Argentine Financial Crisis 2001

11 Key excerpts on "Argentine Financial Crisis 2001"

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  Argentina Since the 2001 Crisis

  Recovering the Past, Reclaiming the Future

  • C. Levey, D. Ozarow, C. Wylde, C. Levey, D. Ozarow, C. Wylde(Authors)
  • 2014(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Convertibilidad created a perception that future income levels would continue to rise or at least remain constant in the medium to long run, and therefore businesses and individuals were encouraged to adopt frivolous consumption and investment habits accordingly. However, as the rigidities of the system dampened economic growth through negatively affecting export competitiveness, these expectations proved to be false and large debt levels (both public and private) became unsustainable as the economy failed to grow. This not only resulted in a crash in confidence in the banking sector—precipitating a run on the banks—but also led to the biggest sovereign default in history.

  While it is true that regular cycles of economic crisis have been a feature of Argentine political economy throughout its modern history, the case of 2001–2 stands out not only in its magnitude, but also in terms of the profound social impacts and political turmoil that engulfed society during this time. The institutional weakness of both the Argentine state apparatus as a result of decades of dictatorship, neoliberal reforms in the 1990s, and of the Alianza government meant that events became uncontrollable and institutional safeguards and social safety nets that should have offered protection to millions of vulnerable citizens were absent precisely at the time when they descended into poverty. All of these factors combined to produce the unique events of during December 2001 and January 2002, and its dramatic consequences for the people of Argentina.

  The crisis and its causes can only begin to be fully understood once the connections between political and civil society have been integrated (Armony and Armony 2005, 27). The same can be said of its aftermath. The rest of the sections of this book will further explore responses to and recovery from the 2001–2 period in this context. The following chapters will demonstrate that an appreciation of the dynamics of both continuity and change are needed to comprehend the postcrisis period, just as much as this chapter has underlined this need in order to understand the crisis itself. Subsequent sections will then adopt this framework into other aspects of the state-society relationship, namely, the role of social mobilization and civil society as well as more cultural and literary representations. As argued in the introductory chapter to this book, this is due to the need to move beyond narrow economic interpretations of the crisis so that analysis of the Argentine case can be grounded in an understanding of the importance of how crisis and its associated effects impact on both aspects of individual life and social imaginary.

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  Globalization and the Distribution of Wealth

  The Latin American Experience, 1982–2008

  • Arie M. Kacowicz(Author)
  • 2013(Publication Date)
  • Cambridge University Press

    (Publisher)

  After all, the economic crisis was somehow determined, if not constrained, by the external shocks of the late 1990s and the ideological hegemony of the ‘Washington Con- sensus’, which led to the implementation of pro-globalization and liber- alization policies (Carranza 2005, 77–8). I turn now to assess this second set of explanations. International economic considerations (‘external shocks’) In addition to the political domestic arguments, it is evident that the international context of the second half of the 1990s, namely the modern system of globalized financial capital, is crucial to understand the steady deterioration of the Argentine economy, following the Mexican, East Asian, Russian, and Brazilian crises (all crises of globalization) in 1994– 9. Those financial crises led to ‘external shocks’ that swept the globe, having a profound impact upon the Argentine economy, due to its already vulnerable financial position in the world economy. The full integration of Argentina into the international financial mar- kets played a fundamental role in the continuing functioning of its con- vertibility regime, but it also laid the ground for the crisis of December 2001. As Blustein argued, foreign funds numbed Argentine policymak- ers into discounting the risks of their own policies. Like steroids, these influxes of foreign capital gave the economy a short-term boost while seriously damaging it in the long term (Blustein 2005, 6; and Gambina and Crivelli 2005, 393–4). Russia’s default in August 1998 deprived Argentina of ready access to foreign capital, due to the contagion effect. Furthermore, Brazil’s devaluation in early 1999 destroyed Argentina’s competitiveness in the foreign markets. As a result, Argentina was stuck with twin deficits, a trade gap and a budget gap, which foreigners were less and less willing and ready to finance. To right itself, the Argentine economy needed to regain competitiveness.

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  Latin America after the Financial Crisis

  Economic Ramifications from Heterodox Perspectives

  • Juan E. Santarcángelo, Orlando Justo, Paul Cooney, Juan E. Santarcángelo, Orlando Justo, Paul Cooney(Authors)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  3 The Global Crisis and Its Effects on the Accumulation in Argentina Juan E. Santarcángelo and Guido Perrone 3.1 Introduction Many economists consider the global financial crisis that started in 2007 to be the worst crisis since the Great Depression of the 1930s. Some of the immediate effects of it have been the collapse of signifi- cant financial institutions, an intense process of concentration and centralization of financial assets, and a massive injection of public resources, which tried by different means to rescue the more compro- mised commercial banks and financial institutions. The correlate of this phenomenon has been seen in the real economies of the countries that were most affected, especially the European periphery, which saw how labor market indicators worsened with the development of the crisis. Despite that historically international crisis have had significant negative effects on Latin America, the current crisis appears to have affected the countries of the region less severely. A particularly spe- cial case in this sense is Argentina, which after experiencing its worst and most dramatic economic and social crisis in 2001, has succeeded in changing the dynamics of accumulation, achieving for the period 2003–2013 the most important economic growth decade of its history. The aim of this chapter is to study the main features of the dynamics of growth experienced by Argentina in recent years, the role performed by the manufacturing sector in it, and the different 34 Juan E. Santarcángelo and Guido Perrone transmission channels of the international financial crisis on the path of growth. The chapter is divided in the following sections: the first part examines the main features of the growth process that begins after the abandonment of the convertibility regime and the contri- bution that the industrial sector made in this process.

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  Ten Crises

  • Peter Montiel(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  Lessons from the Crisis in Argentina, IMF Occasional Paper 236 (Washington, DC: International Monetary Fund).

  De La Torre, Augusto, Eduardo Levy-Yeyati, and Sergio Schmukler (2002), “Argentina’s Financial Crisis: Floating Money, Sinking Banking,” mimeo (Washington, DC: World Bank).

  Dominguez, Kathryn and Linda Tesar (2005), International Borrowing and Macroeconomic Performance in Argentina, NBER Working Paper 11353 (May) (Cambridge, MA: National Bureau of Economic Research).

  Edwards, Sebastian (2002), “The Argentine Debt Crisis of 2001–2: A Chronology and Some Key Policy Issues,” mimeo (University of California, Los Angeles).

  Eichengreen, Barry (1994), International Monetary Arrangements for the 21st Century (Washington, DC: Brookings Institution).

  Feldstein, Martin (2002), “Argentina’s Fall: Lessons from the Latest Financial Crisis,” Foreign Affairs, 81(2), March-April, 8–14.

  Ghosh, Atish, Anne-Marie Gulde, and Holger Wolf (2002), Exchange Rate Regimes: Choices and Consequences (Cambridge, MA: MIT Press).

  Gruben, William C. and John H. Welch (2001), “Resisting and Recovering from Crises: Lessons from Brazil and Argentina,” Domestic Finance and Global Capital in Latin America Conference (Federal Reserve Bank of Atlanta).

  Hausmann, Ricardo and Andres Velasco (2002), “Hard Money’s Soft Underbelly: Understanding the Argentine Crisis,” in S. Collins and D. Rodrik, eds, Brookings Trade Forum 2002 (Washington, DC: Brookings Institution), pp. 59–119.

  Izquierdo, Alejandro (2002), “Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability in Argentina,” The World Economy 25(7), 903–923.

  Kiguel, Miguel A. (2002), “The Argentine Financial System in the Nineties,” mimeo (Federal Reserve Bank of Atlanta).

  Leipziger, Danny (1998), “The Argentine Banking Crisis: Observations and Lessons,” in G. Caprio, W. Hunter, G. Kaufman, and D. Leipziger, eds, Preventing Bank Crises: Lessons from Recent Global Bank Failures

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  The Currency of Confidence

  How Economic Beliefs Shape the IMF's Relationship with Its Borrowers

  • Stephen C. Nelson(Author)
  • 2017(Publication Date)
  • Cornell University Press

    (Publisher)

  82 The different currency denominations of assets and liabilities on balance sheets can create a wave of bankruptcies, from the individual borrower to the central government, when the price of the currency on the liability side shoots up relative to the currency on the asset side. Such adverse exchange rate moves multiply the real value of external debt. When the Argentine peso strengthened (as it did by almost 25 percent between 1991 and 1993), the risks of the debt structure could be elided; but if the market price of the home currency weakened vis-à-vis the price of the currency in which the debt was denominated, the exploding debt dynamics could trigger a severe financial crisis. The new love affair of Argentina with the international financial community was fraught with dangers.

  The Convertibility system faced its first serious test at the end of 1994. Earlier in the year, the IMF mission had noted that fiscal progress had slowed and that the Argentines had failed to meet the fiscal targets for the first quarter of the year. Nonetheless, the country passed its July review without facing a suspension or tightening of the fiscal performance criteria, thanks to another set of waivers. Noting that her authorities were “happy to accept the waivers recommended in the proposed decision,” the U.S. ED, Karin Lissakers, remarked, “with an election approaching, some relaxation of spending discipline might be expected, even in a team as determined as the Argentine authorities .”83 In late September, Cavallo felt confident enough to announce that Argentina would not need the final two drawings under the EFF. Outside observers worried that the cancellation of the final tranches of the EFF indicated that the authorities had lost control of the fiscal situation in the run-up to the May 1995 presidential elections, in which Menem sought reelection.84

  In late December 1994, the Mexican currency crisis exploded. The international shock triggered a confidence crisis among investors in Argentina, which ignited a massive capital outflow. Between January and April 1995, $8 billion—accounting for 18 percent of all bank deposits—were drained from the country. The stock market lost 30 percent of its value in the first two months of the year. Cavallo compared the events of early 1995 to the financial panic of 1929.85 The Argentines hoped that a series of auctions of short-term treasury bills would staunch the bleeding, but the severity of the crisis forced the Cavallo-Fernández team to turn back to the Fund in late February to negotiate terms to restart the EFF.86

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  Routine Crisis

  An Ethnography of Disillusion

  • Sarah Muir(Author)
  • 2021(Publication Date)
  • University of Chicago Press

    (Publisher)

  2

  Aligning History and Autobiography

  I did not initially set out to gather a set of life histories when I began fieldwork. However, I quickly found that my informants repeatedly and insistently offered me variants of that genre. In interviews and casual conversations alike, as people presented their theories about the crisis in the form of partly or overtly autobiographical narratives, I began to realize how important it was to attend to the form those narratives took. Focusing on their formal features allowed me to understand how the narratives rendered particular happenings comprehensible as “the crisis” and, in so doing, identified the individual speaker, the middle class, and the nation as isomorphic subjects, nearly perfectly aligned in their experiences, perceptions, and judgments.

  First, however, for those interested, a brief recounting of the developments that came to be known, almost immediately, as “the crisis of 2001–2002.” —

  The roots of the 2001–2002 Argentine financial crisis lay in a series of reforms some ten years earlier aimed at restructuring the national economy in order to address a cluster of problems, including soaring poverty rates, crippling hyperinflation, unserviceable levels of public debt, and rapidly declining salaries. By 1989 those problems had become so dire that they had prompted a wave of protests, lootings, and, eventually, the resignation of then president Raúl Alfonsín, who handed the presidential sash and scepter over to Carlos Menem some six months early. These structural reforms, designed by President Menem’s economy minister, Domingo Cavallo, included pegging the Argentine peso to the US dollar, privatizing state-owned companies, disempowering unions, deregulating foreign investment, and dismantling state social welfare programs. With the exception of the currency peg, these reforms hewed closely to the so-called Washington Consensus, a set of policy guidelines typically advocated by the IMF, the World Bank, the United States Treasury, and the European Central Bank.3

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  From Capital Surges to Drought

  Seeking Stability for Emerging Economies

  • R. Ffrench-Davis, S. Griffith-Jones, R. Ffrench-Davis, S. Griffith-Jones(Authors)
  • 2003(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  According to the authors, these countries have made considerable progress with restructuring their financial system and putting in place prudential Ricardo Ffrench-Davis 31 regulation and supervision since the initial phase of more naïve financial liberalization. Supposedly, with the reform to the previous reform, these countries are now better able to withstand external shocks, with their financial systems showing greater resilience than before. It was a common belief among international financial institutions that Argentina had pro- gressed enormously in terms of improving its financial system. This is con- firmation that Argentina, as evaluated by financial markets, was classified as a well-behaved and dedicated reformer. Argentina’s regulations appeared to be the strictest in the region. However very strong macroeconomic shocks can undermine even the strictest regula- tions and lead to banking crises, as Argentina’s experience in 2001–2 showed. In this case a particularly crucial domestic variable was an outlier macro price – the exchange rate – in a highly but far from fully dollarized economy. The sharp rise in spreads faced by Argentina severely complicated its fiscal stance. The exchange-rate regime has become a much more influential variable in emerging economies in terms of trade and finance. It is subject to two conflicting demands, which reflect the more limited degree of freedom that authorities face in a world of reduced policy effectiveness (see ECLAC, 2000; Ocampo, 2002b). The first demand comes from trade: with the dismantling of traditional trade policies the real exchange rate has become a key determin- ant of international competitiveness and a crucial variable in the efficient allocation of resources into tradables.

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  Straining at the Anchor

  The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935

  • Gerardo della Paolera, Alan M. Taylor(Authors)
  • 2007(Publication Date)
  • University of Chicago Press

    (Publisher)

  MacroeconomicTwin-Risk: Exchange-Rate Regime and Financial Structure The almost simultaneous problems of exchange-rate crises and financial crises were a recurrent problem for Argentina, and this type of “twin crisis” economic 23. We also examined correlations of real output per person and the two financial variables. The correlations are striking: before 1920, the economy appears to be developing as per the standard economic model: real economic growth moves in parallel with the relative expansion of the financial system, and the substitution away from cash. After 1920, these correlations completely break down. Distress Signals 155 phenomenon is now better understo~d.’~ The complicated dynamics of a regime that combined a high ratio of inside to outside money (a fractional-reserve financial system) and a fixed exchange-rate regime (the Gold Standard) had become all too apparent by 1914. The “central banker to the world”-the Bank of England-had decided on a course of successive and dramatic increases in its discount rate. The years 1913-14 were thus characterized by a devastating foreign shock to the Argentine economy in general, and to the monetary and financial regime in particular. In Table 7.2 we show the anatomy of several financial crises to highlight the main channels of transmission to the real economy. We include three important financial crises from our period of study: first, looking back, the 1890-91 Baring Crisis; next, the financial crash of 1913-14; and, last, the 1930-31 downturn. A common characteristic of real financial crises is the fall in bank money, or in the ratio of inside to outside money. This is due to a persistent run on bank deposits, and it is usually associated with a severe loss in output. In 1913-14we see that, although a major devaluation of the currency was avoided-to avoid a repeat of one major cost of the Baring Crisis-another price was paid instead.

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  Unconstitutional Regimes and the Validity of Sovereign Debt

  A Legal Perspective

  • Sabine Michalowski(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  114

  111 Rapoport (2000) , at 977.

  112 Ibid. , at 980.

  113 Ibid. , at 1002–1003.

  114 Kulfas and Schorr (2003) , at 33–34.

  Just as during the latest military dictatorship, under Menem both the public and private foreign debt of the country increased significantly, and the incoming money was not used to increase productivity, but rather to finance the growing public deficit, financial speculation and capital flight.115 One effect of the foreign public and private debt was an increasing capital flow out of the country, in the form of interest and debt repayment. This trend was further exacerbated by the internationalization of companies which transferred their profits abroad. In 1998 alone an estimated 100,000 million dollars left the country.116 Another important factor leading to Argentina’s fiscal crisis was the privatization of the social security system117 which was strongly supported, if not requested, by the IMF as part of the structural adjustment measures expected from the country.

  115 Rapoport and Musacchio (2005) , at 53.

  116 Rapoport (2000) , at 1010.

  117 Stiglitz (2006) , at 167.

  Galasso describes Argentina’s situation at that time as follows:

  Argentina lives to pay the service of its debt. The state budget does not consist in planning the annual expenditures and resources directed towards improving the situation of its inhabitants, their quality of life in the areas of health care, education, food, housing etc. … It only exists in order to adapt expenditures and resources to the servicing of the foreign debt, and to estimate how much of [the debt] could be renegotiated with new loans.118

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  International Banking Crises

  Large-Scale Failures, Massive Government Interventions

  • Benton E. Gup(Author)
  • 1999(Publication Date)
  • Praeger

    (Publisher)

  Mimeographed. D'Amato, Laura, Elena Grubisic, and Andrew Powell. 1997. "Contagion, Banks Fundamentals or Macroeconomic Shock? An Empirical Analysis of the Argentine 1995 Banking Problems." Banco Central de la Republica Ar- gentina, Documento de Trabajo, July. Fernandez, Roque, and Liliana Schumacher. 1996. "The Argentine Panic After the Mexican Devaluation: Did 'Convertibility' Help or Hurt?" In Banking Crisis in Regional Blocks. Washington, D.C: George Washington University. Folkerts-Landau, David, and Takatoschi Ito. 1995. "Evolution of the Mexican Crisis." In International Capital Markets: Developments, Prospects and Policy Issues. Washington, D.C: IMF. Ganapolsky, Eduardo, and Sergio Schmukler. 1998. "The Impact of Announce- ments and News on Capital Markets: Crisis Management in Argentina During the Tequila Effect." Working document, Banco Central de la Republica Argentina. Garrido, Celso. 1996. "El Sistema Financiero en Mexico a Principio de los Noventa: Crisis de una Reforma Contradictoria." In La Macroeconomia de los Mercados Emergentes, edited by Gonzalo Rodriguez Prada. Madrid: Universidad de Alcala. Kiguel, Miguel. 1995. "Convertibilidad: Una Historia de Tango y Tequila." Banco Central de la Republica Argentina. Mimeographed. Schumacher, Liliana. 1996. "Bubble or Depositors Discipline: A Study of the Argentine Banking Panic (December 1994-May 1995)." Ph.D. diss., University of Chicago. Schumacher, Liliana. 1997. "Information and Bank Runs—Evidence from a Contemporary System Without a Safety Net: Argentine After the Te- quila' Shock." George Washington University, Washington, D.C. Sotelsek, Daniel. 1995. "La Crisis Bancaria en la Republica Argentina en un Contexto de Tipo de Cambio Fijo." In La Macroeconomia de los Mercados Emergentes, edited by Gonzalo Rodriguez Prada. Madrid: Universidad de Alcala.

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  Oracles, Heroes or Villains

  Economic Policymakers, National Politicians and the Power to Shape Markets

  • George E. Shambaugh(Author)
  • 2019(Publication Date)
  • Cambridge University Press

    (Publisher)

  His dismissal and replacement with a more compliant central bank president in January of 2010, however, are expected to increase uncer- tainty by signaling an end to technocratic pushback against the administration. In the decade following the collapse, the biggest challenges facing Argentina involved meeting its debt obligations to international credit- ors. The creditors included members of the Paris Club of creditor countries and private bondholders. 99 Normally, Paris Club countries do not negotiate debt restructuring unless the country has an IMF lending program in hand and has therefore undergone an Article IV review to assess its ability to repay its debts; furthermore, the IMF would generally not initiate a lending program until an agreement had been offered to all creditors. 100 Instead of following this practice, President Kirchner and Minister of the Economy Lavagna chose to negotiate with its creditors directly rather than use the IMF as an intermediary. President Kirchner and Minister Lavagna took a hardline approach and filed a one-time offer with the US Securities and Exchange 98 “Turmoil at the Argentine Central Bank” (2002). New York Times, December 7. www.nytimes.com/2002/12/07/business/turmoil-at-the-argentine-central-bank.html?ref= roberto_lavagna. 99 See the official Paris Club website: www.clubdeparis.org. 100 J. Hornbeck (2013a). “Argentina’s Defaulted Sovereign Debt: Dealing with the ‘Holdouts.’” Library of Congress, Congressional Research Service, p. 4. 3.4 Period III 79 Commission (SEC) 101 to settle Argentina’s debt with 152 different bond series issued in seven currencies under multiple jurisdictions. 102 To compel the bondholders to accept the deal, President Kirchner encouraged the Argentine Congress to pass the Lock Law (Ley Cerrojo), which prohibited the government from reopening the exchange or making any kind of future offer on better terms and suspending pay- ments on untendered debt after February 25, 2005.

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