Argentina: Anatomy of a Financial Crisis

Argentina: Anatomy of Financial Crisis

Constitutional Problem: Provinces allowed to take loans while Central Government has to collect taxes inorder to repay them

Emerging markets Scenario: There was high inflow of Capital from foreign iinvestors, so economy became overdependent on this source

Emerging markets: high risk of Banking crisis (when there is potential run on bank deposits), Currency Crisis(Sharp devaluation of Currency.

Contagion Effect: The currency crisi occurs due to irrational behaviours of the investors. This highlight the need for stringent regulations!

Tax Collection: Has been very ineffective.

Government vulnerable to External Shocks (Oil Shocks, Real Devaluation)

High level of foreign Debt. high external debt to export ratio of 400% Debt to GDP rose to 41.4% ; Projected GDP of 2.5% but sctuall -5.0%

Political Factors: High Corruption Levels, Ministry of Econoy turning against the president, two cabinet ministers resigning on corruption charges

Labor reforms: Health care programs and benefi cost a lot to the fiscal deficit

Pension reform: 45% of federal budget went to pensions

Privatization- Lead to the formation of two-tier economy: those exposed to international competion and those shielded by government

Banking sector: Return on Assets greater then 10%, return on Equity -0.7& Sovereign bonds used as debt instruments, Ineffective Swaps

Vijay Krishnan A DM14257

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Argentina: Anatomy of a Financial Crisis

Alternate Solutions

Basic Restructuring of Constitution

Less Dependancy on foreign capital / Strong regulations to prevent Capital Fleeing

Effective ways of collecting taxes, spending consciously on pension plans

Regulated Privatization, Central Bank to follow Macroeconmic policies

Vijay Krishnan A DM14257

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