ARGENTINE ECONOMIC CRISIS

(1999–2002)

Peso (currency)
 Pastly……
Argentina was subject to military dictatorship
(alternating with weak, short-lived democratic
governments) for many years, that resulted in a
number of significant economic problems.
By the end of the military government the country's
industries were severely affected and unemployment,
calculated at 18% was at its highest point since the
Great Depression.
In 1983, democracy in the country was restored with
the election of president Raúl Alfonsín. The new
government's plans included stabilizing Argentina's
economy including the creation of a new currency (the
austral, first of its kind not to carry the word peso as
part of its name), for which new loans were required
Cond…..
The state eventually became unable to pay the interest of this
debt and confidence in the austral collapsed. (Collapsed due to
Instability in foreign markets and Political issues)
 During the Alfonsin years, unemployment did not substantially
increase; but, real wages fell by almost half

Early 1990’s………………
Under the rule of Minister of Economy Domingo Cavallo,
executive measures fixed the value of Argentine currency at
10,000 australes per United States dollar. 
Any citizen could go to a bank and convert any amount of
domestic currency to dollars. To secure this "convertibility", the
Central Bank of Argentina had to keep its U.S. dollar foreign
exchange reserves at the same level as the cash in circulation.
Mid 1990’s……….
People had started to reject it as payment, demanding U.S.
dollars instead. This was later fixated by a law (Ley de
Convertibilidad) which restored the peso as the Argentine
currency, with a monetary value fixed by law to the value of
the U.S. dollar.

As a result of the convertibility law,

inflation dropped sharply,
price stability was assured, and
the value of the currency was preserved.
This raised the quality of life for many citizens, who could
now afford to travel abroad, buy imported goods or ask for
credits in dollars at very low interest rates.
Dis –Ad
The fixed exchange rate made imports cheap,
producing a constant flight of dollars away from the
country and loss of Argentina's industrial infrastructure,
which led to an increase in unemployment.

Mexico and Brazil (both of which also happen to be

important trade partners for Argentina), faced economic
crises of their own Brazil (30% of total trade flows) and
the euro area (23% of total trade flows).
In 1999-2000………
Many people assert that the crux of the Argentine crisis was an
overvalued peso. The peso’s link to the strong US dollar made
the peso overvalued, rendering Argentina uncompetitive,
causing the economy to go down, and forcing the government
to default.
A uncompetitiveness caused by an overvalued currency is
declining exports. But Argentina’s exports increased every year
in the past decade except 1999, when Brazil, its largest trading
partner, suffered a currency crisis.
As the result Recession ruled the State for three years.
During a recession, the tax rates are steadily increased and
new rules were introduced in monetary policy.
Depositors protest
the freezing of their
accounts. Their
mostly dollar-
denominated
accounts were
converted to pesos
at less than half
their new value

In 2001, people fearing the worst began withdrawing large sums of money from
their bank accounts, turning pesos into dollars and sending them abroad, causing
a run on the banks. The government then enacted a set of measures (informally
known as the corralito) that effectively froze all bank accounts for twelve months,
allowing for only minor sums of cash to be withdrawn.
Many private companies were affected by the crisis: Aerolíneas
Argentinas, for example, was one of the most affected Argentine
companies, having to stop all international flights for various days in
2001-02. The airline came close to bankruptcy, but survived.
As a result there is 4% in 2001 & 6% in 2002 of GDP down fall in the
crisis period.

Role of IMF/WORLD BANK

The International Monetary Fund, kept lending money to Argentina and
postponing its payment schedule due to the no improvement in the situation.