1998–2002 Argentine great depression
1998–2002 Argentine great depression |
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Economy of Argentina |
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The 1998–2002 Argentine great depression was an
By the first half of 2003,
Origins
Argentina's many years of
Democracy was restored in 1983 with the election of President Raúl Alfonsín. The new government intended to stabilize the economy and in 1985 introduced austerity measures and a new currency, the Argentine austral, the first of its kind without peso in its name. Fresh loans were required to service the $5 billion in annual interest charges, however, and when commodity prices collapsed in 1986, the state became unable to service this debt.[19]
During the Alfonsin administration, unemployment did not substantially increase, but real wages fell by almost half to the lowest level in fifty years. Prices for state-run utilities, telephone service, and gas increased substantially.[20]
Confidence in the plan, however, collapsed in late 1987, and inflation, which had already averaged 10% per month (220% per year) from 1975 to 1988, spiraled out of control. Inflation reached 200% for the month in July 1989, peaking at 5000% for the year. Amid riots, Alfonsín resigned five months before the end of his term; Carlos Menem took office in July.[21]
1990s
After a second bout of
The convertibility law reduced inflation sharply, preserving the value of the currency. That raised the
Argentina, however, still had external public debt that it needed to roll over. Government spending remained too high, and corruption was rampant. Argentina's public debt grew enormously during the 1990s without showing that it could service the debt. The IMF kept lending money to Argentina and extending its payment schedules.
Massive
Other Latin American countries, including Mexico and Brazil (both important trade partners for Argentina) faced economic crises of their own, leading to mistrust of the regional economy. The influx of foreign currency provided by the privatization of state companies had ended. After 1999, Argentine exports were harmed by the devaluation of the Brazilian real against the dollar. A considerable international revaluation of the dollar directly weakened the peso relative to Argentina's trading partners: Brazil (30% of total trade flows) and the eurozone (23% of total trade flows).
After having grown by over 50% from 1990 to 1998, Argentina's GDP declined by 3% in 1999 and the country entered what became a three-year-long recession. President Fernando de la Rúa was elected in 1999 on a reform platform that nevertheless sought to maintain the peso's parity with the dollar. He inherited a country with high unemployment (15%), lingering recession, and continued high levels of borrowing.[27] In 1999, economic stability became economic stagnation (even deflation at times), and the economic measures taken did nothing to avert it. The government continued its predecessor's economic policies. Devaluing the peso by abandoning the exchange peg was considered political suicide and a recipe for economic disaster. By the end of the century, complementary currencies had emerged.
While the
In a 2001 interview, journalist Peter Katel identified three factors that converged "the worst possible time" that made the Argentine economy unravel:
- The fixed exchange rate between Argentine peso and the US dollar decided by Cavallo.
- The large amounts of borrowing by Menem.
- An increase in debt from reduced tax revenues.[29]
Currency
The 2002 crisis of the Argentine peso, however, shows that even a currency board arrangement cannot be completely safe from a possible collapse. When the peso was first linked to the U.S. Dollar at parity in February 1991 under the Convertibility Law, initial economic effects were quite positive: Argentina's chronic inflation was curtailed dramatically and foreign investment began to pour in, leading to an economic boom. Over time, however, the peso appreciated against the majority of currencies as the U.S. Dollar became increasingly stronger in the second half of the 1990s. A strong peso hurt exports from Argentina and caused a protracted economic downturn that eventually led to the abandonment of the peso-dollar parity in 2002. This change, in turn, caused severe economic and political distress in the country. The unemployment rate rose above 20 per cent and inflation reached a monthly rate of about 20 per cent in April 2002. In contrast, Hong Kong was able to successfully defend its currency board arrangement during the Asian financial crisis, a major stress test for the arrangement. Although there is no clear consensus on the causes of the Argentine crisis, there are at least three factors that are related to the collapse of the currency board system and ensuing economic crisis:
- The lack of fiscal discipline
- Labour market inflexibility
- Contagion from the financial crises in Russia and Brazil.
While the currency crisis is over, the debt problem has not been completely resolved. The government of Argentina ceased all debt payments in December 2001 in the wake of persistent recession and rising social and political unrest. In 2004, the Argentine government made a 'final' offer amounting to a 75 per cent reduction in the net present value of the debt. Foreign bondholders rejected this offer and asked for an improved offer. In early 2005, bondholders finally agreed to the restructuring, under which they took a cut of about 70 per cent on the value of their bond holdings.[30]
Rates, riots, resignations and default
When a short boom in the early 1990s of
GDP growth projections proved to be overly optimistic (instead of growing, real GDP shrank 0.8%), and lagging tax receipts prompted the government to freeze spending and cut retirement benefits again. In early November,
Rising bond yields forced the country to turn to major international lenders, such as the IMF, the
Standard and Poor's cut the credit rating of the country's bonds to B− in July 2001.[37] Cavallo reacted by offering bondholders a swap: longer-term, higher-interest bonds would be exchanged for bonds due in 2010. The "megaswap" (megacanje), as Cavallo referred to it, was accepted by most bondholders, and it delayed up to $30 billion in payments that would have been due by 2005;[38] but it also added $38 billion in interest payments in the out years; of the $82 billion in bonds that eventually had to be restructured (triggering a wave of holdout lawsuits), 60% were issued during the 2001 megaswap.[39]
Cavallo also attempted to curb the budget crisis by instituting an unpopular across-the-board pay cut in July of up to 13% to all civil servants and an equivalent cut to government pension benefits, De la Rúa's seventh austerity round[40]—triggering nationwide strikes,[41] and from August, it paid salaries of the highest-paid employees in IOUs instead of money.[42] That further depressed the weakened economy, the unemployment rate rose to 16.4% in August 2001[43] up from a 14.7% a month earlier,[44] and it reached 20% by December.[45]
Public discontent with the economic conditions was expressed in the nationwide election. De la Rúa's alliance lost its majority in both chambers of Congress. Over 20% of voters chose to give blank or defaced ballots rather than indicate support of any candidate.[46]
The crisis intensified when, on 5 December 2001,[34] the IMF refused to release a US$1.3 billion tranche of its loan, citing the failure of the Argentine government to reach its budget deficit targets,[47] and it demanded budget cuts, 10% of the federal budget.[48] On 4 December, Argentine bond yields stood at 34% over U.S. treasury bonds, and, by 11 December, the spread jumped to 42%.[49][50]
By the end of November 2001, people began withdrawing large sums of dollars from their bank accounts, turning pesos into dollars, and sending them abroad, which caused a bank run. On 2 December, the government enacted measures, informally known as the corralito,[51][52] which allowed for only minor sums of cash to be withdrawn, initially $250 a week.[53]
December 2001 riots and political turmoil
The freeze enraged many Argentines who took to the streets of important cities, especially Buenos Aires. They engaged in protests that became known as foreign-owned privatized companies, and, especially, big American and European companies.
Confrontations between the police and citizens became common, and fires were set on Buenos Aires avenues. De la Rúa declared a
Following the presidential succession procedures established in the Constitution of Argentina, the Senate chairman was next in the line of succession in the absence of the president and the vice-president.[64] Accordingly, Ramón Puerta took office as a caretaker head of state, and the Legislative Assembly (a joint session of both chambers of Congress) was convened.[65][66]
Adolfo Rodríguez Saá, the governor of San Luis Province, was eventually appointed as the new interim president.[67]
Debt default
During the last week of 2001, the administration defaulted on the larger part of the public debt, US$132 billion, a seventh of all the money borrowed by the Third World.[8]
Politically, the most heated debate involved the date of the following elections. Proposals ranged from March 2002 to October 2003, the end of De la Rúa's term.[citation needed]
Rodríguez Saá's economic team came up with a scheme designed to preserve the convertibility regime, dubbed the "Third Currency" Plan. It consisted of creating a new, non-convertible currency, the Argentino, that would coexist with convertible pesos and US dollars. It would circulate as cash, or but not in checks, promissory notes, or other instruments, which could be denominated in pesos or dollars. It would be partially guaranteed with federally managed land to counterbalance inflationary tendencies.
Argentines having legal status would be used to redeem all
Rodriguez Saá lost the support of his own Justicialist Party and resigned before the end of the year. The Legislative Assembly convened again, appointing Peronist Senator Eduardo Duhalde of Buenos Aires Province, who had been the runner-up in the 1999 race for the presidency.
End of fixed exchange rate
In January 2002, after much deliberation, Duhalde abandoned the
In addition to the corralito, the Ministry of Economy dictated the pesificación; all bank accounts denominated in dollars would be converted to pesos at an official rate. Deposits would be converted at 1.40 ARS per dollar and debt was converted on 1 to 1 basis.[68] The exchange rate spiked as depositors converted their peso deposits back into US dollars.[69] By October 2002, depositors who withdraw lost 50% of their value in dollars.[70] That angered most savings holders and attempts were made to declare it unconstitutional.[71]
After a few months, the exchange rate was mostly a floating exchange rate. The peso further depreciated, which prompted increased inflation. Argentina depended heavily on imports but then could not replace them locally.
Inflation and unemployment worsened during 2002. Then, exchange rate had reached nearly 4 pesos per dollar, and the accumulated inflation since the devaluation was about 80%, considerably less than predicted by most orthodox economists. The quality of life of the average Argentine 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 supply of pesos did not meet the demand for cash (even after the devaluation), complementary currencies kept circulating alongside them. Fears of hyperinflation as a consequence of devaluation quickly eroded their attractiveness. Their acceptability now ultimately depended on the state's irregular willingness to take them as payment of taxes and other charges.
While the regional currency was frequently accepted at the same value as the peso, Entre Ríos Province's Federal fared among the worst, discounted by an average 30% as even the provincial government that had issued them was reluctant to accept them. There were also frequent rumors that the first state would banish complementary currency overnight, leaving their holders with useless printed paper.
Immediate effects
Aerolíneas Argentinas was one of the most affected Argentine companies, canceling all international flights for various days in 2002. The airline came close to bankruptcy but survived.[citation needed]
Several thousand homeless and jobless Argentines found work as
Argentine agricultural products were rejected in some international markets for fear that they might have been damaged by the chaos. The
Recovery
Duhalde eventually stabilised the situation somewhat and called for elections. On 25 May 2003, Néstor Kirchner took office as the new president. Kirchner kept Duhalde's Minister of Economy, Roberto Lavagna. 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 devalued peso made Argentine exports cheap and competitive abroad and discouraged imports. In addition, the high price of
The government encouraged
The peso slowly rose, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and tourism returned. The huge
By December 2005, foreign currency reserves had reached $28 billion (they were later reduced by the payment of the full debt to the IMF in January 2006sterilized its purchases by buying Treasury letters. In this way the exchange rate stabilised to about 3:1.
). The downside of this reserve accumulation strategy is that US dollars had to be bought with freshly issued pesos, which risked inflation. The Central BankThe currency exchange issue was complicated by two opposing factors: a sharp increase in imports since 2004, which raised the demand for dollars, and the return of foreign investment, which brought fresh currency from abroad, after the successful restructuring of about three-quarters of the external debt. The government set up controls and restrictions aimed at keeping short-term speculative investment from destabilising financial markets. The country faced a potential debt crisis in late July 2014, when a New York judge ordered Argentina to pay hedge funds the full interest on bonds it had swapped at a discount rate during 2002. If the judgement proceeded, Argentina argued, the country would become insolvent and have a second debt default.[74]
Argentina's recovery suffered a minor setback in 2004, when rising industrial demand caused a short-lived
While unemployment has been considerably reduced (it has hovered around 7% since 2011), Argentina has so far failed to reach an equitable
Living standards recovered significantly after growth resumed in 2003. Even using private inflation estimates, real wages rose by around 72% from their low point, in 2003, to 2013.[79] Argentina's domestic new auto market recovered especially quickly from a low of 83,000 in 2002 (a fifth the levels of the late 1990s) to a record 964,000 in 2013.[80]
Cooperatives
During the economic collapse, many business owners and foreign investors sent their money overseas. As a result, many small and medium enterprises closed for lack of capital. The majority of their workers, faced with a sudden loss of employment and no source of income, decided to reopen the closed facilities on their own as self-managed cooperatives.[81][82]
A survey by an Buenos Aires newspaper found that around a third of the population had participated in
Effects on wealth distribution
Although GDP grew consistently and quickly after 2003, it did not reach the levels of 1998, the last year before the crisis, until late 2004. Other macroeconomic indicators followed suit. A study by Equis, an independent counseling organization, found out that two measures of
|
The adjacent table shows statistics of poverty in Argentina, in per cent of the population. The first column shows the date of the measurement (note that the method and time changed in 2003; poverty is now measured each semester). Extreme poverty is here defined as not having enough money to eat properly. The poverty line is set higher: it is the minimum income needed for basic needs including food, clothing, shelter, and studies. |
Similar statistics are available from the World Bank.[84]
Debt restructuring
When the default was declared in 2002, foreign investment stopped, and capital flow ceased almost completely and immediately. The government faced severe challenges in trying to refinance its debt.
The government reached an agreement in 2005 by which 76% of the defaulted bonds were exchanged for other bonds at a nominal value of 25 to 35% of the original and at longer terms. A second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, but some creditors have still not been paid.[11][12] Foreign currency denominated debt thus fell as a percentage of GDP from 150% in 2003 to 8.3% in 2013.[14]
Criticism of IMF
The IMF accepted no discounts in its part of the Argentine debt. Some payments were refinanced or postponed on agreement. However, IMF authorities 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 21 September 2004, Kirchner said, "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 1–2 October 2004, at the annual meeting of the IMF/World Bank, leaders of the IMF, the European Union, the Group of Seven industrialised nations, and the Institute of International Finance (IIF), warned Kirchner that Argentina had to come to an immediate debt-restructuring agreement with creditors, increasing its primary budget surplus to slow debt increases and imposing structural reforms to prove to the world financial community that it deserved loans and investment.
In 2005, after turning its primary surplus into an actual surplus, Argentina began paying the IMF on schedule, with the intention of regaining financial independence. On 15 December 2005, following a similar action by Brazil, Kirchner suddenly announced that Argentina would pay the whole debt to the IMF. The debt payments, totaling US$9.810 billion, were previously scheduled as instalments until 2008. Argentina paid it with the central bank's foreign currency reserves. The payment was made on 6 January 2006.[85]
In a June 2006 report, 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 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.[86]
Films
- Memoria del Saqueo, by Pino Solanas
- Un Día de suerte
- The Take
- Nueve Reinas
- Heroic Losers
See also
- 1998 in Argentina
- 1999 in Argentina
- 2000 in Argentina
- 2001 in Argentina
- 2002 in Argentina
- Piquetero
- Popular assemblies
- South American economic crisis of 2002
- Argentine debt restructuring
References
- ^ a b c d Cibils, Alan B.; Weisbrot, Mark; Kar, Debayani (3 September 2002). "Argentina Since Default: The IMF and the Depression". Center for Economic and Policy Research. Retrieved 23 September 2013.
But this approach has failed for more than four years, as the economy remains mired in a depression, with a loss of more than 20 percent of GDP since the last business cycle peak in 1998.
(...) Furthermore, the crisis was not caused by fiscal profligacy: the worsening of the central government's fiscal balance from 1993 to 2002 was not a result of increased government spending (other than interest payments). Rather, there was a decline in government revenue due to the recession, which began in the third quarter of 1998. More importantly, Argentina got stuck in a debt spiral in which higher interest rates increased the debt and the country's risk premium, which led to ever higher interest rates and debt service until its default in December 2001. The interest rate shocks came from outside, starting with the US Federal Reserve's decision to raise short-term rates in February 1994, and on through the Mexican, Asian, Russian, and Brazilian financial crises (1995–1999).
(...)GDP has declined at a record 16.3 percent annual rate in the first quarter of 2002. Unemployment stands at 21.5 percent of the labor force, and real monthly wages have declined by 18 percent over the course of the year. Official poverty and indigence rates have reached record levels: 53% of Argentines now live below the official poverty line, while 25% are indigent (basic needs unmet). Since October 2001, 5.2 million Argentines have fallen below the poverty line, while seven out of ten Argentine children are poor today.
(...)While this is the worst economic crisis in Argentine history, there are a number of reasons to view the economy as poised for a rapid recovery, and one that can take place without external financing. Most importantly, Argentina is running a large current account and trade surplus. Primarily a result of the devaluation, the export sector has vastly expanded as a share of the economy (see below), and is considerably more competitive internationally.
(...)The second major private outflow, which coincides with the Asian, Russian, and Brazilian crises, sent the economy into a recession from which it has never recovered. - ^ a b Saxton, Jim (June 2003). "Argentina's Economic Crisis: Causes and Cures". Joint Economic Committee. Washington, D.C.: United States Congress. Archived from the original on 29 October 2013. Retrieved 23 September 2013.
In 1998, Argentina entered what turned out to be a four-year depression, during which its economy shrank 28 percent.
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- ^ Schuler, Kurt (August 2005). "Ignorance and Influence: U.S. Economists on Argentina's Depression of 1998–2002". Intellectual Tyranny of the Status Quo. Econ Journal Watch. pp. 234–278. Archived from the original on 25 December 2013. Retrieved 23 September 2013.
- ^ a b Kehoe, Timothy J. "What Can We Learn from the 1998–2002 Depression in Argentina?" (PDF). Minneapolis: Federal Reserve Bank of Minneapolis. pp. 1, 5. Retrieved 23 September 2013.
Abstract in 1998–2002, Argentina experienced what the government described as a "great depression" (...) Although it started more slowly than the U.S. Great Depression, the 1975–90 great depression in Argentina lasted longer and resulted in a larger deviation in output from potential as measured by the 2 percent growth path. Figure 2 shows that between 1974 and 1990, real output per working-age person fell by almost 44 percent compared to the 2 percent growth path, with a decline of almost 25 percent in the first decade. Notice that this economic performance was horrible even ignoring the trend—real output per working-age person fell 23 percent, making the period 1975–90 in Argentina a great depression by any reasonable definition. Over the period 1990–98, except for a brief downturn in 1995 associated with the Tequila Crisis, Argentina boomed, with cumulative growth almost 17 percent more than the 2 percent growth path (37 percent ignoring the trend). Starting in 1998, however, Argentina entered yet another great depression, with real output per working-age person falling by more than 29 percent by 2002, compared to the 2 percent growth path (23 percent ignoring the trend). As noted by the Argentine government in the earlier quotation, the decline was particularly severe in 2001 and 2002.
- ^ a b c Pascoe, Thomas (2 October 2012). "Britain is following Argentina on the road to ruin". The Telegraph. London. Archived from the original on 4 October 2012.
In 1998, Argentina entered what was to become a savage depression. Like Britain, it had previously been a poster boy for free-market capitalism. (…) As in Britain, the crisis of 1998–2002 was predominantly one of debt. It began once credit markets froze – in Argentina's case this followed currency crises in Russia and Brazil which spooked the market. Argentina's crisis ought to have been a shallow one. Instead, a series of spectacular misjudgments ensured that its economy shrank 28pc, the peso fell to a third of its pre-crash value against the dollar, inflation hit 41%, unemployment reached one quarter of the workforce, real wages fell 24pc, and over half of the population fell below the poverty line.
- ^ Weisbrot, Mark; Sandoval, Luis (October 2007). "Argentina's Economic Recovery". CEPR. Archived from the original on 2 September 2012. Retrieved 2 September 2012.
Argentina's current economic expansion is now more than five and a half years old, and has far exceeded the expectations of most economists and the business media. Despite a record sovereign debt default of $100 billion in December 2001 and a financial collapse, the economy began growing just three months after the default and has enjoyed uninterrupted growth since then.
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Further reading
- "Guillermo Nielsen exclusive: Inside Argentina’s 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 República Argentina (Argentina's central bank website, with various economic statistics available on the fly)
- Argentina: Life After Default Article looking at how Argentina has recovered from the crisis
- Video: "Argentina's Economic Recovery: Four Years After the Meltdown" featuring CEPR co-director Mark Weisbrot and former IMF Research Director Michael Mussa, 30 November 2005
- A Look at Argentina’s 2001 Economic Rebellion and the Social Movements that Led It – video report by Democracy Now!
- Bortot, F. (2003). "Frozen Savings and Depressed Development in Argentina". Savings and Development, Vol. XXVII, n. 2. ISSN 0393-4551.
- Mussa, Michael (2002). Argentina and the Fund: from triumph to tragedy. Peterson Institute.
- Jutta Maute: Hyperinflation, Currency Board, and Bust: The Case of Argentina, (Hohenheimer Volkswirtschaftliche Schriften) (Paperback), Peter Lang Publishing. (2006), ISBN 978-0820487083
External links
- Argentina Didn't Fall on Its Own (Global Exchange)
- Argentina's debt restructuring: A victory by default? (The Economist)
- Argentina’s Economic Disaster (The Free Market)
- How Argentina Got Into This Mess (The Cato Institute)
- Confiscatory Deflation: The Case of Argentina (Joseph T. Salerno, PhD Professor of Economics)
- No Tears for Argentina (Antony P. Mueller, PhD Professor of Economics)
- Report of the External Evaluation of the Independent Evaluation Office (International Monetary Fund)
- The Crisis that Was Not Prevented: Lessons for Argentina, the IMF, and Globalisation (Jan Joost Teunissen and Age Akkerman)
- The Empty ATM (PBS, Wide Angle)
- What went wrong in Argentina? (Steve H. Hanke, PhD Professor of Applied Economics and Kurt Schuler, PhD Economics)