Transcript Argentina Crisis

Argentina Crisis
Econ 462
Presented by:
Anthony Sierra
Rossina Torres
Li Xu
Agenda
Causes of the crisis: Rossina
During the crisis: Li
Post-Crisis: Anthony
Political Instability
1989 – 1999: Carlos Menem - President
1999: Fernando De La Rua - President
2000: Vice-President Carlos Alvarez – Resigns
Dec 20, 2001: Fernando De La Rua – Resigns
Dec 21, 2001: Ramon Puerta – President
Dec 23, 2001: Adolfo Rodriguez – President
Dec 31, 2001: Eduardo Duhalde - President
Currency Board - Convertibility
Law
5
*Collapse of the currency board arrangement
4
Peso/$ = 1.00
January 17, 2002
3
2
1
0
1995
1996
1997
1998
1999
2000
2001
2002
Unemployment
Real GDP
Inflation
Contagion Effect
Tequila Crisis 1995
Asian Crisis 1997
Russia 1998
Brazil 1999
Fun Facts!
Difference between wages and salaries paid by
the federal government and the private sector.
Powerful labor unions
Inflexible wages and prices
Real GDP
Inflation
Unemployment
Weak Export Growth
Mounting debt
What went wrong? Factors?
Lack of fiscal discipline
Labor market inflexibility
External environment and shocks
Convertibility plan / Currency board
Unsustainable debt
Overvalued Peso
The Scope of the Crisis
Real GDP
Unemployment
Inflation
Cash basis
Public debts
Real GDP
15
10
5
0
Real GDP
1990
-5
-10
-15
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Unemployment Rate
25
20
15
Unemployment
10
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
BANK: Problem faced
Convertibility regime to “Pesoization”
People seeking Private rather than public
Monthly deposit withdrawal limit was to
$250 pesos, (raised to $1500 in 2002)
Dollar deposits would remain frozen until
at least 2003
Congress also approved an emergency law
that severely curtailed creditors’ rights
Private over Public
The government decrees the unification of the exchange rate regime
and the asymmetric pesoization of bank balance sheets (assets at
Arg$1/US$1, and liabilities at Arg$1.4/US$1).
“pesoization”
The existing stock of banks’ dollar-denominated assets and
liabilities would be converted at the rate of Arg$1=US$1 for loans
to the private sector and Arg$1.4=US$1 for loans to the public
sector
U.S. dollar deposits, which were also indexed to inflation. The
measure was intended to protect firms and households with
foreign-currency denominated debt, but it merely shifted the
burden of the devaluation to the banking system—and ultimately
to the taxpayer as banks would need to be issued compensation
bonds.40
The main effect of the measure was to deepen financial
disintermediation, curtailing the supply of fresh credit—
including working capital—that banks were able to provide, and
that would be critical in any eventual recovery.
Response of Policy Maker
to the Crisis
Government was able to borrow amply both
domestically and internationally
The monetary policy was tighten
After the Tequila Crisis (1995)
Resulted : Y
Put a direct constraint on Fiscal Policy
To maintain the peg
Dollarization
Fiscal deterioration in 1999
Reduce over public deficit => IR
Response of Policy Makers
to the Crisis
Revamped program
Convergence factor
Debt swap
Zero Cash Deficit
Lead to “pull the plug”
Actions to fight the crisis
Fiscal responsibility law
Zero Deficit Law
Deposit freeze
Devaluation
Fiscal policy
The Role of the IMF
Fiscal Responsibility Law
September 1999 the Argentine Congress
passed the Fiscal Responsibility Law, aiming
to large reductions in federal and provincial
government spending.
Zero Deficit Law
Zero-deficit law was implemented in an
attempt to restore market confidence, attract
foreign capital and ultimately get the
Argentinean market back on track.
Deposit Freeze
In late 2001 the government set a number of
financial restrictions to stop the massive run
on the banks and to avoid a collapse of the
whole banking system.
Devaluation
January 2002 the government was forced to
announce the end of convertibility regime
and the currency devaluation.
The peso was first devalued by 29 percent
from 1 to 1.4 pesos per US dollar for major
foreign commercial transactions and then
was allowed to float thereby quickly peaking
to over 4 pesos per dollar
Fiscal Policy
The government announced an economic
program that among other things included
increases in the personal income and wealth
taxes, a bill to strengthen tax enforcement,
and a cut in non-interest expenditures.
Debt Restructuring
The Role of the IMF