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Will Argentina Devalue

its Peso?

Presentation Outline


Events Leading to the



Critical Aspects

Events During the Crisis

Questions & Answers of

the Case

Liliana Ruan

2nd Largest Country in South
Founding Member
United nation
World Bank
World Trade Organization
World Bank:
Middle Income and
Developing Country
Sebastian Gomez

Argentina Trading Partners

Sebastian Gomez

Events leading to the crisis

In 1991 the Argentine government passed a

convertibility law that linked the peso to the U.S.
dollar at parity.
In 1995 to 1999, the U.S dollar experienced a period
of real appreciation, which resulted in Argentine
peso appreciation relative to its trading partners.
There were many negative effects during the peg of
Argentina peso to Dollar. One the most significant
problems was the overvaluation of the peso in the
international market. Exportations from Argentina
became expensive for their allies in the South
American continent.
As a way to reconstruct the country economy and
trust among international investors, Argentina
started a swap mechanism to exchange long-term
bonds that were due in 2005 to bonds that would be
paid in 2010.
Even though the payment of the bonds was

Liliana Ruan & Sebastian

Events leading to the crisis

Reduction of government pension funds by 13%. As

well as, using bonds as a way of payment for civil
workers rather than money. This led to an important
riot in the nation and a lot of mistrust by international
investors, which believed the country, was not
recovering from the economic stagnation but rather
drowning more into debt.
About the 1991 convertibility law that linked the peso
to the U.S. dollar at parity. The initial economic effects
were positive: as Argentinas chronic inflation was
curtailed, foreign investment poured in and the
financial situation or Argentina looked promising.
As the U.S dollar appreciated on the world market the
Argentine peso became stronger as well. However, the
strong peso hurt exports from Argentina and cause a
economic downturn that led to the abandonment of

Liliana Ruan & Sebastian


The unemployment rate rose above 20%, the inflation rate reach a
monthly rate of 20% causing a financial crisis that Argentina has
never gone through before.
In an attempt for securing many Argentinian jobs, the unions led
many multinationals to go out of business plus shrinking Argentine
economy by 20 percent over all.
Neighbor countries did not want to buy Argentine agricultural
products since they did not trust the product quality.
Even though the Argentinian peso was rising due to their fixed
exchange rate with the dollar, the amount of international trades was
decreasing on the other side. Companies were filing for bankruptcy at
the same time many goods were reaching unbelievable prices
Many citizens started withdrawing money from their bank accounts
and sending them overseas as a way of protecting their capital. Bank
runs the government fiscal policies which led the country to freeze
bank accounts for 12 months, where only small amounts of money
were allowed to be withdrawn.
At the end of this period and after four years of economic stagnation,

Liliana Ruan & Sebastian

Critical Aspects

The economic activity slowed

down generating an
unemployment rate increase
and devaluation of the peso.

The agriculture department

suffers heavily due to lack of
funding, generating a two
digits increase in the family
Sebastian Gomez

Critical Aspects

International interest rates

increase restricting
Argentinian government to
access international debt
Equity of Banks and financial
institutions fell due to bank
runs and foreign investors
Budget deficit increased and

Sebastian Gomez

During the crisis


Unemployment soared beyond 20 percent, and reports surfaced of

widespread hunger and malnutrition in a country that had long
prided itself as being one of the world's breadbaskets.

Before the crisis ended, theeconomyhad shrunk by a fifth and

thousands of young, educated Argentines had immigrated to their
grandparents' ancestral homes in Europe. The government also
stopped payment on more than $100 billion in debt. This was the
world's biggest-ever sovereign default.
In an Argentinian news article in 2001, Chief Economist Fausto
Spotorno says:
"La gran medida que le hubiera quedado a Argentina habra sido una
devaluacin. Si Argentina hubiera hecho lo que hizo finalmente,
devaluar y reestructurar la deuda, pero de una forma ordenada, tal vez
la crisis hubiera sido de menor magnitud", dijo Spotorno.
Google Translate:
"The great as would have been to Argentina would have been a

Liliana Ruan

Activists and unemployed protesters

demanded that supermarkets
distribute food. Given the negative, on
December 18 several supermarkets
and convenience stores are looted in
Buenos Aires and Rosario

A protest against the

banks in 2002. The large
sign reads "Thieving
banks - give back our
Liliana Ruan & Sebastian

Since the default


Since the default,Argentinahas remained cut off

from foreign capital markets and is considered a
pariah by most investors
High government spending on social welfare
programs, printing of new money and an ailing
currency have fueled one of the world's highest
inflation rates.

In January, the government was forced to

devalue the peso.
IfArgentinadefaults once again, economists
forecast an outflow of dollars that will pile more
pressure on dwindling central bank reserves if it
cannot extricate itself from the mess swiftly. So
far, no one expects a recession anywhere near as

Liliana Ruan

What should Argentina do?

GET AWAY from pegging, focus on

improving their export areas.
Try to developed their weak areas of
economy so they dont have to import
at higher prices.
Focus on other areas of the economy.
Lower interest rates. Lower taxes.
Take some debt (Leverage) to
stimulate the economy.

Sebastian Gomez


Q1 What are the pros and

cons of Argentina peso

Advantages of Devaluing the Peso

It improves
competitiveness of
Argentine exports-imports
competing products.
Attraction of foreign
investors and a stimulation
to the economic activity.
Increase in tax revenues
and reduction of the
unemployment rate.

Disadvantages of Devaluation
Liabilities total amount will
increase since most of the
liabilities are denominated in
Banking and financials
institutions equity will be
affected due to a lack of
financing opportunities.
The budget deficit increase
and the inflation rate surges
increasing the cost of living.

Q2 Given these pros and cons, what is the

likelihood that Argentina will devalue its peso?

There is a chance that Argentina

devalues its Peso or adopt the
dollarization to move out of the crisis,
On the other hand, the government of
Argentina adopts other option such as
controlling the monetary policy tools to
controls its currency value.
Devaluation affects a lot to the
Argentine economy and foreign
Therefore, Argentina should first adopt
other options of controlling currency

Q3 What are the pros and

cons of dollarization?

Advantages of Dollarization
Increase the credibility of
Argentina to foreign
Helps maintain the stability
in exchange rate
Faster the economy growth.
The increment of
employment opportunities.
Better control of inflation

Disadvantages of Dollarization
Dollarization will result in
high credit cost.
Reduction of investors
trying to diversify their
Government deficit will
incresae and the
governmental revenues will
The Argentina peso will be
linked to any USA financial

Q4 What are the likely consequences of peso

devaluation for the Mega project?
Devaluation cause high inflation rate
and cause the estimated cost of
project to rise
Devaluation effects the liabilities of
the project. Devaluation increases
the liabilities of the mega project.
It causes the equity of the project to
Devaluation of peso effects the
importing of raw material. This will
lead to increase spending above the
forecast, and there might be budget

Q5 - What are effects would dollarization

likely have on the Mega Project?
Dollarization helps to stabilize the
economy as it absorbs risk and help
in estimation of cost of project and its
If global crisis occurs the dollar
denominated securities and assets
value decline and have to face loss.
So it ultimately also effects the
project because if all estimation and
loan are consider in dollar value than
the effect is same as mentioned.
It helps to import raw material from
other countries and save the

Q6 What alternatives are available to stimulate

Argentinas economy growth independent of
exchange rate policy?

Inflation must be controlled

Stabilize its political condition to reduce
political risk
Interest rate decreases
Government should encourage FDI
Government should decreases its
budget deficit
Trade off loss must be decreases
Argentina should utilize its resources to
increase its exports and increase foreign
Government utilize loan for
development purpose which ultimately
increases the GDP.