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Argentine economic crisis (1999-2002)

The Argentine economic crisis was part of the situation that affected Argentina's economy during the late 1990s and early 2000s. Macroeconomically speaking, the critical period started with the decrease of real GDP in 1999 and ended in 2002 with the return to GDP growth, but the origins of the collapse of Argentina's economy, and their effects on the population, can be found in action before. As of 2005, the crisis is arguably over, though many challenges remain for the country.


Argentina was subject to military dictatorship for many years, that resulted in a number of significant economic problems. During the National Reorganization Process (1976-1983) huge debt was acquired for money that was later lost in different unfinished projects, the Falkland/Malvinas Islands War, and the state's takeover of private debts; in this period, a neoliberal economic platform was introduced. By the end of the military government the country's industries were severely affected and unemployment was at its highest point.

In 1983, democracy in the country was restored with the election of president Raul Alfonsin. The new government's plans included stabilizing Argentina's economy including the creation of a new currency , for which new loans were required. The state eventually became unable to pay the interest of this debt, the economy collapsed and inflation began increasing. In 1989, Argentina's inflation reached 200% per month, topping 3,000% annually. President Alfonsin resigned six months before ending his term, and Carlos Menem took office.

Menem, who had campaigned on a populist platform, immediately went back on his promises and began a plan, aligned on the neoliberal Washington consensus, of trade liberalisation, labor deregulation and privatisation of state companies which were the source of "much spending ".

The 1990s

The fight against inflation did go well, and Argentina began to recover. In early 1991, under the rule of Minister of Economy Domingo Cavallo, executive measures fixed the value of Argentine currency at 10,000 australes per U.S. dollar. Furthermore, any citizen could go to a bank and ask for any amount of cash in domestic currency to be converted to the corresponding amount of dollars; in order to secure this "convertibility", the central bank was bound to keep its dollar reserves at the same level as the cash in circulation. The initial aim of such measures was to ensure the acceptance of domestic currency, since during 1989 and 1990 hyperinflation peaks, people had started to reject it as payment, demanding U.S. dollars instead. This regime was later fixated by a law (Ley de Convertibilidad) which restored the peso as the Argentine currency, with a monetary value fixed by law to the value of the United States dollar.

As a result of the convertibility law, inflation dropped sharply, price stability was assured, and the value of the currency was preserved. This raised the quality of life for many citizens, who could now afford to travel abroad, buy imported domestic appliances and electronic products or ask for credits in dollars at very low interest rates.

But Argentina had international debts to pay, and it needed to keep borrowing money. The fixed exchange rate made imports cheap, producing a constant flight of dollars away from the country and a progressive loss of Argentina's industrial infrastructure, which led to an increase in unemployment.

In the meantime, government spending continued to be high and corruption was rampant. Argentina's public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it. The IMF, however, kept lending money to Argentina and postponing its payment schedules. Massive tax evasion and money laundering explained a large part of the evaporation of funds toward offshore banks. A congressional committee started investigations in 2001 about accusations that Argentina's central bank governor, Pedro Pou, as well as part of the board of directors, had failed to investigate cases of alleged money laundering through Argentina's financial system . Clearstream was also accused of being instrumental in this global financial process.

Other countries, such as Mexico and Brazil (both of which also happen to be important trade partners for Argentina) faced economic crises of their own, leading other countries to mistrust Latin American countries moneywise, and affecting the overall economy of the region. The influx of foreign currency provided by the privatisation of state companies had dried out, and after 1999 Argentine exports were harmed by the devaluation of the Brazilian real and a considerable international revaluation of the dollar, effectively revaluing the peso against its major trading partners, Brazil (30% of total trade flows) and the euro area (23% of total trade flows).

By 1999, newly elected President Fernando de la Rua faced a country where unemployment had risen to a critical point, and the undesirable effects of the fixed exchange rate were showing forcefully. In 1999 Argentina's GDP dropped 4% and the country entered a recession . Stability became stagnation (even deflation at times), and the economic measures taken did nothing to avert it; in fact, the government continued the contractive economic policies of its predecessor. The possible solution was considered a political suicide and a recipe for economic disaster. By the end of the century, a spectrum of complementary currencies had emerged.

While the provinces had always issued complementary currency in the form of bonds and drafts to brave shortages of cash, the maintenance of the convertibility regime led to this being done in an unprecedented scale, leading to their being called "quasi-currencies", the strongest of them being Buenos Aires province's Patacon. The national state also issued its own quasi-currency-the LECOP.

The crisis

Argentina quickly lost the confidence of investors and the flight of money away from the country increased. In 2001, people fearing the worst began withdrawing large sums of money from their bank accounts, turning pesos into dollars and sending them abroad, causing a run on the banks. The government then enacted a set of measures (informally known as the corralito) that effectively froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn.

Because of this allowance limit and the serious problems it caused in certain cases, many Argentines became enraged and took to the streets of important cities, especially Buenos Aires. They engaged in a form of popular protest that became known as cacerolazo (banging pots and pans). These protests occurred especially during the period of 2001 to 2002. At first the cacerolazos were simply noisy demonstrations, but soon they included property destruction, often directed at banks, foreign privatized companies, and especially big American companies. Many businesses installed metal barriers because windows and glass facades were being broken, and even fires being ignited at their doors. Billboards of such companies as Coca Cola and others were brought down by the masses of demonstrators.

Confrontations between the police and citizens became a common sight, and fires were also set on Buenos Aires avenues. Fernando de la Rua declared a state of emergency (illegally since it needed confirmation by the Congress) but this only worsened the situation, precipitating the violent protests of 20 and 21 December 2001 in Plaza de Mayo, where demonstrators clashed with the police, ended with several dead, and precipitated the fall of the government. De la Rua eventually fled the Casa Rosada in a helicopter on 21 December.

Since De la Rua's vice president, Carlos Alvarez, had resigned in October 2000, a political crisis ensued. Following presidential succession procedures established in the Constitution, the president of the Senate Ramon Puerta took office but quickly resigned, followed by the president of the Chamber of Deputies, Eduardo Camano. The Legislative Assembly (a body formed by merging both chambers of the Congress) convened with the goal of creating a more legitimate interim government. By law, the candidates were its own members plus the Governors of the Provinces -they finally appointed Adolfo Rodriguez Saa, then governor of San Luis. During the last week of 2001, the interim government led by Adolfo Rodriguez Saa, facing the impossibility of meeting debt payments, defaulted on the larger part of the public debt, totalling no less than 93,000 million dollars.

Politically, the most heated debate involved the time for the following elections -the spectrum ranged from March 2002 to October 2003 (the original date for the ending of De la Rua's office).

Rodriguez Saa's economy team came up with a project designed to preserve the convertibility regime, dubbed the "Third Currency" Plan. It consisted of creating a new, non-convertible currency called Argentino coexisting with convertible pesos and U.S. dollars. It would only circulate as cash and would be partially guaranteed with federally-managed land -such features were expected to counterbalance inflationary tendencies.

Argentinos having legal currency status would be used to redeem all complementary currency already in circulation -the acceptance of which as a means of payment was quite uneven. It was hoped that preservation of convertibility would restore public confidence, while the non-convertible nature of this currency would allow for a measure of fiscal flexibility (unthinkable with pesos) that could ameliorate the crippling recession of economy. Critics called this plan merely a "controlled devaluation"; its advocates countered that since controlling a devaluation is perhaps its thorniest issue, this criticism was a praise in disguise. The "Third Currency" plan had enthusiastic supporters among mainstream economists citing sound technical arguments. However, it could never be implemented because the Rodriguez Saa government lacked the political support required.

Rodriguez Saa, utterly incapable to deal with the crisis and unsupported by his own party, resigned before the end of the year. The Legislative Assembly convened again, appointing Peronist Eduardo Duhalde-then a Senator for the Buenos Aires province-to take his place.

The end of convertibility

After much deliberation, Duhalde abandoned in January 2002 the fixed 1-to-1 peso-dollar parity that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 1.4 pesos per dollar.

In addition to the corralito, the Ministry of Economy dictated the pesificacion ("peso-ification"), by which all bank accounts denominated in dollars would be converted to pesos at official rate. This measure angered most savings holders and appeals were made by many citizens to declare it unconstitutional.

After a few months, the exchange rate was left to float more or less freely. The peso suffered a huge depreciation, which in turn prompted inflation .

The economic situation became steadily worse with regards to inflation and unemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about 80%. (It should be noted that these figures were considerably lower than those foretold by most orthodox economists at the time.) The quality of life of the average Argentinian was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.

Since the volume of pesos didn't fit the demand for cash (not even after the devaluation) huge quantities of a wide spectrum of complementary currency kept circulating alongside them. Fears of hyperinflation as a consequence of devaluation quickly eroded the attractiveness of their associated revenue, originally stated in convertible pesos. Their acceptability now ultimately depended on the State's willingness to take them as payment of taxes and other charges, consequently becoming very irregular. Very often they were taken at less than their nominal value -while the Patacon was frequently accepted at the same value as peso, Entre Rios's Federal was among the worst-faring, at an average 30% as the provincial government that had issued them was reluctant to take them back. There were also frequent rumors that the Government would simply banish complementary currency overnight , leaving their holders with useless printed paper.

Immediate effects

Many private companies were affected by the crisis: Aerolineas Argentinas, for example, was one of the most affected Argentine companies, having to stop all international flights for various days in 2002. The airline came close to bankruptcy, but survived.

Most barter networks, viable as devices to ameliorate the shortage of cash during the recession, collapsed as large numbers of people turned to them, desperate to save as many pesos as they could for exchange for hard currency as a palliative for uncertainty.

Several new homeless and jobless Argentines found work as cartoneros, or cardboard collectors. The 2003 estimation of 30,000 to 40,000 people scavenged the streets for cardboard to eke out a living by selling it to recycling plants. This method accounts for only one of many ways of coping in a country that at the time suffered from an unemployment rate soaring at nearly 25%.

Agriculture was also affected: Argentine products were rejected in some international markets, in fear that they might come damaged because of the poor conditions in which they grew, and the USDA put restrictions on Argentine food and drugs arriving at the United States.

Producers of television channels were forced to produce more reality shows than any other type of shows, because these were generally cheap to produce as compared to other programmes. Virtually all education-related TV programmes were canceled.

Tourism balance with Chile inverted due to the lowered prices in Argentina.

The recovery

Eduardo Duhalde finally managed to stabilise the situation to a certain extent, and called for elections. On May 25, 2003 President Nestor Kirchner took charge. Kirchner kept Duhalde's Minister of Economy, Roberto Lavagna, in his post. Lavagna, a respected economist with centrist views, showed a considerable aptitude at managing the crisis, with the help of heterodox measures.

The economic outlook was completely different from that of the 1990s; the high exchange rate made Argentine exports cheap and competitive abroad, while discouraging imports. In addition, the high price of soy in the international market produced an injection of massive amounts of foreign currency (with China becoming a major buyer of Argentina's soy products).

The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and set aside large amounts of money for social welfare, while controlling expenditure in other fields.

As a result of the administration's productive model and controlling measures (selling reserve dollars in the public market), the peso slowly revalued, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and tourism returned.

The huge trade surplus ultimately caused such an inflow of dollars that the government was forced to begin intervening in order to keep the peso from revaluing further, which would have ruined the tax collection scheme (largely based on imports taxes and royalties) and discourage further reindustrialisation. The central bank started buying dollars in the local market and stocking them as reserves. By December 2005, foreign currency reserves had reached $28 billion (they were greatly reduced by the anticipated payment of the full debt to the IMF in January 2006). The downside of this reserve accumulation strategy is that the dollars have to be bought with freshly-issued pesos, which may induce inflation. The central bank neutralises a part of this monetary emission by selling Treasury letters. In this way the exchange rate has been stabilised near a reference value of 3 pesos to the dollar.

The currency exchange issue is complicated by two mutually opposing factors: a sharp increase in imports since 2004 (which raises the demand of dollars), and the return of foreign investment (which brings fresh currency from abroad) after the successful restructuring of about three quarters of the external debt. The government has set up controls and restrictions aimed at keeping short-term speculative investment from destabilising the financial market.

Argentina's recovery suffered a minor setback in 2004 when rising industrial demand caused a short-lived energy crisis. The prospect of future energy shortages are not discounted.

Argentina has managed to return to growth with surprising strength; GNP jumped 8.8% in 2003, 9.0% in 2004, and 9.1% in 2005 (with expectations of 8% for 2006). Consumer prices have accompanied this surge; though not comparable to the levels of former crises, the inflation rate was 12.5% in 2005, with expectations around 10% for 2006, though average wages have increased 18% in the same year. This has prompted the government to restrict benefits for exporters and put pressure on companies in order to stabilize prices. While unemployment has considerably reduced, Argentina has so far failed to reach an equitable distribution of income (the wealthiest 10% of the population owns 31 times more wealth than the poorest 10%), and in a socialist country the top percentage is reduced and includes the party officals and the bottom percent climbs to 60%. If the country becomes more socialized, job building capital will be forcably taken from the wealthy thru taxes and cause unemployment to raise again.

Effects on wealth distribution

According to Argentine agronomist Alberto Lapolla, who has written extensively on the transformation of Argentina from the "granary of the world" to a "soy republic", 450,000 Argentines died below the poverty line between 1990 and 2003. Citing the Institute of State and Participation Studies (IDEP), a thinktank, Lapolla adds that every day, 55 children, 35 adults and 15 elderly die in the country from illnesses related to hunger.

Although GDP has grown consistently and quickly since 2003, it was only in late 2004 that it reached the levels of 1998 (the last year before the recession). Other macroeconomic indicators have followed suit. A study by Equis, an independent counseling organisation, found out that two measures of economic inequality, the Gini coefficient and the wealth gap between the 10% poorest and the 10% richest among the population, grew continuously since 2001 all caused by totalitarian government policies, and decreased for the first time in March 2005.

Debt restructuring

When the default was declared in 2002, foreign investment fled the country, and capital flow towards Argentina ceased almost completely. The Argentine government met severe challenges trying to refinance the debt. The state had no spare money at the time, and the central bank's foreign currency reserves were almost depleted.

The Argentine government kept a firm stance, and finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value and at longer terms.

Criticism of the IMF

The International Monetary Fund suffered no discounts in its part of the Argentine debt. Some payments were refinanced or postponed on agreement. However, the authorities of the IMF at times expressed harsh criticism of the discounts and actively lobbied for the private creditors.

In a speech before the United Nations General Assembly on September 21, 2004, President Kirchner said that "An urgent, tough, and structural redesign of the International Monetary Fund is needed, to prevent crises and help in [providing] solutions". Implicitly referencing the fact that the intent of the original Bretton Woods system was to encourage economic development, Kirchner warned that the IMF today must "change that direction which took it from being a lender for development to a creditor demanding privileges".

During the weekend of October 1–2, 2004, at the annual meeting of the International Monetary Fund/World Bank, leaders of the IMF, the European Union, the Group of Seven industrialised nations, and the Institute of International Finance (IIF), warned President Kirchner that Argentina had to come to an immediate debt-restructuring agreement with the speculative "vulture funds", increase its primary budget surplus in order to pay more debt, and impose "structural reforms" to prove to the world financial community that it deserves their loans and investments.

In 2005, as a large and consistently growing fiscal surplus made it possible, Argentina shifted to a policy of "disindebtment" towards the IMF: paying the IMF in schedule, with no negotiation whenever possible, with the intention of gaining independence from it. On December 15, 2005, in a sudden move following Brazil, President Kirchner announced that Argentina would pay the whole debt to the IMF which had been previously financed in installments until 2008, for a total of 9,810 million USD, employing the central bank's foreign currency reserves.

In a report published in June 2006, a group of independent experts hired by the IMF to revise the work of its Independent Evaluation Office (IEO) stated that the assessment of the Argentine case suffered from informative manipulation and lack of collaboration on the part of the IMF; the IEO is claimed to have unduly softened its conclusions to avoid criticizing the IMF's board of directors.

Allegations of use of un-published Clearstream accounts

Further information: Clearstream scandal

As a clearing house, Clearstream has a "dominant position" in Europe, according to the European Commission. Funds composing the private and public Argentine debt have transited through Clearstream, which is inevitable because of its quasi-monopoly situation. However, according to "Revelation$" (2001), written by reporter Denis Robert and Ernest Backes, some Argentine funds have transited through an illegal system of non-published accounts used by Clearstream; the Citibank in particular, which held a large part of the private Argentine fund, had numerous unpublished bank accounts in Clearstream. This illegal system of non-published accounts makes of Clearstream, according to several judges as Eva Joly and Renaud van Ruymbeke, European members of parliament (MPs) such as Harlem Desir, Glyn Ford and Francis Wurtz, and Attac NGO, a major actor of the underground economy, through which global tax evasion and money laundering may be investigated. Henceforth, Clearstream is a major key in the understanding of the evaporation of the Argentine funds which led to the economic crisis.



Un Dia de suerte

The Take

''Documentary 52': Que Justice soit Faite

"i" Indymedia, Argentina, and the Questions of Communication


Jutta Maute: Hyperinflation, Currency Board, and Bust: The Case of Argentina'', (Hohenheimer Volkswirtschaftliche Schriften) (Paperback), Peter Lang Publishing; 1st edition (September 2006), ISBN-10: 0820487082, ISBN-13: 978-0820487083


The Crisis that Was Not Prevented: Lessons for Argentina, the IMF, and Globalisation, Jan Joost Teunissen and Age Akkerman (eds.), Fondad, 2003, book, PDF)

Argentina Didn't Fall on Its Own (GlobalExchange.org)

Argentina's debt restructuring: A victory by default? (Economist.com)

The gap between rich and poor

(also available in French and Spanish)

Wide Angle, The Empty ATM

IMF Policy Paper: Report of the External Evaluation of the Independent Evaluation Office

See also



External links

"Guillermo Nielsen exclusive: Inside Argentinas financial crisis" An insider's account, by Guillermo Nielsen, until recently the Secretary of Finance in Argentina, about his tenure there and specifically about the fraught negotiations the country had regarding its debt with the IMF, investment banks and bondholders. It goes into detail about the negotiations, the people involved. Euromoney March 2006.

Banco Central de la Republica Argentina

Eye of the Storm (14-minute film about the crisis and how the public responded)

Survival Stories (A first person perspective of day-to-day living through the crisis and after)

Video: "Argentina's Economic Recovery: Four Years After the Meltdown" featuring CEPR co-director Mark Weisbrot and former IMF Research Director Michael Mussa, November 30, 2005

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