Transcript Argentina
Angel Munoz Kolby Patrick History Threats The Crisis IMF Intervention Critiques Q&A 1983 – Raul Alfonsin becomes president ◦ Inherits Huge Debt from Predecessor ◦ Prints Money to pay off debt – Inflation ↑ 1991 – Carlos Menem Assumes Power ◦ Chief Economist, Domingo Cavallo, recommends a fixed exchange rate to stifle hyperinflation ◦ Recommends Privatization of many industries 1995 – Establishment of MERCOSUR ◦ A common market between Argentina, Brazil, Paraguay and Uruguay ◦ Aimed To Eliminate Tariffs between the nations Fixed Exchange Rate ◦ Halts Hyperinflation ◦ Encourages Imports Privatization ◦ Decreases Government Deficits ◦ Decreases Public Debt MERCOSUR ◦ Increases Exports U.S. Dollar Appreciation ◦ Exports becoming more expensive ◦ Exports Decline Brazil Devalues the real ◦ Brazilian Exports more attractive and less expensive ◦ Argentinean Exports decline further ◦ Current Account Falls into deeper Deficit Capital Account dwindling ◦ Foreign Direct Investment Decreases ◦ High debt to defend Fixed Exchange Rate ◦ Argentina Fails To Pay Interest on its Debt Capital Account falls. Argentina Uses Foreign Reserves to pay debts Fernando de la Rua replaces Carlos Menem ◦ Forces businesses to raise prices to increase tax revenue ◦ Businesses fail because of added costs ◦ Tax Revenues Decline Early 2001 - Public Debt = 50% of GDP GDP Drops 3% Late 2001 – Public Debt = 60% of GDP 10 6.062712435 5 4.291509811 1.369476632 0 Real GDP % Change -5 -4.803435117 -6.033775263 -6.449960277 -10 -12.67826738 -15 1997 1998 1999 2000 2001 2002 2003 Gross Domestic Product – Down 6.03% Government Deficit – 4.5% Total Economic Activity – Down 18% Construction – Down 36% Imports – Down 50% Tax Revenue – Down 17% Devaluation Fears ◦ Run on the Banks $3.6 Billion Withdrawn 6% of Deposit Base Withdrawn in 2 Days Deposits fell from $85B to $15B by July 2002 Government imposed a freeze on withdrawals ◦ Riots ensued ◦ 20 Dead Removal of US$ Peg, Devaluation of the Peso Reduction of Government Spending ◦ Public Sector Wages dropped 13% Raised Interest Rates Unrealistic Forecasts ◦ 2001 Real GDP growth was forecasted to be +3.5% ◦ Actual Real GDP declined by over 6% ◦ Were not able to assess severity of the situation Oversight of Fixed Exchange Rate ◦ Should not have been permanent Debt Management ◦ Borrowed at higher interest rates than economic growth rates ◦ Continued Borrowing when it did not have funds to pay interest on existing debt Lending Policy ◦ Must have standards for loans ◦ Must not encourage moral hazard