1. 1 Research Department TWO PROPOSITIONS ON ARGENTINA IDB SEMINAR ON “ARGENTINA: PERSPECTIVES AND LESSONS FOR LATIN AMERICA” March 10th 2002, Fortaleza, Brazil Miguel Sebastián Chief Economist

2. 2 Research Department Proposition one: “the argentine crisis was not caused by a fiscal problem” Proposition two: “there was no orthodox exit of the Convertibility”

3. 3 Research Department Debt sustainability condition We consider two different subperiods: 1992-1997 1998-2001 Debt sustainability = a function of GDP growth, Interest rates, Primary balance, Initial public debt +-+- Sustainability Condition -6 -4 -2 0 2 4 6 8 10 12 -4-3-2012345678910 GDP (%) Real interest rate (%) Primary balance (% GDP) Explosive debt Sustainable debt

4. 4 Research Department Growth was strong in the first subperiod of the Convertibility GDP growth (%) -6,0 -4,0 -2,0 0,0 2,0 4,0 6,0 8,0 10,0 12,0 1992199319941995199619971998199920002001 Average 5,3

5. 5 Research Department Real interest rates were reasonable Real interest rates -4.0 3.3 5.9 6.1 -5.0 -3.0 1.0 3.0 5.0 7.0 9.0 11.0 13.0 15.0 199319941995199619971998199920002001 Source: BBVA

6. 6 Research Department The primary fiscal balance was close to zero*. Was it appropriate? * Excluding privatization revenues (+0.5% otherwise) Consolidated primary surplus (% GDP) -0.4 1.2 -0.7 0.0-0.1 -1.5 -0.5 0.0 0.5 1.0 1.5 1992199319941995199619971998199920002001 Average -0.2 * Including Provinces (+0.5% otherwise)

7. 7 Research Department Fiscal policy was sustainable throughout 1992-1997 Sustainability Condition -6 -4 -2 0 2 4 6 8 10 12 -4-3-2012345678910 GDP (%) Real interest rate (%) Primary balance (-0,2 % GDP) 92-97 Explosive debt Sustainable debt

8. 8 Research Department Of course, consolidated public debt was on a sustainable path Consolidated Public Debt (% GDP) 53 45 41 42 41 39 35 40 45 50 55 60 19911992199319941995199619971998199920002001 Source: BBVA Including Provinces

9. 9 Research Department But the debt picture changed dramatically from 1998 onwards. What is to blame? Consolidated Public Debt (% GDP) 53 45 41 42 41 39 42 49 52 59 35 40 45 50 55 60 19911992199319941995199619971998199920002001 Source: BBVA

10. 10 Research Department The primary fiscal balance did not change* Consolidated primary surplus (% GDP) -0.4 1.2 -0.7 0.0-0.1 -1.5 -0.5 0.0 0.5 1.0 1.5 1992199319941995199619971998199920002001 -0,2 0.1 -1.1 0.1-0.3 -0,3 * Excluding privatization revenues (+0.2% otherwise) * Including Provinces (+0.6% otherwise)

11. 11 Research Department Real interest rates rocketed Real interest rates -4.0 3.3 5.9 6.1 -5.0 -3.0 1.0 3.0 5.0 7.0 9.0 11.0 13.0 15.0 199319941995199619971998199920002001 Source: BBVA 5.8 8.3 9.2 26.6

12. 12 Research Department And real growth plunged GDP growth (%) -6,0 -4,0 -2,0 0,0 2,0 4,0 6,0 8,0 10,0 12,0 1992199319941995199619971998199920002001 Average 5,3 Average -1,1

13. 13 Research Department The new macroeconomic environment made the fiscal policy unsustainable, not viceversa Required primary surplus jumped to over +8% of GDP. Sustainability Condition -6 -4 -2 0 2 4 6 8 10 12 -4-3-2012345678910 GDP (%) Real interest rate (%) Primary balance (-0,2 % GDP) 92-97 Explosive debt Sustainable debt 98-01

14. 14 Research Department Proposition one: conclusion There was no reasonable fiscal policy to ensure public debt sustainability

15. 15 Research Department Proposition one: “the argentine crisis was not originated by a fiscal problem” Proposition two: “there was no orthodox exit of the Convertibility”

16. 16 Research Department DOLLARIZATION DEVALUATION - SINGLE MONEY DEVALUATION - BIMONETARY Three possible Convertibility exit strategies

17. 17 Research Department Three possible economic environments Confidence Lack of domestic confidence Lack of external confidence

18. 18 Research Department Policy measures surrounding Convertibility exits Dollarization was the only “orthodox” exit, but only if confidence survived Heterodoxy Orthodoxy

19. 19 Research Department External confidence disappeared in late 2000 and domestic confidence in late 2001

20. 20 Research Department Heterodoxy policies have not been a “will” but a “must” for exiting the Convertibility Long-term orthodoxy Free float Sustainable fiscal policy Credible monetary policy (inflation targeting ) Reasonable bankruptcy Law Payment of the external debt Short-term heterodoxy Corralito Dual exchange rate Capital controls Domestic default External default Deposit pesification Asking for an “orthodox exit” is going back to May 1968……... The key is to ensure long term orthodoxy.

21. 21 Research Department Paris, May 1968

22. 22 Research Department TWO PROPOSITIONS ON ARGENTINA IDB SEMINAR ON “ARGENTINA: PERSPECTIVES AND LESSONS FOR LATIN AMERICA” March 10th 2002, Fortaleza, Brazil Miguel Sebastián Chief Economist