MIB 7 Group 6

ARGENTINA CRYSIS ANALYSIS

Argentia crysis analysis

LECTURER: Hoang Xuan Binh, PhD CLASS: MIB7 GROUP Members 6 : Vu Ngoc Long Vu Thi Ngoc Quynh Hoang Thi Quynh Trang Nguyen Thi Hai Yen Dinh Huyen Anh

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CONTENT I. ARGENTINAS CRYSIS OVERVIEW II. ARGENTINAS CRYSIS REASONS 1. Exchange rate regime 2. Irresponsive fiscal policy 3. External shocks 4. Debt spiral and excessive external borrowing 5. Other factors III. ARGENTINAS CRYSIS SOLUTION 1. Fiscal Responsibility Law 2. The deposit freeze and pesification 3. Leaving the Fixed Exchange Rate 4. Argentinas Sovereign Debt Restructuring IV.GENERAL LESSONS FROM THE ARGENTINE CRISIS V. CONCLUSION 3 5 6 7 9 9 10 11 14 16 17 18

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I. ARGENTINAS CRYSIS OVERVIEW During 5 years, since 1998 to 2002, Argentinas economy had experienced through a huge crisis. Initially, the foreign exchange between Peso and USD was 1 rate 1. Its current account was deficit caused by transaction with foreign currency was . In responds, Government had to devaluate the peso currency which brought about many challenges for Argentinas economy for along time. When the currency was devaluated which meant the value of currency was worsen leading to export products reduced. In 1999, the whole areas economy was too recessed. The neighbor country, Brazil also depreciated its currency. Tn the same year , The Fiscal Responsibility Law of Argentina Gov took effect and URC was on argument in order to curb corruption in this country. In addition, Government applied for IMFs assistance. Early in 2000, peso currency slowdown to 7%, reached the bottom this period. However, the advantage competitive of the country in international market still slightly increased. In order to receive, the IMFs assistance package of 7.2 bn USD, Argentina needed to balance budget in fourth quarter of 2001. In spite of assistance from IMF, Gov still wasnt able to solve out all difficult problems. Gov carried on conducting a second debt swap to support Central bank increased its reserves but the payment on foreigndebt was no longer guaranteed. Gov had to plan a new long-term economic project which forced Gov s cutting 1 bn USD from budget. And then, thanks to a 40 billion multilateral assistance package of IMF, the Argentina s economy recovers, in the fields: revaluating Peso currency. Growing in agricultural exports, returning tourism, increasing average wage for 17% annually leading to reducing unemploymentrate to 8.5% in 2002. After the huge crisis, Argentina had suffered from many negative effects. From several thousand newly homeless and jobless, which made many habitants became waste picker or cardboard collectors, to the unemployment rate gradually increased annually. In addition, the agricultural products were rejected in some international markets. A number of private enterprises were affected by the crisis likeAerolineas Argentina. The bellowing tables briefly show us economic and Financial Indicators from 1995 to 2002 and Economic growth and inflation in Argentina during 52 years ( from 1950 to 2002).

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MIB 7 Group 6 II. ARGENTINAS CRYSIS REASONS

ARGENTINA CRYSIS ANALYSIS

1. Exchange rate regime The convertibility system maintained a pegged exchange rate of one peso per dollar. The peso supposedly became overvalued because, converted into dollars, prices in Argentina rose faster than prices inthe United States and in Argentinas neighbors, notably Brazil. After Brazil devalued in 1999, the convertibility system prevented Argentina from devaluing to remain competitive; to end its recession, Argentina supposedly had to take the slower, more painful, and politically harder path of cutting wages. Ultimately that proved impossible, so Argentina had to devalue the peso. The major characteristics of an orthodox currency board are (1) a fixed exchange rate with an anchor currency; (2) no restrictions on exchanging (converting) currency board currency into the anchor currency at that exchange rate, nor discriminatory exchange rates; and (3) net foreign reserves equal to 100 percent or slightly more of the currency boards liabilities of a monetary nature. Together, these characteristics imply that an orthodox currency board has no room for independent monetary policy. The convertibility system at times lacked one, two, or all three characteristics of an orthodox currency board, hence Argentinas central bank retained considerable discretionary powers. Because the reserve ratio of central bank was often far from 100 percent, under the convertibility system the exchange rate of the peso was intermediate (pegged) rather than fixed. An orthodox currency board maintains a fixed exchange rate, under which itsets the rate, but lets market demand determine the amount of the monetary base it supplies at that rate. At the other extreme, a few central banks, including the U.S. Federal Reserve System, have clean floating exchange rates, under which they set the amount of the monetary base, but let market demand determine exchange rates. In intermediate (pegged) exchange arrangements, such as the convertibility system, central banks try to set both the exchange rate and the amount of the monetary basea practice called sterilized intervention. There are times when a target for the monetary base can conflict with a target for the exchange rate. The result can be a currency crisis1. Particularly after Brazils devaluation of January 1999, it was often claimed that the Argentine peso was overvalued. The Economist magazines tongue-in-cheek Big Mac index, which compares the prices of McDonalds hamburgers around the world, suggested that the peso was 2 percent undervalued relative to the dollar in early 2001.

Hanke (1991); Hanke and others (1993), pp. 72-7; Hanke and Schuler (1991, 1999); Schuler (1999).

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For much of the life of the convertibility system, Argentina had deficits in its trade account and current account. A countrys trade account is imports minus exports of goods; its current account is net trade in goods (the trade account), plus net trade in services, plus net current transfers such as interest payments made or received. Some observers took the deficits as indications that the Argentine exporters were uncompetitive because the peso was overvalued. However, exports grew every year of the convertibility system except 1991, when the system was not in effect the full year, and 1999, when Brazils devaluation had a significant but temporary effect. Growth in exports was not limited to commodities; exports of manufactured goods also increased. 2. Irresponsive fiscal policy Argentina had defaulted on its foreign debt during the Latin American debt crisis of 1982; ten years later it was still in default and hence unable to borrow in international financial markets. In April 1992, it agreed to a plan for restructuring its debt; it began totherefore less solid than the figures from 1993 onward.

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Argentinas ratio of government debt to GDP increased in the mid 1990s, but much of the increase came from converting contingent liabilities into explicit liabilities. A reform of the social security system began in August 1994. Some payroll taxes that the federal government had formerly used for a pay-as-you-go system now went into private accounts. The federal government had to finance the resulting shortfall in current social security payments by other means. The government also bore some of the costs of rescuing provincially owned banks in the recession of 1995. Unlike many other countries in similar situations, Argentina closed or privatized the banks to prevent them from causing further problems. Some observers have argued that the federal government should not have converted its contingent liabilities from the social security system into explicit liabilities, but doing so would have made the budgetary situation less transparent. 3. External shocks From 1998 onward Argentina faced an external situation unfavorable in three respects: foreign investment to emerging market countries fell in the context of some major currency crises; Brazil devalued its currency in January 1999; and the dollar was unusually strong.The East Asian currency crisis of 1997-98 and the Russian currency crisis of August 1998 made investors in developed countries much more cautious about
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investing in developing countries, even those far from East Asia and Russia. Estimated net private flows of capital to developing countries fell from a peak of $187.8 billion in 1996 to just $8.3 billion in 2001, as investors in developed countries sold many of the stocks and bonds they had bought in developing countries 2. In Argentina, the capital and financial account, which measures net foreign investment, turned from a net inflow of $18.3 billion in 1998 to a net outflow of $4.4 billion in 2001. Brazil, Argentinas largest trading partner, withstood a currency crisis from August to October 1998, on the heels of the Russian crisis. In a fresh currency crisis in January 1999, Brazil allowed its currency to float rather than maintaining the crawling peg to the dollar that had previously existed. The Brazilian real quickly depreciated from 1.21 per dollar to 2.18 per dollar before recovering somewhat. (As of early June 2003, the exchange rate of the real is about 2.90 per dollar.) Brazilian manufacturers gained a temporary advantage over Argentine competitors, because wages in Brazil did not immediately rise to offset the depreciation in full. Growth in Brazils real GDP slowed from 3.3 percent in 1997 to 0.1 percent in 1998 and 0.8 percent in 1999. After years of gains, Argentine-Brazilian trade was flat in 1998 and shrank in 1999.Because the Argentine peso was pegged to the U.S. dollar, it appreciated with the dollar against most other currencies, notably the real and euro. The Federal Reserves broad measure of the exchange rate strength of the dollar, based on an index level of 100 for March 1973, rose from a low of 84.23 in July 1995 to a peak of 113.09 in February 2002its highest level since January 1986. Some analysts of U.S. monetary policy thought that from 1999 to 2001, part of the strength of the dollar resulted from the Federal Reserve keeping monetary policy too tight. Trends in commodity prices and other indicators support this view. External events triggered the initial recession, but were not responsible for deepening the recession into a depression. As has been mentioned, the peso prime rate rose sharply from August to October 1998 and again in January 1999 on fears Argentina might devalue. High interest rates hurt the economy, but they were temporary: by April 1999, interest rates were back around the levels prevailing before the Brazilian crisis. Foreign investment in Argentina did not actually turn negative until the first quarter of 2001. This reversal seems to have resulted more from investors specific fears about Argentina than from the general reduction of investments to emerging markets: Brazil and Mexico, the two biggest Latin American economies, continued to attract substantial foreign investment in 2000 and 2001. After dipping in 1999 as a result of events in Brazil, Argentinas exports to all countries combined grew in 2000 and reached a record level in 2001, despite the strength of the dollar and therefore of the peso. The behavior of interest rates in Argentina reinforces the case that domestic factors were paramount in causing the crisis. In 2001, lending rates charged by banks rose
2

International Monetary Fund (2002), p. 212.

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steeply in Argentina at the same time they were falling in the United States. They were also falling in El Salvador, Panama, and, more erratically, in Ecuador. The difference between the other countries and Argentina was that they all used the dollar as their official currency, while Argentina maintained a separate currency, which was losing the confidence of Argentines and foreigners alike. 4. Debt spiral and excessive external borrowing Argentinas spectacular economic crash and default were the culmination of a debt-led development process that began in the late 1970s. the December 2001 default and economic crisis were the logical outcome of a massive debt accumulation process which resulted from two main factors. First, the negative effects of policy prescriptions by the international financial institutions (IFIs), particularly the IMF and the World Bank (WB), enthusiastically implemented by Argentine officials. In other words, US-trained Argentine officials and IFI staff acted like a team in which there was a high degree of agreement on the economic policies to be implemented. Second, a series of exogenous shocks which ranged from US interest rate hikes to financial crises in Asia, Russia, and, finally, Brazil. These shocks led to spiraling costs of public sector borrowing and to massive capital flight as the system unraveled. The combination of inconsistent macroeconomic policies and exogenous shocks led to an economic collapse of historical proportions in December. Therefore, the Argentine economic crisis of 2001 was in part the result of massive capital flight, induced by fears that Argentina would default on its external debt (the situation was made worse by the fact that Argentina had an artificially low fixed exchange rate and was dependent on large levels of reserve currency). 5. Other factors Moreover, with the Mexican crisis of late 1994. Argentina was hit hard by this so-called tequila crisis, but with the help of the central bank, its relatively strong banking sector survived the withdrawal of deposits and after one year of sharp decline, the economy grew again in 1996. But another shock followed in 1997, when a violent financial crisis erupted in Asia, followed in 1998 by the Russian crisis and in 1999 by crisis in Brazil, which floated its currency. Argentina has already suffered from turmoil caused by Asian and Russian crises and devaluation of the Brazilian currency added to its problems. Many investors were still licking wounds from the Asian and Russian crises and in the meantime, hi-tech share bubble began to burst. Risk aversion of investors remained high and emerging markets access to international capital markets continued to be difficult. Also, Argentinas instability and high level of corruption led to a withdrawal of capital from the country

III. ARGENTINAS CRYSIS SOLUTION

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MIB 7 Group 6 1. Fiscal Responsibility Law

ARGENTINA CRYSIS ANALYSIS

FRLs. At the national level, faced with a deteriorating budget balance and growing debt payments, the Argentine Congress approved a Fiscal Solvency Law in September 1999. Besides establishing numeric limits for the central governments fiscal deficit, it limited the growth of expenditures, stipulated the adoption of pluri-annual budgeting, created a Countercyclical Fiscal Fund, and implemented transparency measures regarding public financesthe features favored by the recent literature on fiscal rules. The Law required reaching fiscal balance no later than 2003 and set nominal ceilings for the national-level non-financial public sector deficit between 1999 and 2002. But they were broken in every year. Although the national law did not include conditions for subnational governments, it invited the provinces to pass similar laws of their own, and several did. The provisions of the laws differ across provinces, as did the degree to which they were adhered to, even before the economic crisis in 2001. All the provincial FRLs have limits on the deficit or overall debt, and most have both (Braun and Tomassi 2003). More importantly, however, the city of Buenos Aires and three of the four large provinces did not pass any FRL. They contain well over half of the nations economy, and their nonparticipation undercut any hope for the system of FRLs to assure that no government would spoil the common good of fiscal prudence. The tradition of not respecting rules goes beyond the FRLs. For instance, 16 of 24 provinces have constitutional limits on the ratio between debt service and total revenue20 to 25 percentbut in 2000, only 10 of the 16 provinces complied with those limits; results for 2001 were much worse (Braun and Tomassi 2003). In 2001 the FRLs stopped working because of the extreme mismatch between the national governments fiscal and monetary policies in the context of a fixed exchange rate. Although the federal governments FRL lacked enforcement power, the more fundamental problem was the governments many legally inflexible spending obligations, most notably debt service and provincial transfers. Federal-provincial agreements in 2000 had set nominal peso (= US dollar) floors on transfers to the provinces that would last several years during a transition to a long-term arrangement of moving-average calculations that were more favorable to the federal government. Unfortunately, the recessions of 2001 and thereafter reduced revenues to the point that the federal government could not make the promised transfers and defaulted on those and other obligations, paying them with debt that circulated as money (Gonzalez, Rosenblatt and Webb 2003). Even with stronger enforcement procedures on paper, the FRL could not have solved the problem. The provincial FRLs also had shortcomings that would have been problematic even if the collapse at the top had not come first. They lacked enforcement power and a critical mass of states had not passed themBuenos Aires province, Buenos Aires city, and Santa Fethe same entities that had formed the core group for fiscal adjustment in the early 1990s. The Compromiso Federal of 2000 did not have contingencies to assure fiscal sustainability in down-side scenarios of growth. It arranged to share benefits of growth but not to share the cost of recession. All the governments were benefiting from the public asset of a stable currency and using it to access credit markets, but they failed to appreciate the fragility of the asset and the need

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to coordinate effortsex ante controlsto avoid overusing it. The attachment of coparticipaciones at Banco de la Nacion looked so much like a federal guarantee of the provincial debt that most lenders did not fear ex post consequences, and there were no ex ante constraints from their side. Source: Steven B. Webb, Fiscal Responsibility Laws for Subnational Discipline: The Latin American Experience, World Bank, 2004 http://elibrary.worldbank.org/docserver/download/3309.pdf? expires=1349346814&id=id&accname=guest&checksum=22FCE33D7E4317F5D88DE9 6379C5C7EA 2. The deposit freeze and pesification An important part of the story of the imposition and then amelioration of shock to the economy turns on the deposit freeze and the succession of adverse and then compensatory measures affecting the banking sector. The deposit freeze began in midDecember, 2001, when the de la Rua administration sought to halt the large withdrawals of deposits and resulting losses of international reserves as depositors took their capital abroad. That freeze, the corralito (little fence), prevented the conversion of demand deposits into currency (except for modest monthly sums), but allowed full use of demand deposits for any payments within the banking system. In part because of concern that this arrangement was causing a migration of funds from the public sector banks and Argentine national-ownership banks to the stronger foreign-owned banks, in January 2002 the new administration tightened the freeze, preventing the use of demand deposits even for payments within the banking system except for transactions within the specific bank where the deposit was held. At the same time, a corralon (big fence) was imposed freezing dollar time deposits that had been pesified and reprogrammed to mature in 20032005. It is no surprise that such a pervasive initial freeze would have sparked a seizing up in payments and economic activity, although during the course of 2002 the demand deposits in the corralito were gradually released. Aside from the immediate measure of continuing and tightening the deposit freeze to avoid a mass exodus of funds and further drain on reserves, in January the Duhalde government converted all deposits and debts into pesos (pesification). There had been considerable discussion even in 2001 of converting debts to pesos as a means of dealing with the risk of mismatched balance sheets of firms and households indebted in dollars but earning pesos (Hausmann, 2002). Unfortunately, when the government did adopt pesification in early 2003, the devaluation had already occurred, so that a conversion of loans to pesos at the market rate would not have avoided the shock from the asset-liability currency mismatch. Moreover, for political reasons the government did not use the devalued exchange

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rate to pesify debts, but decreed that a wide range of dollar-denominated debts would 44 be converted to pesos at the old parity of one peso per dollar. (1) Yet it allowed the holders of dollar deposits in the banks to obtain a much more favorable exchange rate of 1.4 pesos for each dollar. The result was a large loss imposed on the balance sheets of the banks, who could only claim 1 peso for each dollar in debt owed by borrowers but now owed 1.4 pesos for each dollar held by depositors. The dollar time deposits frozen in the corralon were converted to pesos at a rate of 1.4 pesos per dollar, in the form of CEDROS (certificates of reprogrammed deposits) indexed against inflation and bearing interest.(2) This asymmetric pesification was one of the most conspicuous examples of a broader phenomenon: the highly political nature of the allocation of the losses from the 3D crisis among the various sectors. In this case the allocation involved depositors, debtors, the banks, and the government. In effect the government granted a windfall gain to debtors owing dollar obligations and imposed a loss on the banks, which subsequently necessitated that the government make good on some part of the bank loss if it desired to avoid a collapse of the banking system. The losses imposed on the banks by the asymmetric pesification amounted to about $10-15 billion, compared to their equity (net worth) of about $17 billion at the end of 2001.(3) The government soon recognized that it could not risk a consequential collapse of the banking system, and it eventually agreed to grant $9 billion or more to the banks in compensation, in the form of government bonds (Boden).(4) From the standpoint of the banks, however, a true accounting of the value of the compensation bonds was problematical, considering that market prices on the Boden government bonds were about 50 cents on the dollar (and prices on other government bonds were as low as 25 cents on the dollar).(5) The International Monetary Fund had reportedly sought that Argentina convert all of the frozen bank deposits into government bonds in order to avoid an inflationary impact of the release of these funds. Instead, the government pursued a patchwork of policies that had the effect of gradually releasing the bulk of the funds. One important provision was that depositors could sell their frozen deposits to corporations at a discount for use by the corporations to repay debts owed to the same bank in which the deposits were held. Similarly, additional amounts were released by the court-awarded amparos to individual plaintiffs who had legally challenged the freeze. Other windows permitting release from the freeze were the allowance of use of deposits of up to 100,000 pesos to pay mortgage debt and up to 35,000 pesos to pay debt on automobiles and other consumer durables. In addition, the government carried out two rounds of deposit swaps for government bonds on a voluntary basis, although these met with only limited response. Further, the banks themselves were allowed to offer advanced release of depositor funds at a discount of about one-third, though again the uptake by holders was limited. The combined effect of all of these mechanisms was to cut back the amount of frozen deposits in the corralon to only one-fifth of total deposits by March, 2003, allowing the Minister of Economy to pledge complete liberalization of

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the freeze by the time of the new governments entry into office by May 25 (La Nacion, 18 March 2003). (6)
(1) About two-thirds of loans to the private sector enjoyed the conversion at parity, including mortgages up to $100,000, auto and consumer durable loans up to $30,000, consumer loans up to $10,000, and small business loans up to $100,000. Other dollar-denominated debts were converted at 1.4 pesos per dollar, and by February 2002 the government converted its own dollardenominated domestic-law debt to pesos at 1.4 per dollar. (2) As of mid-March 2003, the CEDRO with accumulated inflation correction (by the CER) and interest amounted to about 2 pesos for each original dollar, in contrast to the exchange rate at about 3.1 to the dollar. (3) Others have reached similar estimates; Lagos (2002) places the cost at $11.2 billion. My own rough calculation of the asymmetry loss is as follows. The banks had $45 billion in dollar deposits. If these are converted at an average exchange rate of 2.0 (about the CEDRO value by early 2003), their liabilities jumped by 45 billion pesos; if they are converted at 2.5 pesos, the increase in liabilities was 67 billion pesos. The banks held about $11 billion in unsheltered dollar loans to the private sector, converted at 1.4 pesos per dollar, and about $21 billion in dollar loans to the public sector, converted at 1.4 pesos to the dollar; so the value of these assets rose by about 13 billion pesos. Net liabilities thus rose by an amount ranging from 32 to 45 billion pesos, or about $10-15 billion at the late-March 2003 exchange rate of 3.1 pesos per dollar. In actual practice, there were dollar deposit liability liquidations at a more steeply depreciated exchange rate, boosting the loss. An offsetting consideration, however, is that there were also the amounts of dollar deposits unwound by transactions on the discounted secondary market (noted below), which would have enabled a bank to reduce both its dollar claims and dollar liabilities without a loss except for the forgiveness granted on the loans in question. (4) Compensation is to be paid either in peso bonds maturing in 2003-07, indexed to inflation and bearing 2 percent interest; or in dollar bonds (Bonos Optativos del Estado Nacional, Boden) maturing 2005-2012 and bearing interest at Libor. The amount of the compensation is the difference between the banks net worth at end-2001 valuing its dollar assets and liabilities at 1.4 pesos per dollar, on the one hand, and the same net worth valued at the actual (asymmetric) exchange rates applied in the pesification process. The peso difference can be taken in the government indexed peso bonds, or the dollar difference can be taken in Boden (Lagos, 2002). (5) As discussed below, the banks are being allowed to phase in gradually over five years the marking to market of the value of the government bonds they hold on their books. (6) Javier Finkman estimates the disposition of dollar accounts as follows. Initial stock: $46 billion. Pesified in January-February 2002: $16.4 billion. Reschedule and pesified into Cedros (Certificados Reprogramados de Plazo Fijo) at end-February 2002: $30 billion. Released through Amparos completed and pending as of late February 2003: $4.6 billion. Exchanged in Swap I: $4.7 billion. Swap II and loosening of the corralon: $0.86 billion. Bank conversion offering: $0.6 billion. Loans repaid on automobiles, mortgages, and other windows: $10.4 billion. Remaining rescheduled deposits as of March 2003: $8.8 billion. By communication, 14 April 2003.

Source: Restoring Economic Growth in Argentina, JBIC Institute, 2004 http://www.jbic.go.jp/en/research/report/research-paper/pdf/rp27_e.pdf

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3. Leaving the Fixed Exchange Rate Argentina left the fixed exchange rate and stopped trying to keep the currency pegged against the dollar. The government also tried to prevent capital outflows by freezing bank accounts for 12 months. Leaving the currency peg, led to a huge devaluation in the Argentinian currency. From 1 Argentina Peso = 1 US Dollar. By 2002, the currency fell to 4 Peso to 1 Dollar. Inflation was running at 80% This led to imported inflation and a large reduction in living standards.

Using Data at http://www.indec.gov.ar/ wiki commons

Benefits of Devaluation in Argentina Peso When Argentina left the fixed exchange rate, it was very grim situation. Capital fled from Argentina and consumer spending fell amidst uncertainty. However, the devaluation made Argentina exports much more competitive and imports uncompetitive. This led to a big increase in export demand (helped by rise in price of soya). Also, the devaluation forced people to buy less imports and more domestically produced goods which was good for Argentinian industry. Since the devaluation and debt default, Argentina has posted impressive rates of economic growth. This suggests that despite defaulting on debt and leaving the security of a fixed exchange rate the economy can recover.

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Costs of Devaluation

There was a big fall in living standards from devaluation. Argentina has had inflation since devaluation (official figures 9% in 2011.

Congressional estimate of 22%)

Most savings were lost Argentina has a bad reputation for borrowing (though it hasnt been permanently

locked out of bond markets) However, the main thing is that the economy could recover and unemployment fell from the critical peaks of the early 2000s Source: Tejvan Pettinger, Argentina Crisis and Recovery, 2012 http://www.economicshelp.org/blog/5422/economics/argentina-crisis-and-recovery/

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MIB 7 Group 6 4. Argentinas Sovereign Debt Restructuring

ARGENTINA CRYSIS ANALYSIS

Argentina started the process of debt restructuring in 2002, negotiations with the IMF and the investors in the three years to find a solution that it feels real value for profound social and economic decline. Faced with a huge debt burden, Argentina has adopted a hard line against all parties, the original emphasis on a massive write-down for the private creditors and deferred action Paris Club and IMF debt. After years of negotiations,which has been criticized by both sides, Argentina finally determined that it had reached an impasse with the creditors and decided to act on its own. It suspended the agreement with the IMF and give it suggest unilateral some time with the SEC to deal with private creditors. Argentine legislature codified this commitment, through the called "Padlock Law" (Ley Cerrojo), the regulations prohibit the government to reopen the exchange or make any kind of offer better conditions in the future. January 14, 2005, Argentina opened exchange of bonds for six weeks, hoping to achieve a final settlement of the debt face value of $ 81.8 billion plus $ 21.4 billion of overdue interest (PDI). The default is unprecedented for its size ($ 103.2 billion), resolution (over three years), low recovery rate (30% on a net present value basis, including PDI), and the remaining large residual holdout (24% of all loans). Owners of bonds and IMF criticized Argentina to participate in a process lasting (creditors will debate) accepted guidelines of the debt negotiations. However, the value of $ 81.8 billion in debt, $ 62.2 were exchanged for $ 35.2 billion in new bonds. Argentine government, however, can not completely solve the problem because the $ 19.6 billion of bonds (24% of the stock) is not tender and still dispute together with accrued interest, $ 6.2 billion Paris Club debt, and $ 9.8 billion debt to the IMF. Argentina has settled this debt remaining in one of two ways. In 2006, it decided to pay the full $ 9.8 billion debt to the IMF, to reduce the pressure to the government of any policy of the IMF. However, Argentina refused to restructure or repay Paris Club countries or holdouts. Holdout creditors have pursued litigation to force repayment, with the result of the judgment and orders attached together effectively prevent Argentinafrom borrowing on international capital markets until the bond payment default, restructuring. For years, neither of these responses affected Argentinas determination to deviate from its policy of financial independence. Strong economic growth until the 2008 global financial crisis and reliance on various stop-gap measures (details below) to meet financing gaps have allowed Argentina to rebuff attempts at forced resolution Argentina made a first attempt to restructure the remaining debt default in September 2008. As President, Cristina Fernndez de Kirchner announced that Argentina would seek to repay the Paris Club debtits about $ 47 billion of international reserves and signed a deal with three bank-Barclays Capital, Deutsche Bank, and Citibank to consider the consider the offer to negotiate with private holdout creditors. Simultaneous onset ofglobal financial crisis, however, the potential termination of the agreement and any hope to meet short-term financial needs international loans.

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IV. GENERAL LESSONS FROM THE ARGENTINE CRISIS Not all financial crises dued to moral hazard in the management of the bank. Argentina is a good example. The system has been defined and monitored, can withstand a severe and prolonged recession, beginning in 1998, no major incidents and to a deposit level up until February 2001 . This system is capitalized and can withstand significant losses in the value of its assets. However, it can not exist a set of interventions that destroy the brand value of the bank (as corralito) and deprived of their capital (such as pesification asymmetric). So, good financial regulation and supervision while necessary are not sufficient to protect banks from the crisis. Liability dollarization can seriously amplify the costs of the crisis. The crisis is often associated with large fluctuations in the real exchange rate increases the cost of debt in U.S. dollars in the country at a time when the borrower at least be able to service its obligations of them. The country plans to maintain exchange rate flexibility should develop policies designed to increase the market for domestic currency denominated assets both at home and on the international market. The importance of the integrity of the payment system can not be overstressed. When this system fails, it causes a tremendous economic activity that, in addition to the social costs of its large, complex financial solvency and limits the government's ability to address crisis. Therefore, the Argentine crisis shows that the country should be even willing to pay the cost of securing a payment system functions well in times of crisis. It also implies that the government should consider the impact of their crisis management initiatives on the stability of the payment system. This is the first major crisis took place in the context of a system of international banks in the country. Therefore, it provides an important opportunity to assess the effect of ownership structure of banks during the crisis. It is often argued that foreign-invested banks have better access to capital and liquidity in times of crisis through their relationships to their parent company and therefore will be seen by the public is a safer organization. In this context, the Argentine crisis that this may be true in the case of personal problems, limitations in the banking system. However, during the crisis of the system, the parent company is less likely to support their subsidiaries. This is especially true when capital losses may be due to the government's decision. Argentina crisis also provides new evidence on the long-term lessons on the problems caused by public sector commercial banks. The temptation to influence politics in the allocation of credit institutions undermined their ability to retain the respect of depositors in bad times aggravating, the overall situation. In Argentina, the banks are the ones with the worse asset quality and the poorest indicators of performance. The bank suffered a lot as a flight to quality became rampant. The Commission believes that it is important for countries to reduce the role of the public commercial banks in the domestic system. Extend the maturity of the public debt is very important to avoid the problem of reinvestment. However, the Argentine crisis shows that when buying long-term bonds by banks, they can create mismatches on bank term deposits with a term shorter than bonds

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government. Upon the occurrence of a systemic crisis, the decline of deposits held at the same time that the bond price is very low and that the central bank is struggling to protect the reserve by international credit control in the country. Debt maturity increased management complexity banking crisis. Currency crisis can cause through exchange controls as a temporary measure to contain the decline of the exchange rate and the decline of bank liquidity. In this context, the central bank is required to include an evaluation of how exchange controls should apply to transactions between the head office of the domestic banks and their foreign subsidiaries and its subsidiaries owned by the majority. This decision is further complicated by the fact that international trade can take place in a context of its head office is required liquidity support from central banks. The Commission believes that exchange controls should not interfere with the responsibilities between headquarters and branches above, and its subsidiaries, in accordance with the principle of consolidated supervision. Also, in this context, efforts should be made to coordinate the actions of various central banks on how to deal with the problems facing liquidity of banks specific goods in different countries. Besides the really obvious impact of Argentina on its neighbors, Uruguay significant spread from the presence of the bank is owned by Argentina. When the bank has negative effects of the Argentine crisis, they can not guarantee the support of the central banks of the two countries, as an organization feel responsible for the organization. This leads to a gray area in the international division of labor between the central bank, a problem to be solved. V. CONCLUSION Argentina's economy has declined in the 1980s, ending the decade in a hyperinflation. After making drastic reforms to open the economy, private companies governmentowned, and monetary stability, Argentina enjoyed strong economic growth began in 1991 under President Carlos Menem. Economic recession in 1995 as a result of the financial crisis of Mexico, but then continue to grow. However, in October 1998, immediately after the currency crisis in Russia and Argentina's neighbors Brazil, Argentina entered a recession khac. Bad economic policy turned what should have been a recession a year into a recession four years. The economy had signs of growth at the end of 1999 when the newly elected president, Fernando de la Rua, the tax increase to reduce the budget deficit of the federal government's Argentina. When internal political division in March 2001, de la Rua government has issued two more tax increases and changes in monetary policy to weaken confidence in the one-to-one exchange rate contracts Argentine peso to the dollar, which has existed since in economic 1991. The economy continued shrinking government revenue and is still under planning. In July 2001, the international bond rating agencies had downgraded its credit rating of the government. Faced with rising costs refinance its debt, the government increasingly desperate measures. In December 2001, it imposed a freeze on bank deposits, making what is believed to still be called a bad recession into a real recession. About the

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economy protests forced President de la Rua from office later this month. In the interim period of three presidents in less than two weeks, the government broke its foreign debt in a way almost designed to respond to the debt. At the beginning of the National Assembly in January 2002 of Argentina chosen as president Eduardo Duhalde, was second in the 1999 presidential election. Within days, he set the new policy that nasty ownership painstakingly built since the 1800 long right that prosperity which strengthened as Argentina has achieved economic duoc.Nen decline rapidly more, finally reaching the bottom around August 2002 after falling 28% from its peak of 1998. The election of a new president, Nestor Kirchner, took office on May 25, 2003. Argentines have suffered so much in the last few years that a widespread feeling exists that the prosperity of the early and mid 1990s were a bubble depending on fortunate circumstances that could not persist, such as an overvalued exchange rate, unsustainable inflows of foreign capital, loans from the IMF, or obviously unsound government finances. That is not the case. Starting in 1989, Argentina has made fundamental economic reforms greatly increased its attractiveness for employees, businesses, savings, and investment. Capital flows, some of it from abroad, many from Argentina bring funds they sent abroad or tucked under their mattress. Economic growth because the fundamentals have improved a lot. However, continued growth depends on the incentives to work, business, savings, and investment. The tax rate is not too heavy, a credible currency, and respect for private property rights is very important. In the recession of 1995, The federal government of Argentina after some hesitation reaffirmed his commitment to class of course it has since 1989. In the recession started in 1998 and developed into a crisis in 2001, the government moved increasingly away from the course. Argentina's crisis is not a failure of the free market, as some observers have suggested. Instead, the crisis stems from the failure of the federal government in economic policy. The blunders impede economic growth, reducing government revenue and threaten the government's ability to service its debt. Understanding the crisis is essential for Argentina can achieve sustained long-term growth. The recovery of Argentina is currently undergoing is welcome, but it does not look like the beginning of sustainable growth, because the government's policies have made the institutions of a market economy is weaker than at any any time since at least 1989. By lending to Duhaldegovernment, the international community granted the legitimacy of the policy to reduce economic freedom and the poor. It's greater economic freedom allows the economy of Argentina appeared in the 1990s decline of the 1980s. Long-term growth will require reverse policy direction in the past few years and allow greater economic freedom, anchor respect property rights.

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