FINANCIAL CRISIS

Made By - Neha Kumari Sneha Kumari

Presented By - Neha Kumari

History of the Argentina Economy

Argentina was the third largest economy in Latin America behind Brazil &

Mexico. It was one of the world’s wealthiest countries in the early 20th

century.

It benefits from rich natural resources and highly literate population it has

an export oriented agricultural sector and a well diversified industrial base,

but Argentina has had a series of fiscal, monetary and economic problems &

faced political instability throughout its history .

After it achieved freedom from Spain in 1810 , the sate of Argentina fought

among themselves . There was no stable nationwide government till 1862.

During 1891 , Argentina suffered from a several financial crisis.

Introduction of the Argentine Financial Crisis 1999-2002

Real GDP fell 28% from perk (1999) to trough (2002).

Argentina’s currency, Peso, equal to US$ 1 since April

1991, was devalued in January 2002 and depreciated to

near 4 per dollar .

Inflation , low or negative during 1990s , reached 21% in

2002 .

Unemployment , excluding people working in

emergency Govt relief programs , rose from 12.4% in

1998 to 18.3% in 2001 and 23.6% in 2002 .

The poverty rate from 25.9% in 1999 to 38.3% in 2001

and 57,5% in 2002 .

In real terms , wages fell 23.7% in 2002.

ROAD TO

CRICIS

1. Started in 1980’s • Argentina struggling to come out of the Latin America Debt Crisis which had

left it with huge foreign debt.• Government spending more than it could raise by tax and borrowing from

financial market.• Argentina replaced Peso with Austral as its currency in 1983. Inflation was too

much to Handel in 1989.

2. Argentina Convertibility Law• Introduced the Convertibility law in 1991 which pegged its currency Austral to

US Dollar in the ratio of 10000 Austral per US Dollar .• Later on, Austral were replaced with Peso as the official currency of Argentina

and it was pegged in the ratio 1:1 with the American Dollar.

• Features of Convertibility Law :- A fixed exchange rate with the anchor currency i.e. US Dollar. Unrestricted convertibility between the domestic and the anchor

currency. Net reserves of at least 100% of the board’ monetary liabilities.

WHY DID IT HAPPEND ....?

Devaluation of Brazilian Real and fall in Exports.

Tax increase in 2000 and High level of Unemployment . Extensive Goverment Debt

• Argentina Peso was pegged with dollar , it also started appreciating. This routed the exports from investments into Argentina.

• This situation was further aggravated by the rising interest rates by banks in country, thus the foreign world which used to import goods from Argentina shifted to Brazil.

• So, Argentina’s exports and foreign investments dried up.

• The government changed and the new ministry imposed a financial transaction tax in mid 2001. This tax was imposed a financial transactions in bank depositor withdrawal and every sale of stock.

• The government also introduced a bill to switch the exchange rate link of peso-dollar to peso-dollar and euro in a 50:50 combination .

• The rating agencies downgraded Argentina’s debt.

• The high level of debt pushed up the domestic interest rates. Due to this , the cost of borrowing shot up for the businesses.

• The high cost of funding forced many businesses hut down, thus , impacting not only GDP but also unemployment and poverty .

WHAT HAPPENED IN THOSE 3 YEARS : 1999-2002…….?

Argentina faced many issues during these 3 years , which aggravated the state of their economy …………

First Crisis• The Argentinean peso was legally pegged to the dollar, on a one-to-one basis, a decade ago by Economy Minister Domingo Cavallo. In the hope to end hyperinflation. • But due to devaluation of Brazilian Real investors were attracted to invest in Brazil rather than Argentina.

Results: • Argentina lost the trust of investors • The cash outflow from the country increased

Second Crisis• The president Carlos Menem acquired lot of debt, in both domestic and foreign which lead domestic interest rates to increase• In early 1990s, privatization was done which had already thrown lot of people out of work• As privatized companies were utilities, so the prices of the utilities increased • The economy was facing recession from quite few years but it grew steadily worst as domestic demand decreased

Results: • Higher the borrowings, higher the credit became for businesses • Due to which many companies were closed • Increase in unemployment • The downward domestic demand increased debt burden

Third crisis• The peso was believed to be devalued • So people rushed to their banks to convert their peso into dollars • So to avoid draining of banks, Cavallo enacted a set of measures that froze only small amounts of cash were allowed to be withdrawn Results: • These measures were followed by many protests in the big cities • First only noisy protests and later they included property destruction (mainly at banks and big US and European companies)

1. Deregulation of currency and end of

convertibility

2. Increase in exports and reduction in

imports

3. Supportive Government Policies

4. Administration of Currency Revaluation

5. Reviving world Economy

WHAT HAPPENED THEREAFTER …?

1. Return of Growth

2. Repayment of IMF Loans

3. Debt Restructuring

Concerns still prevailing in Argentine Economy

1. High Rate Of Inflation

2. Unemployment

3. Unequal Distribution Of Wealth

4. IMF’s lending's

The Argentine was a classic example of monetary and fiscal policies going haywire and pushing the economy into a deep crisis. It enjoyed the short term benefits of the fixed currency rate regime which it

adopted in 1991 but failed to foresee the long term drawbacks of the policy.

The political instability added fuel to the fire . Frequent changes in the government made it tougher for the economy to pull itself out, especially when every subsequent government had major differences in ideologies

and policies.it took strict actions on the part of government to bring the nation back on track.

Experts say that Greece also committed some similar mistakes and is in huge crisis today. Again , the international institution had to come to rescue Greece.

It’s high time when economies learnt from each other’s mistake and make decisions cautiously .

THANK YOU