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The Crisis Of Argentina In 2001 2002

1534 words - 6 pages

This assignment is about the crisis that affected Argentina in 2001. First of all, we will try to understand how this crisis occured. In a second part, we will see the measures taken by the Argentinian government and will analyse of the results of those measures. Then, we will take a look at the interventions of the International Monetary Fund and their consequences. To conclude, we will analyse this crisis, trying to determine what could have been done and what to learn from this economic disaster.After its crisis at the end of the 1980's, Argentina started to find the road to a good health on April 1rst, 1991, when Carlos Menem's government installed the "convertibility system" to fight against hyperinflation. Under the Convertibility law, the peso and the U.S. dollar circulated at a "1 to 1 exchange rate". The owner of a peso had a property right for a dollar and could freely convert this peso into a dollar.The crisis of 2001 originated in a complex mix of problems that had been at work from the mid-1990s or even before. The crisis also was the result of a weak financial systems that became too exposed to exchange rate risks as well as the large-scale capital inflows driven by cyclical downturns in the industrialized countries in the early 1990's. To this can be added an excessive demand which rose asset prices fueled by strong credit expansions, speculative and imprudent investment decisions, weak or clumsy governance of companies and banks and a general lack of transparency in the public sector.In concrete terms, Argentina's economy went into recession in September 1998 as a consequence of the Asian and Russian currency crises, which finished in a general decline in volumes of investment to emerging market economies. The Brazilian currency crisis of 1999 led the economy into another blow.When Fernando de la Rúa became president in December 1999, things went from bad to worse. His administration's new economic plan, approved by the IMF, was supposed to lower interest rates and produced a boom by raising taxes, which aimed to reduce the government's deficit. But its timing was awful. World interest rates in December 1999 were on the rise, so Argentina's rates also rose and the economy fell deeper into recession.From there the "de la Rúa administration" committed various policy mistakes that damaged the successful reforms of the early 1990s: stable money and sound banking.In this context of growing economic crisis, a political crisis appeared as well.In late 1999 and early 2000, the incoming government of "de la Rúa" choked the starting recovery by imposing large tax increases that took effect at the beginning of 2000. The government thought the tax increases were necessary to reduce the budget deficit. Instead, tax collections fell. When Domingo Cavallo became minister of the economy in March 2001, he pushed through a financial transaction tax, which has been increased in august to its current rate of 0.6 percent on banks'...

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