An Overview Of The Argentine Financial Crisis

1929 words - 8 pages

The financial crisis in Argentina during the late 1990s and early 2000s resulted in severe issues with foreign debt, inflation, unemployment, and political turmoil for the country. Argentina not only suffered a currency crisis, but also suffered a political crisis. Fallout from the economic collapse was so severe the Argentinean population resorted to civil unrest and protest, which in turn exacerbated Argentina’s problems at the turn of the century. While other issues related to this financial crisis such as the impact on the lives of the Argentinean population or the political turmoil and corruption are certainly worthy of discussion, this paper will focus on the currency crisis and the Argentinean government’s role in this economic catastrophe, primarily discussing the relative fiscal policies and external shocks that led up to the crisis in 2001, followed by a brief examination of the governmental reaction and recovery efforts.
In order to identify the causal factors of this crisis, it may be best to start by looking at the 1980s in Argentina. While the economy of Argentina may have suffered deeply during 2001 and 2002, economic instability was nothing new to the country. During the 1980s Argentina was a victim to the Latin American Debt Crisis and high inflation. In 1989, inflation spiraled out of control, reaching nearly 200% in July alone (Hanke and Schuler, 2002). Not long after, the president at the time, Raúl Alfonsín, resigned due to subsequent protests and riots. As a result, the next elected president, Carlos Menem, took office several months early and appointed Domingo Cavallo as Minister of Economy. Together, starting in the early 1990s, Menem and Cavallo enacted certain major structural reforms—including market liberalization and adoption of a currency board—to Argentina’s economy that laid the foundation for the financial collapse in 2001 (Hornbeck, 2002).
In an effort to move Argentina from an internationally isolated and state-dominated economy to one that encouraged international trade and foreign investments, Carlos Menem, in the early 1990s, initiated a wave of privatization, which included state-owned industries such as utilities (Feldstein, 2002). Following the examples of Chile and the emerging economies of Southeast Asian nations, Menem hoped this liberalization would foster growth in productivity and economic growth.
On April 1, 1991, Argentina’s Congress, with Domingo Cavallo as Minister of Economy, enacted the Convertibility Law (or Ley de Convertibilidad) legally adopting the currency board (Hornbeck, 2002). This legislation essentially pegged the Argentinean peso to the U.S. dollar. The government guaranteed the convertibility of the peso to U.S. dollar at a one-to-one exchange rate, limiting the printing of pesos to only those necessary to purchase dollars in the foreign exchange market. Thus, the central bank was required by law to hold foreign reserves to cover its peso liabilities (Hanke...

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