Argentina Economic Crises

TABLE OF CONTENTS

THE ARGENTINA ECONOMIC CRISIS……………………………………………2

ORIGINS………………………………………………………………………………...2

THE 1990s……………………………………………………………………………….2

THE CRISIS…………………………………………………………………………….3

THE END OF CONVERTIBILITY…………………………………………………...5

IMMEDIATE EFFECTS……………………………………………………………….6

THE RECOVERY………………………………………………………………………6

EVOLUTION OF THE ARGENTINE GNP, 1999–2004…………………………….7

FOREIGN CURRENCY RESERVES OF ARGENTINA'S CENTRAL BANK, IN

MILLIONS OF USD……………………………………………………………………8

EFFECTS ON WEALTH DISTRIBUTION………………………………………….9

DEBT RESTRUCTURING……………………………………………………………10

CRITICISM OF THE IMF……………………………………………………………10

ALLEGATIONS OF USE OF UN-PUBLISHED CLEARSTREAM

ACCOUNTS………………………………………………………………………
……11

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THE ARGENTINA ECONOMIC CRISIS

The Argentina 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.

ORIGINS

Argentina was subject to military dictatorship (alternating with weak, short-lived

democratic governments) for many years. Huge debt was acquired for money later to be
lost in different unfinished projects, the Falkland/Malvinas Islands War, and the state's
takeover of private debts.

In 1983, democracy in the country was restored with the election of president
Raúl Alfonsín. The new government's plans included stabilising Argentina's economy,
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
Alfonsín 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 (such as those providing the telephone, energy and water
services). The terms of these privatisations were often rather unfavourable to the
Argentine state. These economic policies led to some social unrest, as the new piquetero
movement.

THE 1990s

The fight against inflation did not go well. In 1991, under the rule of Minister of
Economy Domingo Cavallo, the Argentine peso's monetary value was fixed by law to the
value of the United States dollar. The law (Ley de Convertibilidad) stated that any citizen
could go to a bank and ask for any amount of cash in pesos to be converted to an equal
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.

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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 [1].
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 1997 Argentine exports were harmed by the
devaluation of the Brazilian real and a considerable international revaluation of the
dollar.

By 1998, newly elected President Fernando de la Rúa 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 (which was to last three years, ending in a collapse). 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 (abandonment of the exchange peg, with a
voluntary devaluation of the peso) was considered a political suicide and a recipe for
economic disaster. By the end of the century, complementary currencies such as the
LECOP and the Patacón (bonds issued by the national and provincial states) emerged due
to the shortage of cash.

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 bank run. The government then enacted a set of measures (informally
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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 the allowance limit, with the serious problems it caused in certain
cases, many Argentines became enraged and took on the streets of important cities,
especially Buenos Aires. They created a new form of protest, known as cacerolazo
(banging pots and pans). This happened specially during the 2001 and 2002 periods. At
first the cacerolazos were simply noisy demonstrations, but soon they included violence,
which was directed especially to banks, foreign privatised companies and especially
prominent American companies. Many businesses were forced to install metal barriers, as
they were suffering from windows and glass facades 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.

Confrontations between the police and citizens became a common sight, and fires
were also set on Buenos Aires avenues. 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. Fernando de la Rúa fled the Casa Rosada in a
helicopter on 21 December.

During the last week of 2001, the interim government led by Adolfo Rodríguez
Saá, facing the impossibility to meet debt payments, defaulted on the larger part of the
public debt, totalling no less than 93,000 million dollars. Rodríguez Saá, utterly incapable
to deal with the crisis and unsupported by his own party, resigned before the end of the
year. The Peronist Eduardo Duhalde was appointed by Congress to take his place.

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THE END OF CONVERTIBILITY

Evolution of the cost of living in Argentina. The continuous blue line shows the
price of basic needs, in Argentine pesos per month per adult person (corresponding to the
poverty line). The discontinuous red line shows the price of the minimum food
requirements. Note the abrupt increase in the first semester of 2002.

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 pesificación

("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 devaluation, which in turn prompted inflation (since Argentina
depended heavily on imports, and had no means to replace them locally at the time).

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

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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.

IMMEDIATE EFFECTS

Many private companies were affected by the crisis: Aerolíneas 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 it
survived.

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.

On the entertainment world, 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 cancelled, including a popular one which was aimed at teenagers, often
distributing prizes to the person who could answer through the telephone a series of
physics and mathematics-related questions.

THE RECOVERY

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

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EVOLUTION OF THE ARGENTINE GNP, 1999–2004

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.

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FOREIGN CURRENCY RESERVES OF ARGENTINA'S CENTRAL BANK, IN

MILLIONS OF USD

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
$28,000 million (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-emitted 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 drawback in 2004 when rising industrial

demand caused a short-lived energy crisis. Scenarios of energy shortage are not discarded
in the near future.

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 7.5% for 2006).
Consumer prices, however, have accompanied this surge, and average wages have barely
caught up; though not comparable to the levels of former crises, the inflation rate for
2005 (~12%) has prompted the government to "cool down" some sectors of the economy,
restrict benefits for exporters, and put pressure on companies in order to stabilize prices.

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While unemployment was considerably reduced in 2005, Argentina has so far failed to
reach a more equitable distribution of income.

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 of hunger 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, and decreased for the first time in March
2005.

Poverty in Argentina
Under
Date of Extreme
poverty
measurement poverty
line The table on the left shows statistics of
May 2001 11.6% 35.9% poverty in Argentina, in percent of the
population. The first column shows the date of
Oct 2001 13.6% 38.3% the measurement (note that the method and
May 2002 24.8% 53.0% time changed in 2003; poverty is now
Oct 2002 27.5% 57.5% measured each semester). Extreme poverty is
here defined as not having enough money to
May 2003 26.3% 54.7% eat properly. The poverty line is set higher: it
2nd sem 2003 20.5% 47.8% is the minimum income needed for basic needs
including food, clothing, shelter, and studies.
1st sem 2004 17.0% 44.3%
2nd sem 2004 15.0% 40.2%
1st sem 2005 13.6% 38.5%

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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
(25–35% of the original) 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 2004-09-21,

President Kirchner said that "An urgent, tough, and structural redesign of the
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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 2005-12-15, 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.

ALLEGATIONS OF USE OF UN-PUBLISHED CLEARSTREAM ACCOUNTS

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 Désir, 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.

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ECONOMY OF ARGENTINA
Currency 1 Argentine peso = 100 centavos

Fiscal year Calendar year

Trade WTO and SACN

organizations

STATISTICS
(GDP expressed in
PPP where
applicable)

GDP ranking 23rd (2005) [1]

GDP $537,200 million (2005 est.)

GDP growth 9.2% (2005)

GDP per capita $13,600 (2005 est.)

GDP by sector Agriculture (10.5%) industry (35.8%) services (53.7%) (2004 est.)

Inflation 12% (2005 est.)

Pop below 34.0% (February 2006)

poverty line

Labor force 15.04 million (2004 est.)

Labor force by N/A

occupation

Unemployment 12.1% (June 2005)

Main industries food processing, motor vehicles, consumer durables, textiles, chemicals
and petrochemicals, printing, metallurgy, steel

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TRADING PARTNERS
Exports $40,000 million (2005 est.)

Main partners Brazil 19.1%, Chile 10.7%, US 9.7%, China 7.7%, Spain 4.6% (2003)

Imports $25,000 million (2005 est.)

Main partners Brazil 24.5%, US 21.5%, Germany 6.8%, Italy 4.3%, Spain 4.2% (2003)

PUBLIC FINANCES
Public debt $US 124,000 million (69% of GDP)
(January 2006 est.)

Revenues $29,150 million (2004 est.)

Expenses $26,840 million (2004 est.)

Economic aid $0 (paid Jan 2006)

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