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Analysis Of Argentinean Debt Crisis: Imf And Government Actions

1914 words - 8 pages

The Argentina debt affected the country between the late 90’s to the early 2000’s and can be attributed to misdiagnosis and ineffective policy. During this time the IMF and Argetina’s government worked closely together. Previous to the crisis Argentina had been celebrated for its economic policies and growth. The government worked to put in place conservative economic policy, including the privatization of companies, looser trade regulations, among other conservative changes. Economic growth in that period appears to have been in large part the result of increasing amount of international debt. Before the end of the 90’s, things began to fall apart.
The crisis can be traced back to the 80’s, where the country experienced extreme hyperinflation. The currency inflated at over 5000% this was during the presidency of Carlos Menem and, his finance minister, Domingo Cavallo who attempted three ways to limit inflation. The first was a stabilization act with the backing of a large private firm; the second attempt was to buy up certificates of deposit into government bonds (Nataraj & Sahoo 2003). After the first two methods failed the third option was introduced, this was to peg the argentine peso to the US dollar. To fixate the exchange rate, the currency board kept up dollar reserves, and could not change the supply of pesos without the same change in dollars as well (Sergio L., Eduardo, & Augusto 2003). By the mid-1990s, inflation had vanished but the government were unable to alter many of the concretionary policies that stabilized inflation yet hurt growth. When debt crisis began to develop, the government could not expand the money supply as a means of stimulating the economy, resulting in stagflation in the 90’s (Macewen 2002). Argentina's debt rose from less than 33 percent of GDP in early 1990s to more than 41 percent in 1998 (Krueger 2002). Argentina had difficulties in their ability to shoulder debt so large. For example, Argentina had less capacity to raise tax revenue than industrial countries. Simultaneously the inflow of dollars decreased, lessening the money supply even more, this was do in large part to external factors. It was more vulnerable to external shocks, which in turn lead to low export-to-GDP ratio (Krueger 2002). For example, the US dollar appreciated against other currencies, which caused the peso also to appreciate; this resulted in weakening of demand for Argentine exports (Nataraj & Sahoo 2003). A non-competitive economy and international debt all lead to a balance of payments crisis.
The 2001 the Argentine recession grew rapidly deeper. The IMF gave additional funds, on the condition that the government would eliminate its budget deficit. Yet, in doing so, the government was cutting most social programmes. The government announced that it would cut the salaries of public employees by 20% and reduce pension payments. Simultaneously, the worsening crisis raised fears the peso would devalue and the government...

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