ARGENTINA CRISIS

ARGENTINA
Third largest economy in Latin America behind Mexico and Brazil In early 20th century it was one of the wealthiest countries It has an export oriented agricultural sector and a well diversified industrial base.

ARGENTINA AN ECONOMIC HISTORY

1810

- War for Independence from Spain 1862 - Infighting among provinces finally ends and National Government installed Late 1800s - Provincial and National Governments funded deficits by printing money which produced inflation and low growth Late 1800s to 1930s rapid growth due to agricultural exports to Euro

ARGENTINA AN ECONOMIC HISTORY

Beginning of a period of triple digit inflation reached all time high of 300% per day consumers who shopped in the morning were able to buy good cheaper than afternoon shoppers 1989 New, democratic government installed
1975

Privatization, deregulation, tax cuts, governmental reforms

ROAD TO CRISIS

It all started in 1980s

Borrow money at high risk from Foreign Market. 1983-Replace Peso with Australes.

Convertibility Law
1991-Replace 1000 Austales/US Dollar. 1993-Peso pegged with US Dollar in (1:1)

FEATURES OF CONVERTIBILITY LAW

A fixed exchange rate with the anchor currency, i.e. US dollar b) Unrestricted convertibility between the domestic and the anchor currency c) Net reserves of at least 100% of the board monetary liabilities, i.e. the government had to maintain a foreign reserve in dollars equal in amount to the money floating in the economy
a)

WHY IT ALL HAPPENED??

Devaluation of Brazillian Real & Fall in exports. Tax increase in 2000/High Level on Unemployment. Extensive Government Debt.

200000

150000

100000

50000

0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

THE ARGENTINE CRISIS

1998 2001

EXTERNAL FORCES PROVOKED A RECESSION

External situation unfavorable in 3 respects:

Foreign investment to emerging market countries fell in the context of some major currency crises. Brazil devalued its currency in January 1999. The dollar was unusually strong.

JANUARY 2000 TAX INCREASE

President De la Ra enacted the first of its three packages of tax increases in January 2000. Belief that reducing the budget deficit would instil confidence in government finances. However, results were the opposite from the governments expectation.

BLUNDERS IN TAX AND MONETARY POLICY

Resignation of Frepaso cabinet ministers on March 18, 2001. Appointment of Domingo Cavallo as minister of economy.

A bill passed to switch the exchange rate link of the peso from the dollar alone to a 50-50 combination of the dollar and the euro. Announcement of a preferential exchange rate for exports.

ARGENTINE GOVERNMENT ENTERED A DEBT TRAP BY MID 2001.

CONTAMINATION OF PRIVATE SECTOR.

Crisis entered its final phase affecting the private sector through a variety of policies. On Dec 1, 2001 a Deposit Freeze was announced by Cavallo. Declaration of default on the federal governments debt to foreign private-sector creditors by the then President Adolfo Rodrguez Sa (Dec 23,2001).

CONTAMINATION OF PRIVATE SECTOR. CONT

Devaluing of the peso; pesofying dollar deposits and loans; and voiding many kinds of contracts. (w.e.f Jan 2002, Eduardo Duhalde) Poverty rose sharply, as did unemployment (excluding people working in emergency government relief programs). Exports had fell 4.5% despite the huge boost the currency depreciation should have given.

AFTERMATH OF CRISIS

Rates Riots Resignations and Default

Reflections on political front after 2002 Changing Lending pattern by International lenders.

Credit rating

Immediate Effects

ROLE OF IMF
Surveillance Failures Endorsed currency pegging-Biggest mistake Currency pegging solved inflation problem, but led to other problems Led to increase of imports, and lifestyle improved appreciably Export decreased drastically after Brazil currency devaluation No exploration of the implications to debt sustainability of less favourable economic developments Debt sustainability of projects were never judged IMF supported government projects despite rise in debts Federal government missed fiscal targets every year from 1994-1998 Staff repeatedly overlooked or waived reforms which the government failed to implement IMF focused on tax reforms and social security reforms Tax reforms were not adequately implemented leading to poor tax regime

ROLE OF IMF
Surveillance Failures Social Reforms were not undertaken until 1994 IMF also focused on labor reforms(1994), but no conditionality was imposed on its implementation Trade policies and governance related reforms were not emphasized Prolonged programme involvement despite government failure IMF supported programs had insufficient structural content and conditionality

ROLE OF IMF
Crisis Mismanagement IMF didnt develop an exit strategy for Argentina, if its assumptions failed Absence of a fallback strategy leading to repeated use of same strategy that failed

Failed to adequately assess exchange rate and debt sustainability Wrong assumptions related to growth being main reason
Unwilling to discuss alternatives to their preferred strategy Fund's second rescue attempt, an $8 billion loan in August 2001 was approved to "ensure that the [Argentine] authorities, not the IMF, took responsibility" for the painful changes that had to be made

ROLE OF IMF
Ill-informed decisionmaking Lack of transparency regarding who is responsible for a particular decision in IMF Board was not presented with adequate information Governance issue at IMF Important decision made by major shareholders outside the executive board Board hardly challenge proposals brought by management

CONCLUSION AND RECOMMENDATION

Surveillance Failures Conclusion: IMF did not take into account long term effects of exchange rate policy IMF did not stop programs despite failures to implement it by Govt.

Recommendation: IMF should implement strengthened, more candid surveillance of exchange rate regime choices IMF should avoid prolonged programme involvement if policies are not being undertaken to deal with fundamental problems

Crisis Mismanagement Conclusion: Failure to develop exit strategy No alternative strategy in place Failure in assessing exchange rate and debt sustainability

CONCLUSION AND RECOMMENDATION

Crisis Mismanagement Recommendation: IMF should develop a set of criteria- Stop Loss rules- to asses if initial strategy is working and to signal whether a change in approach is needed IMF should develop alternative strategy in case preferred one fails Ill-informed decision-making Conclusion: Lack of information for decision making Board powers are considerably reduced No transparency and accountability Recommendation: IMF Executive board should be strengthened IMF should ensure transparency and accountability in decision making process

THANK YOU !