Background to Argentine Default

Background to Argentine Crisis(Joint Economic Committee, United States Congress)

  • Turbulent History
    • Chronic economic, monetary, and political problems
    • Until late 1800’s, provinces and national government financed deficits by printing money
      • Inflation and little growth
    • Rapid Economic growth (late 1800’s, early 1900’s)
      • Due to rising exports of beef and wheat to Europe
        • Possible because of new technologies
      • In 1930, important trade partners discriminated against Argentine exports
        • Argentina switched to “import substitution”
          • Closes, self-sufficient economy with high tariffs and government direction
          • Low growth and frequent inflation
        • Inflation typically in triple digits from 1975 onward
      • Economic Reforms in the 1990’s
        • Carlos Manem became president in 1989
          • Adopted free market approach
          • Centerpiece was Convertibility Law
            • Established pegged exchange rate with the US Dollar
              • Backed money issues by Central Bank with dollars
            • Peso replaced the Austral in 1992 as official currency
              • Caused a large drop in inflation
            • Quick Reforms
              • Real GDP grew by less than 10% per year in 1991 and 1992
                • 60% in 1993 and 1994
              • Inflexible labor laws and high taxes made creation of new jobs difficult
                • High unemployment
              • Entered recession in 1998, full blown depression by 2001
                • Some causes:
                  • External Forces provoked a recession
                    • Currency crises in East Asia and Russia
                      • Caused investors to be wary of investing in developing countries
                    • Brazil had a currency crisis (major trading partner)
                      • Argentine-Brazil trade decreased
                    • Tax increases in 2000 killed growth
                    • Poor monetary policy

NY Times- 2011

  • Argentina defaulted in $100 billion in mostly foreign debt
  • As of 2011, still couldn’t enter global credit market
    • No longer seen as serious country
  • Argentina is/was a large supporter of agricultural products
    • Generally runs a foreign trade surplus
    • Bulk of Greek economy is based around services, mostly tourism
      • Generally runs a trade deficit
    • Argentina’s debt when it defaulted was 54% of GDP
      • At the time of this article, Greece’s debt was 150% of GDP
    • In 2003, Argentina’s president pursued an economic strategy
      • Weak currency
        • Fosters exports, discourages imports
        • Maintains fiscal and trade surplus
      • Rising global prices for agriculture helped this strategy work
    • Argentina waited until 2005 to conduct first 2 debt restructurings
      • Already in recovery
      • Nongovernment foreign investors (biggest were pension funds) took haircuts, costing them 2/3rd’s of investment
      • International Monetary Fund was paid back in full in 2006
        • Official creditors not likely to take haircuts
      • Even when eventually reentering the global credit market, there will be huge interest rates for Argentina

Stratfor – 2/11/15

  • Like Greece, Argentina couldn’t apply monetary policy
    • Pegged to the dollar to prevent hyperinflation
    • Only option was fiscal policy
  • Between 2003 and 2007, Argentine economy grew by an average of 8%
    • Unemployment went from 20 to 8%
  • Argentina converted dollars that were in accounts into pesos using an official conversion rate
    • Only affected wealthy Argentines
    • Argentina never abandoned their national currency
    • Most unaffected
      • Euro to Drachma would be problematic
    • Argentina benefited from international commodity boom
    • Venezuela bought around $5.6 billion in Argentine debt
      • Not a given Russia would buy Greek debt
    • Argentina was self-sufficient in energy during the 2000’s
      • Return to Drachma for Greeks would make energy imports much more expensive
        • Makes Russia even more important for Greece
      • Argentina imposed protectionism
        • Greece cannot do this, would violate the founding principle of the EU
          • Would likely be expelled
        • Greece has much less room for action than Argentina

Bloomberg- 2/15/2012

  • In 2005, Argentina’s president offered to swap defaulted bonds for ones worth 70% less
    • ¾ accepted the deal
      • Others took the issue to court
    • After defaulting, Argentina abandoned one-one peg and let the currency float

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