Financial & Economic Crisis

Economic Crisis in Argentina (1999-2002)

 

Overview of the crisis

The Argentine economic crisis was part of the situation that affected Argentina's economy during the late 1990s and early 2000s. From the macroeconomic point of view, the critical period started with the decrease of real GDP in 1999 and ended in 2002 with the return to GDP growth, but the origins of the collapse of Argentina's economy, and their effects on the population, can be found much earlier. As of 2005, arguably the crisis was over, though many challenges are still facing the country today.

Background

For many years Argentina was subject to military dictatorship alternating with weak, short-lived democratic governments that resulted in a number of significant economic problems. During the National Reorganization Process from 1976 to 1983 huge debt was acquired for money that was later lost in different unfinished projects, the Falklands War, and the state's takeover of private debts; in this period, a neo-liberal economic platform was introduced. 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 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, for which new loans were required. The state eventually became unable to pay the interest of this debt and confidence in the Austral collapsed. Inflation, which had been held at 10 to 20% a month, spiralled out of control. In July, 1989, Argentina's inflation reached 200% that month alone, topping 5,000% for the year. During the Alfonsin years, unemployment did not substantially increase; but, real wages fell by almost half to the lowest level in fifty years. Amid riots, President Alfonsín resigned five months before the end of his term, and Carlos Menem, took office.

Menem, who had campaigned on a populist platform, had a lukewarm start regarding the country's economy under ministers Miguel Ángel Roig, who died after a few days in office, and Antonio Erman González, but then went back on his promises and began a plan, aligned on the neo-liberal consensus with Washington, of trade liberalisation, labour deregulation and privatisation of state companies which were the source of "much spending "such as telephone, energy and water services providers.

History of events

The fight against inflation did go well, and Argentina began to recover. In early 1991, under the rule of Minister of Economy Domingo Cavallo, executive measures fixed the value of Argentine currency at 10,000 australes for one U.S. dollar. Furthermore, any citizen could go to a bank and ask for any amount of cash in domestic currency to be converted to the corresponding amount in dollars; in order to secure this "convertibility", the Central Bank of Argentina was bound to keep its dollar foreign exchange reserves at the same level as the cash in circulation. The initial aim of such measures was to ensure the acceptance of domestic currency. As hyperinflation peaked during 1989 and 1990, people had started to reject it as payment, demanding U.S. dollars instead. This regime was later fixated by law which restored the peso as the Argentine currency, with a monetary value fixed by law to the value of the United States 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 domestic appliances and electronic products and take loans in U.S. dollars at very low interest rates.

But Argentina had international debts to pay and therefore needed to keep borrowing money. The fixed exchange rate made imports cheap, producing a constant flight of dollars away from the country and a progressive loss of Argentina's industrial infrastructure, which led to an increase in unemployment.

In the meantime, government spending continued to be high and corruption was rampant. Argentina's public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it. The International Monetary Fund, however, kept lending money to Argentina and postponing its payment schedules. Massive tax evasion and money laundering explained a large part of the evaporation of funds toward offshore banks. A congressional committee started investigations in 2001 about accusations that the Central Bank of Argentina's governor, Pedro Pou, as well as part of the board of directors, had failed to investigate cases of alleged money laundering through Argentina's financial system. Clearstream was also accused of being instrumental in this global financial process.

Other countries, such as Mexico and Brazil, both of which also happen to be important trade partners for Argentina, faced economic crises of their own, leading other countries to mistrust Latin American countries moneywise, and affecting the overall economy of the region. The influx of foreign currency provided by the privatisation of state companies had dried out, and after 1999 Argentine exports were harmed by the devaluation of the Brazilian real and a considerable international revaluation of the dollar, effectively revaluing the peso against its major trading partners with Brazil at 30% of total trade flows and the euro zone at 23% of total trade flows.

By 1999, newly elected President Fernando de la Rúa faced a country where unemployment had risen to a critical point, and the undesirable effects of the fixed exchange rate were showing forcefully. In 1999 Argentina's GDP dropped 4% and the country entered a recession which lasted three years, ending in a collapse. Economic stability became economic stagnation even deflation at times, and the economic measures taken did nothing to avert it; in fact, the government continued the contractive economic policies of its predecessor. The possible solution of abandonment of the exchange peg, with a voluntary devaluation of the peso was considered a political suicide and a recipe for economic disaster. By the end of the century, a spectrum of complementary currencies had emerged.

While the provinces had always issued complementary currency in the form of bonds and drafts to brave shortages of cash, the maintenance of the convertibility regime led to this being done on an unprecedented scale, leading to them being called "quasi-currencies" with the strongest Buenos Aires province's Patacón. The national state also issued its own quasi-currency - the LECOP.

The crisis

Argentina quickly lost the confidence of investors and the flight of money away from the country increased. 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.

Because of this allowance limit and the serious problems it caused in certain cases, many Argentines became enraged and took to the streets of important cities, especially Buenos Aires. They engaged in a form of popular protest that became known as cacerolazo (banging pots and pans). These protests occurred especially during 2001 and 2002. At first the cacerolazos were simply noisy demonstrations, but soon they included property destruction, often directed at banks, foreign privatized companies, and especially big American and European companies. Many businesses installed metal barriers because windows and glass facades were being broken and even fires being ignited at their doors. Billboards of such companies as Coca Cola and others were brought down by the masses of demonstrators.

Confrontations between the police and citizens became a common sight, and fires were also set on the streets of Buenos Aires. Fernando de la Rúa declared a state of emergency without the confirmation by the Congress but this only worsened the situation, precipitating the violent protests of 20 and 21 December 2001 in Plaza de Mayo, where demonstrators clashed with the police, ended with several dead, and precipitated the fall of the government. De la Rúa eventually fled the Casa Rosada in a helicopter on 21 December.

Amid rioting, President Fernando de la Rua resigned on December 21, 2001. As De la Rúa's vice president, Carlos Álvarez, had resigned in October 2000, a political crisis ensued. Following presidential succession procedures established in the Constitution, the president of the Senate Ramón Puerta took office but quickly resigned, followed by the president of the Chamber of Deputies, Eduardo Camaño. The Legislative Assembly, a body formed by merging both chambers of the Congress, convened with the goal of creating a more legitimate interim government. By law, the candidates were its own members plus the Governors of the Provinces. Finally they appointed Adolfo Rodríguez Saá, then governor of San Luis. During the last week of 2001, the interim government led by Rodríguez Saá, facing the impossibility of meeting debt payments, defaulted on the larger part of the public debt, totalling no less than 93 billion.

Politically, the most heated debate involved the time for the following elections - the spectrum ranged from March 2002 to October 2003 which was the original date for the end of De la Rúa's office.

Rodríguez Saá's economy team came up with a project designed to preserve the convertibility regime, dubbed the "Third Currency" Plan. It consisted of creating a new, non-convertible currency called Argentino coexisting with convertible pesos and U.S. dollars. It would only circulate as cash and would be partially guaranteed with federally-managed land which was expected to counterbalance inflationary tendencies.
Argentinos having legal currency status would be used to redeem all complementary currency already in circulation, the acceptance of which as a means of payment was quite uneven. It was hoped that preservation of convertibility would restore public confidence, while the non-convertible nature of this currency would allow for a measure of fiscal flexibility  that could ameliorate the crippling recession of economy. Critics called this plan merely a "controlled devaluation"; its advocates countered that since controlling devaluation is perhaps its thorniest issue, this criticism was praise in disguise. The "Third Currency" plan had enthusiastic supporters among mainstream economists with the most notorious being perhaps Martín Redrado, current president of the central bank, citing sound technical arguments. However, it could never be implemented because the Rodríguez Saá’s government lacked the political support required.

Rodríguez Saá, utterly incapable to deal with the crisis and unsupported by his own party, resigned before the end of the year. The Legislative Assembly convened again, appointing Peronist Eduardo Duhalde, then a Senator for the Buenos Aires province.

The end of convertibility

After much deliberation, Duhalde abandoned in January 2002 the fixed 1-to-1 peso-dollar parity that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 1.4 pesos per dollar.

In addition to the corralito, the Ministry of Economy dictated the pesificación ("peso-ification"), by which all bank accounts denominated in dollars would be converted to pesos at official rate. This measure angered most savings holders and appeals were made by many citizens to declare it unconstitutional.

After a few months, the exchange rate was left to float more or less freely. The peso suffered a huge depreciation, which in turn prompted inflation since Argentina depended heavily on imports, and had no means to replace them locally at the time.

The economic situation became steadily worse with regards to inflation and unemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about 80%. The quality of life of the average Argentinian was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.

Since the volume of pesos didn't fit the demand for cash even after the devaluation, huge quantities of a wide spectrum of complementary currency kept circulating alongside. Fears of hyperinflation as a consequence of devaluation quickly eroded the attractiveness of their associated revenue, originally stated in convertible pesos. Their acceptability now ultimately depended on the State's willingness to take them as payment of taxes and other charges, consequently becoming very irregular. Very often they were taken at less than their nominal value, while the Patacón was frequently accepted at the same value as peso, Entre Ríos's Federal was among the worst-faring, at an average 30% as the provincial government that had issued them was reluctant to take them back. There were also frequent rumours that the Government would simply banish complementary currency overnight (instead of redeeming them, even at disadvantageous rates), leaving their holders with useless pieces of paper.

Immediate effects

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 2002. The airline came close to bankruptcy, but survived.

Depositors protested the freezing of their accounts. Their mostly dollar-denominated accounts were converted to Pesos at less than half their new value. Most barter networks, viable as devices to ameliorate the shortage of cash during the recession, collapsed as large numbers of people turned to them, desperate to save as many pesos as they could for exchange for hard currency as a palliative for uncertainty.

Several thousand newly homeless and jobless Argentines found work as cartoneros, or cardboard collectors. The 2003 estimation of 30,000 to 40,000 people scavenged the streets for cardboard to eke out a living by selling it to recycling plants. This method accounts for only one of many ways of coping in a country that at the time suffered from an unemployment rate soaring at nearly 25%.

Agriculture was also affected: Argentine products were rejected in some international markets, in fear that they might come damaged because of the poor conditions in which they grew, and the USDA put restrictions on Argentine food and drugs arriving at the United States.

Producers of television channels were forced to produce more reality shows than any other type of shows, because these were generally cheap to produce as compared to other programmes. Virtually all education-related TV programmes were cancelled.

Tourism balance with Chile inverted due to the lowered prices in Argentina.

The recovery

Eduardo Duhalde finally managed to stabilise the situation to a certain extent, and called for elections. On May 25, 2003 President Néstor Kirchner took charge. Kirchner kept Duhalde's Minister of Economy, Roberto Lavagna, in his post. Lavagna, a respected economist with centrist views, showed a considerable aptitude at managing the crisis, with the help of heterodox measures.

The economic outlook was completely different from that of the 1990s; the devalued peso made Argentine exports cheap and competitive abroad, while discouraging imports. In addition, the high price of soy in the international market produced an injection of massive amounts of foreign currency with China becoming a major buyer of Argentina's soy products.

The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and set aside large amounts of money for social welfare, while controlling expenditure in other fields.

As a result of the administration's productive model and controlling measures selling reserve dollars in the public market, the peso slowly re-valued, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and tourism returned.

The huge trade surplus ultimately caused such an inflow of dollars that the government was forced to begin intervening in order to keep the peso from revaluing further, which would have ruined the tax collection scheme largely based on imports taxes and royalties and discourage further reindustrialisation. The central bank started buying dollars in the local market and stocking them as reserves. By December 2005, foreign currency reserves had reached $28 billion although they were greatly reduced by the anticipated payment of the full debt to the IMF in January 2006. The downside of this reserve accumulation strategy is that the dollars have to be bought with freshly-issued pesos, which may induce inflation. The central bank neutralises a part of this monetary emission by selling Treasury letters. In this way the exchange rate has been stabilised near a reference value of 3 pesos to the dollar.

The currency exchange issue was complicated by two mutually opposing factors: a sharp increase in imports since 2004 which raises the demand for dollars, and the return of foreign investment which brings fresh currency from abroad after the successful restructuring of about three quarters of the external debt. The government has set up controls and restrictions aimed at keeping short-term speculative investment from destabilising the financial market.

Argentina's recovery suffered a minor setback in 2004 when rising industrial demand caused a short-lived energy crisis. The prospect of future energy shortages is still not discounted.

Argentina has managed to return to growth with surprising strength; GNP jumped 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006 and 8.7% in 2007. Although average wages have increased 17% annually since 2002 jumping to 25% in May, 2008, consumer prices have partly accompanied this surge; though not comparable to the levels of former crises, the inflation rate was 12.5% in 2005, 10% in 2006 and is believed by private economists to have approached 15% in 2007 and to exceed 20% during 2008. However the Ministry of Economy refuses to acknowledge inflation greater than 10%. This has prompted the government to increase tariffs for exporters and to pressure retailers into one price truce after another in a bid to stabilize prices, so far with little effect.

While unemployment has been considerably reduced, Argentina has so far failed to reach an equitable distribution of income - the wealthiest 10% of the population receive 31 times more income than the poorest 10%. This disparity, nevertheless, compares quite favourably to levels seen in most of Latin America, Asia and Africa.

Worker-owned Cooperatives and Self-Management

During the economic collapse, many business owners and foreign investors drew all of their money out of the Argentine economy and sent it overseas. As a result, many small and medium enterprises closed due to lack of capital, thereby exacerbating unemployment. Many workers of such enterprises, faced with a sudden loss of employment and no source of income, decided to reopen businesses on their own, without the presence of the owners and their capital, as self-managed cooperatives.

Worker managed cooperative businesses include ceramics factory Zanon (FaSinPat), the four-star Hotel Bauen, a suit factory Brukman, a printing press Chilavert, and many others. As of 2007, there were about 10,000 people employed in self-managed businesses, representing a significant source of employment and economic growth. In some cases, the former owners sent police to kick workers out of the workplaces; this was sometimes successful but in other cases workers defended their workplaces against the state, the police, and the bosses.

Some businesses have now been legally purchased by the workers for nominal fees, others remain 'occupied' by workers who have no legal standing with the state and in some cases reject negotiation with the state on the grounds that working productively is its own justification. The Argentine government is considering a Law of Expropriation that would transfer some occupied businesses to their worker-managers.

Effects on wealth distribution

Although GDP has grown consistently and quickly since 2003, it was only in late 2004 that it reached the levels of 1998, the last year before the recession. Other macroeconomic indicators have followed suit. A study by Equis, an independent counselling organisation, found that two measures of economic inequality, the Gini coefficient and the wealth gap between the 10% poorest and the 10% richest among the population, grew continuously since 2001, and decreased for the first time in March 2005.

Debt restructuring

When the default was declared in 2002, foreign investment fled the country, and capital flow towards Argentina ceased almost completely. The Argentine government met severe challenges trying to refinance the debt. The state had no spare money at the time, and the central bank's foreign currency reserves were almost depleted.

The Argentine government kept a firm stance, and finally got a deal in 2005 by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value at 25–35% of the original and at longer terms. In 2008, President Cristina Fernandez de Kirchner announced she was studying a reopening of the 2005 swap in order to gain adhesion from the remaining 24% of the so-called "holdouts," and thereby fully exit the default with private investors.

Criticism of the IMF

The International Monetary Fund suffered no discounts in its part of the Argentine debt. Some payments were refinanced or postponed on agreement. However, the authorities of the IMF at times expressed harsh criticism of the discounts and actively lobbied for the private creditors.

In a speech before the United Nations General Assembly on September 21, 2004, President Kirchner said that "An urgent, tough, and structural redesign of the International Monetary Fund is needed, to prevent crises and help in [providing] solutions". Implicitly referencing the fact that the intent of the original Bretton Woods system was to encourage economic development, Kirchner warned that the IMF today must "change that direction which took it from being a lender for development to a creditor demanding privileges".

During the weekend in October, 2004, at the annual meeting of the International Monetary Fund and World Bank, leaders of the IMF, the European Union, the Group of Seven industrialised nations, and the Institute of International Finance (IIF), warned President Kirchner that Argentina had to come to an immediate debt-restructuring agreement with the speculative "vulture funds", increase its primary budget surplus in order to pay more debt, and impose "structural reforms" to prove to the world financial community that it deserves their loans and investments.

In 2005, as a large and consistently growing fiscal surplus made it possible, Argentina shifted to a policy of "no debt" towards the IMF: paying the IMF in schedule, with no negotiation whenever possible, with the intention of gaining independence from it. On December 15, 2005, in a sudden move following Brazil, President Kirchner announced that Argentina would pay the whole debt to the IMF which had been previously financed in instalments until 2008, for a total of 9,810 million USD, employing the central bank's foreign currency reserves.

In a report published in June 2006, a group of independent experts hired by the IMF to revise the work of its Independent Evaluation Office (IEO) stated that the assessment of the Argentine case suffered from informative manipulation and lack of collaboration on the part of the IMF; the IEO is claimed to have unduly softened its conclusions to avoid criticizing the IMF's board of directors.

 

 
This article uses material from the Wikipedia article "Argentine Economic Crisis (1999-2002)"

 

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