Argentina Crisis in 2001 Professor Ramon A. Castillo-Ponce June 1st, 2006 Presented by Shing Wong Yafan Wu Wanichaya Phunpruk

Summary Exchange rate policy Factors lead to devaluation Economic impact on Argentina Post-Crisis

OVERVIEW Location - Southern South America, bordering the South Atlantic Ocean, between Chile and Uruguay Area – 2,766,890 sq km, Population – 39,921,833 (2006) Currency--Peso

Origins 1983: democracy in the country was restored with the election of President Ra ú l Alfons í n. The new government's plans included stabilizing Argentina's economy, for which new loans were required. The state eventually became unable to pay the interest of this debt, the economy collapsed and inflation began increasing 1989: Argentina's inflation reached 200% per month, topping 3,000% annually.

Fix Rate Policy 1991: Carlos Menem's government installed what was known locally as a "convertibility system" to rid Argentina of hyperinflation and give the country a confidence shock. Under the Convertibility Law, the peso and the U.S. dollar both circulated legally at a 1- to-1 exchange rate

Result of Convertibility Law The dollar peg helped bring inflation under control Greater economic stability attracted foreign investment inflows, contributing to an acceleration in economic growth Inflation Rate 19895,103% % % %

Crisis began to turn sour in Adverse external shocks A reduction of capital flows after the East Asian and Russian crises of 1997 – 98 The Brazilian devaluation (economic growth was negative for three years in a row.) Commodities export shock The convertibility plan locked in the overvaluation Weak fiscal policy Weak tax administration: tax avoidance and evasion

Argentina crisis in 2001 Argentina quickly lost the confidence of investors, and the flight of money away from the country increased. Argentine workers began to withdraw their savings Government ’ s responses

Con ’ t During the last week of 2001, the government facing the impossibility to meet debt payments, defaulted on the larger part of the public debt, totally 93,000 million dollarsdefaulted In January 2002,government abandoned its peg to the U.S. dollar. the currency has depreciated 356% against the U.S. dollar in the year to September 20. Output declined 15% and inflation to rise to 72% in 2002

Fiscal Policy Debt Sustainability 1. During military dictatorship ( years), Argentine external debts are from 8,200 million surges to 43,500 million dollars 2. Argentina ’ s public debt was almost entirely denominated in foreign currencies

Fiscal Policy Weak tax administration leading to widespread tax avoidance and evasion 1. Frequent changes in tax law and senior management in tax administration 2. Lack of a computer based accounting system 3. Politicization of the tax administration

Adverse external shocks The Brazilian devaluation: caused the Argentina less competitive in the exporting markets A secular appreciation of the U.S. dollar caused Peso to be overvalued

The end of convertibility: Immediate effects Peso ’ s devaluation and inflation Many private companies came close to bankruptcy Argentine products were rejected in some international markets

Post-Crisis Economic Recovery Debt Repayment GNP, Unemployment Rate, and Wealth Distribution

Economic Recovery In 2003, Argentina ’ s economy started to climb Agricultural exports hit record high, foreign investments and tourism returned Exported less expensive and became competitive abroad Demand from developing countries increased (China is a major buyer of soy products) Considerable amount of foreign currency inflow

Debt Repayment In 2005, growing fiscal surplus made possible to pay IMF with no negotiation 12/15/2005, it announced to pay IMF the whole debt of 10 billion USD The payment made 3 years earlier than scheduled date

Evolution of International Currency Reserves

GNP/Unemployment Rate

Wealth Distribution Poverty in Argentina Date of measurement Extreme poverty Under poverty line Oct %57.5% May %54.7% 2nd sem %47.8% 1st sem %44.3% 2nd sem %40.2% 1st sem %38.5%

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