chile 10.7%, US 9.7%, China 7.7%, Spain 4.6% (2003)

Imports $25,000 million (2005 est.)

Main partners Brazil 24.5%, US 21.5%, Germany 6.8%, Italy 4.3%, Spain 4.2% (2003)

PUBLICFINANCES

Public debt $US 124,000 million (69% of GDP)(January 2006 est.)

Revenues $29,150 million (2004 est.)

Expenses $26,840 million (2004 est.)

Economic aid $0 (paid Jan 2006)


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http://en.wikipedia.org/wiki/Brazilhttp://en.wikipedia.org/wiki/Chilehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Spainhttp://en.wikipedia.org/wiki/Brazilhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Brazilhttp://en.wikipedia.org/wiki/Chilehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Spainhttp://en.wikipedia.org/wiki/Brazilhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Italy

Argentina Economic Crises

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Transcript of Argentina Economic Crises