Transcript The Crisis Itself (1998

Don’t Cry for Me,
Argentina
March 18th, 2005
Presented by,
Four People Who Are Not John Stiver
Background



Argentina has a history of chronic monetary,
economic, and political problems.
In 1810, it declared independence from the
Spanish Government.
No stable government ruled until 1862.
Background



Late 1800s: Steady growth and a booming
economy due to beef exports to Europe.
1890: First large economic downturn as a nation
due to budgetary problems by an incompetent
government.
Power traded between Presidents and military
dictators.
Background






In 1902, Argentina followed a Gold Standard
that had a 100% reserve ratio.
In 1914, this was abandoned.
Brought back in 1927.
Abandoned in 1929.
In 1945, inflation became a big problem.
Unresolved political pressures resulted in the
government spending more than it had taken in
in taxes, causing inflation.
Background




In the 70’s there was triple digit inflation
Early 90s: President Menem stepped in with a
reform
He pegged the peso to the dollar
Inflation quickly fell to below 4%
The Crisis (1999-2002)


1999: President De la Rúa elected
Federal budget deficit high





Tax increases attempt to control it
Tax rates are already substantial
Caused tax evasion-related corruption
2000: Economy continues to shrink
Drastic decreases in government spending causes chaos
The Crisis (1999-2002)



Political deadlock between president and senate
December 2001: freeze on bank deposits
Recession turns into depression



People and businesses cannot make payments
IMF cuts off loans to Argentina: no outside funds
Five presidents in two weeks
The Crisis- Statistical Data


Bankruptcies reached record levels
From 1998-2002:







Real GDP fell 28%
Inflation went from negative levels to 41%
Exchange rate fell from 1 Peso/$ to 4 Pesos/$
Unemployment increased from 12.4% to 23.6%
Poverty rate rose from 25.9% to 57.5%
Real wages fell 23.7% in 2002
Real supermarket sales fell 26% in 2002
Why the Recession
Did Not Happen
Corruption
Failure
of Free Markets
The Currency Board
Overvalued Peso
Provincial Government Finances
Why the Recession Happened




Currency crisis in Russia and Brazil
Tax Increases
Lowered Confidence in the Peso
Contamination of the private sector
What could Argentina have
done differently?



Fiscal: cut taxes early, accept more
drastic budget cuts to avoid inflation
Monetary: dollarize, allow banks to issue
own notes, default on public debt early
Systematic: could go strictly floating or
gold standard, but disadvantages to both
according to precedents
What to do now?
Short term




Dollarize now
Implement tax cuts
Revamp banking system to
promote confidence
Set floor price for default debt
What to do now?
Long term






Examine structure of law
Simplify tax strategy
Improve Federal-Province
relationships
Reduce unnecessary government
spending
More flexible labor laws
Improve health care
International Policy
Implications





Determine comprehensive view on
handling financial crises
Examine US laws on foreign seizure
Improve IMF recommendations
Borrow / Bailout / Depreciation /
Default may not work as well
Property rights as related to prosperity
Questions??