Money, Jobs and Technology

The 2001 Argentine Economic Crisis

Mike Rizzo

By | March 25, 2011 | 3 comments

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It’s fair to say that many of you would not be here, or be considering a trip to Buenos Aires, if it weren’t for Argentina’s 2001 financial crisis. In the 1990s, Buenos Aires was more expensive for travelers than Paris, New York, or London. Then it all came crashing down.

The seeds of the financial crisis were planted in 1989 with the election of Carlos Menem. Menem had ran on a platform of economic populism, promising wage increases for the working class. Once in office, his policies took a radical shift with the appointment of Domingo Cavallo to head the Finance Ministry. Cavallo quickly enacted a series of reforms intended to stabilize the economy and the value of the Argentine peso. The centerpiece of the reforms was the “Convertibility Plan,” which pegged the peso to US dollar at a rate of 1:1. The policy aimed at keeping inflation under control, a problem that had plagued the Argentine economy in the past. Further, Cavallo liberalized the economy by privatizing (or selling-off) over 200 state-owned industries.

The immediate effects were mostly positive. Inflation stabilized to single-digit rates, the general standard of living increased for the average Argentine, imports became cheaper for Argentines to purchase and after a long time, travel overseas beyond Argentina became affordable. It was said you could hear Argentines saying “dame dos” (give me two) in Miami because of their new-found wealth. Argentine people enjoyed all the benefits of having a strong currency.

However, it was the disadvantages to a strong currency that was the biggest burden on the Argentine economy. Due to cheap imports, many businesses closed down because they could not compete with low costs of foreign products. With the selling-off of state-run industries to the private market, thousands of Argentines were left without work. Simultaneously, the government went on a spending spree financed by debt.

In the late 1990s, the economy started to slow down, partly resulting from external financial instability in the emerging markets along with poor export growth, and a growing government debt. By 1999, GDP had fallen 4% for the year. Investors (Wall Street and foreign investment banks) lost confidence in the Argentine economy and consequently, interest payments rose giving way to an insurmountable financial burden. Foreign and domestic capital left the country in mass.

Lacking funds to pay the interest payments on their debt, Argentina turned to the International Monetary Fund (IMF) for emergency loans. In exchange for loans, Argentina had to enact certain IMF recommendations. One of their key recommendations was to keep in place the law of convertibility, which proved to be fatal. In concert, many Argentines began losing confidence in the Argentine peso and converting all their pesos into dollars. In order to meet this obligation, the Central Bank had to use significant parts of the IMF loans to inject dollars into the financial system.

The tipping point came in November 2001, when there was an all out run on the banks. In an attempt to limit the damage, Finance Minister Cavallo ordered a limit on bank withdrawals to 250 – 300 pesos per week (known as the corralito). A week later, Cavallo announced that all private pensions would be converted into Argentine treasury notes. These measures backfired horrendously on the government. In response, there were massive protests throughout the country against the government and financial institutions. After violent riots, a state of emergency was called on December 19, 2001 and President De la Rua was forced to resign the next day.

During the last week of December 2001, the newly appointed President Saá defaulted on nearly US $93-billion of Argentine debt. However, Saá’s reign was short lived, as he resigned only seven days into his term. In January 2002, the government decided to abandon the law of convertibility and set the official exchange rate at 1 to 1.4. The government also forcibly converted all dollar-dominated accounts into pesos. Months later, when the exchange rate was decided by the market the peso devalued all the way to a rate of 1 to 4.

The immediate effects were devastating for citizens and businesses. Due to the corralito and devaluation of the peso, many depositors lost most of their life savings. Poverty in Gran Buenos Aires reached at rate of 50%, while unemployment rose to 30% and higher. The desperation was aptly portrayed in August 2002, when a truck transporting live cattle overturned on a highway outside of Rosario. Within hours, every ounce of flesh was stripped from the 22 cows by a mob of local residents.

Thankfully, Argentina has had a strong recovery since this financial crisis, in part due to high commodity prices and, some would argue, competent management by former President Nestor Kirchner and Economic Minister Roberto Lavagna. In addition, a weak peso has lead to an enormous increase in tourism and exports since the days of the dollar-peso parity, and has undoubtedly helped in the recovery. While Argentina’s economy has strongly bounced back, long-term economic and political stability is always teetering on the edge.

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SO FAR, THIS ARTICLE HAS 3 COMMENTS!

  1. Shaun

    11/03/2010 - 2:38 am

    Very nice explanation of what caused the crisis… Great content!!!

    Que Bueno!

    Reply
     
  2. Ramon

    25/06/2010 - 12:35 am

    Thank you very Much!!! You Save my Life :)

    Reply
     
  3. Brian McKenna

    02/06/2011 - 3:09 pm

    Hi Mike,
    I would be interested in discussing the seeds of Argentina’s economic crisis possibly in person with you or anyone from Landingpadba.Really they go much further back and are considerably deeper than Menem and Cavallo.To learn more about me please visit my web page at
    http://www.interfaceenglish.com/ or give me a call
    # 15-5-331-4874 I am a native New Yorker who has been resident here since 1979. Sincerely,Brian McKenna.

    Reply