Argentinian economic crisis

The expression Argentinian crisis indicates the large last Economic crisis which took place in Argentine between 1998 and 2002, whose consequences still feel in 2006.

Situation of 1945 to 1998

The shortly after the Second world war, Argentina is the fifth world economic power. Under the mode peronist between 1946 places from there at 1955, it knows a prosperity without precedent. The State then plays a true part of Welfare state by in particular supporting the nationalizations of companies, the subsidy of public transport, the assistance with the access to the private property and social protection.

Following the death of Perón on July 1st, 1974, during its third mandate, Isabel Martínez de Perón, his wife and vice-president, seizes the power. One period of disorder follows during two years. The March 24th 1976, the commander-in-chief of the armies, the general Videla, makes a coup d'etat: the military junta, which will kill and make disappear 30.000 citizens, stops the policy peronist of public allocations. The economists of the École of Chicago advise the capacity in place. Their doctrines preach the privatization of many economic sectors and the control of inflation. Carlos Saúl Menem, president of 1989 to 1999, will affirm: “the Federal state will not have to deal any more but of justice, education, health, safety and the international relations. ”

Growth of the GDP, negative on average during the Years 1980 (- 0.5 % on average), exceeds 10 % in 1991 and 1992, and remains very strong between 1991 and 1998.

The economy is " dollarisée" in 1992 (creation of a new currency fastened on the dollar, the new peso starting from January 1st, 1992, to replace the southern , itself created in 1985), which brings back the rate of inflation of 140 % in 1990 with values lower than 10 % in 1992.

However the policy of privatization benefits before very with the foreign firms (establishments of Suez, Ford, Carrefour.) and the government is shown to sell off the national companies the abroads; the lightening of the public sector is painful. The inequalities explode: the easy classes having capital abroad strongly grow rich, the middle-class benefits from the boom of 1992 to 1998. However, the grogne is strong within the “leave-for-account” of the economic miracle and the pensioners, whose retirement pension was reduced to shagreen.

In parallel, because of the overestimated currency, the deficit of the current Balance increases.

In 1995, the Mexican Economic crisis (“crisis Tequila”) causes a crisis of confidence towards the economies of the emergent Pays.

Outline

Between 1998 and 2002, the economic situation in Argentina worsened of day in day. The two critical points of the crisis were, on the one hand, the recession of 1998/99 and the collapse of the financial system of 2001 /02. On the whole, between 1998 and 2002, the Gross domestic product (GDP) of Argentina decreased by 21 %. The social consequences were disastrous: at worst of the crisis (in the middle of the year 2002), the rate of Pauvreté exceeded 57 %, and the rate of Chômage reached 23%. Since the middle of the year 2002, the economy of the country could nevertheless be restored; since 2003, the country even found the way of the growth (growth of the gross domestic product (GDP) in 2003: 8.9 %, 2004:8.8 %).

Origins of the crisis

For the media, the responsibilities for the crisis are well established: they are the former presidents Carlos Menem and Fernando of Rúa, as well as Minister for the economy Domingo Cavallo. However, the crisis resulted in fact from the conjunction from several complex effects. Among those, must be mentioned:

the overvaluation of the peso . In 1991, the Minister for the Cavallo economy indexed initially the Austral, then, after its introduction, the Argentinian Peso on the US Dollar. The Foreign exchange rates fixes was of 10.000 Southern per US Dollar. This measurement led initially to a fall of the Inflation. Two years before, at the time of the crisis of Hyperinflation of 1989, inflation had reached values with three digits per month. However, an inflation of almost ten, even several tens of pourcents, remained, inflation which caused to maintain rather high the price of the products Argentinian on the worldwide market. That led, in particular during second half of the years 1990, with a surplus of imports and a negative balance of the commercial Balance, which could be mitigated only by debt. Today, the Monetary policy of Argentina of the time is criticized much. One reproaches him for not having given up the parity 1:1 before 1998, which was still possible, with the profit of a flexible mechanism of Foreign exchange rate; the crisis would thus not have been as dramatic as it was not it. The more so as this effect was still worsened by the high value of the dollar at the end of the years 1990.

a rate of very high debt . Already, since the military dictatorship of the years 1970, the debt of Argentina had quickly increased. Under the mandate of Carlos Menem, it continued to increase, especially because of the pay of the commercial Balance almost always negative. This increase was certainly moderated, but there remained constant, carrying the debt up to a value of 55 % of GDP of Argentina.

the domino effect after the crisis of Mexico and Brazil . In 1995, after the “crisis Tequila”, the Mexico devaluated its currency; the same phenomenon occurred with the Brésil in 1998. That resulted in to lower the prices of the products of these two countries making it possible the Mexican and Brazilian exporters to gain market shares with the detriment of the Argentinas companies. That had disastrous consequences for the Argentinian economic sectors directed towards export. Moreover, certain Argentinas companies and certain multinational groups delocalized their production in Brazil, which made still assemble unemployment rate.

denationalization of the economy . The wave of Privatization S of the beginning of the year 1990 led to a situation where whole pieces of the economy of Argentina were held by foreign investors. This exposed the country to the speculation and the capital flight, phenomenon which contributed significantly to the banking crisis in 2001.

lack of confidence in the Argentinian economy . Within sight of the rather unstable history of the Argentinian economy, the Argentinian ones had become enough being wary with respect to the Banking system. That generated reactions of panic, in particular after the new banking law of the end of the year 2001 and the devaluation which followed, thus contributing to undermine still a little more the economy.

History of the crisis

The recession of 1998/99 and the stagnation of 2000

In 1997 and 1998, the Brazilian neighbor passed through an important crisis, which led to a drastic devaluation of its currency, the Brazilian Réal, of approximately half of its old value. The effects of this measurement were not long in being felt in Argentina. On the one hand, Brazil being the principal economic partner of Argentina (the two countries are members of the economic community Mercosur), the Brazilian crisis had important negative effects on the Argentinian foreign trade. And in addition, the devaluation of the Brazilian currency made Brazil much more competitive on the worldwide market, and thus handicapped the Argentinas export businesses.

Then, the imports from Brazil started to increase. In parallel, the Argentinian products were more and more often replaced by Brazilian products on the worldwide market, and much of companies delocalized their production towards Brazil. Finally, the investment foreigners were in constant reduction, because of pessimistic forecasts for the whole of the area.

These circumstances led in 1999 to a recession (lowers GDP of 4 %). In 2000, the economy still did not manage to be restored crisis, and stagnated in spite of a credit of several billion (indicated by the term Blindaje ) granted by the Funds International currency (the IMF), like by private banking.

In corollary with the crisis, unemployment increased, which generated more and more protests and demonstrations of unemployed. The demonstrators organized themselves quickly, and several organizations protesters were created. The protesters named them-even them Piquetero S and became, as from 2001, an important component of the Argentinian political scene.

Another consequence was the increase in the number of under-employed people, in particular of the employees in what the informal sector is called. The media were interested much in the Cartoneros , of the people who excavate the dustbins in the search of materials which can be recycled, generally of paper and the paperboard, for then reselling them. In spite of this rebirth of recycling, one observes only local initiatives as regards sorting of the refuse. However, in certain cities like Córdoba for example, Cartoneros were joined together in co-operatives and were charged officially by the cities with the sorting with the refuse. Thus, they can carry on their activity, which was very abstract before and raised partly of organization of a gangster type, within a controlled and controlled framework.

A particular phenomenon of this phase was the emission of goods of debt by several provinces, as by the State (of which the goods are called LECOP ). Thus were paid certain Fonctionnaire S and employees of the State, is on the whole 50 % of the wage bill. They had the banknote appearance and were accepted like means of payment in many stores, even if often a surtax were then added. They represented, with the apogee of the crisis into 2001/02, a considerable share of the currency in circulation in Argentina.

At that time were also created much circles of exchange which followed the ideology of the free economy partly (economy without interests), although the majority were satisfied to practice the exchange of food goods and services, and this with an aim of compensating for the constant fall of the Purchasing power (real wages decreasing because of strong inflation). As from 2001, these circles became a true phenomenon of mass, and practically each district of each city at that time had its own circle of exchange. The central organization Red Argentina de Trueque went until emitting in 2001 a private Monnaie named Crédito , which could even sometimes be used for the purchase as goods Immobilier S.

Rumors of devaluation - the era Cavallo (January-November 2001)

Because of the economic Stagnation of the economy and pay of the trade balance constantly negative, the voices in favor of a devaluation of the currency started to be made hear more and more extremely. The government answered them by a categorical refusal, asserting risk for the country to be victim of Capital flight and speculative attacks. Now, much of detractors of the Argentinian policy of then note that a devaluation ordered and planned at this time would have had many positive consequences, compared to what actually happened.

Domingo Cavallo, whose several predecessors at the post of minister of the economy had finished their career in prison, had a plan to leave the parity fixes 1:1. This indexing was to be replaced by a complex mechanism which was to couple the value of Peso not only with the Dollar but also with the Euro. Instead of an indexing on only one currency, Peso would have been related to a basket of currency .

This was initially introduced into the domestic trade for the financial affairs, which resulted in a devaluation of 5 with 8 %. According to this new mechanism, the value of Peso was to be established with 50 % on the basis of the Dollar and with 50 % on the basis of Euro. For example:

if one euro is worth 0.83 dollars, Peso is worth (0.5X0.83) + (0.5X1) =0.915 US Dollars
if one euro is worth 1.08 dollars, Peso is worth (0.5X1.08) + (0.5X1) =1.04 US Dollars

This new foreign exchange rate would then have been introduced into all the transaction financial, when the foreign exchange rate of the euro to the dollar would have reached 1 (then, 1euro=1dollar=1peso). In any case, that would have brought only truths advantages, if the euro - which was very low at this time was to reach the parity with the dollar to relapse then. Today it is clear that the euro, after having reached the parity with the dollar, continued to increase. The new mode of foreign exchange rate would have consequently brought only disadvantages for the Argentinian economy, since the majority of the foreign trade of Argentina is carried out in the dollar area and not in the Euro area. This is why the detractors of the Cavallo plan proposed to also include the Brazilian Réal in the monetary basket, since the major part of the Argentinian foreign trade was carried out with Brazil.

During the year 2001, it seemed that the economy was going to be able to draw some cheaply, the economic growth slipping even worms of the slightly positive values.

It is possible that the final release of the resumption of the recession was the economic depression world which was observed after the September 11th, 2001, which further decreased the confidence granted by the investors to the market, and this on a worldwide scale but more still in the countries in crisis like Argentina.

Capital flight, banking chaos and devaluation (November 2001 - April 2002)

When the Minister for the economy Domingo Cavallo announced, at the end of November 2001, that the budgetary objective given by the the IMF was not achieved, the latter refused to transfer, as it was envisaged, a sum of 1,25 billion dollars. This bad news was the cause of a terrible loss of confidence in the Argentinian economy what resulted in a fast escape of the capital, which involved the banking system in an serious attack. In order to avoid complete chaos, Cavallo introduced at the beginning of December the Corralito , which limited the money withdrawals since a Compte running to 250 Peso per week. The goal was to prevent the Argentinian ones from changing their currency into dollars, without what the Banking system could not provide soon any more the accounts - currents and the savings accounts.

However, Corralito still worsened the crisis of confidence in the economy, Argentina like abroad, and caused the anger of the middle-class (which was found ruined by the strong inflation), which initially expressed it by a general Grève the December 13rd, and finally 19 and massive December 20th by series of demonstrations, sometimes violent (Cacerolazo), which made 28 dead. This pushed Cavallo to be resigned, imitated, a few days later, by the president Fernando of Rúa.

Temporarily, the peronist Adolfo Rodríguez Saá occupied the president's function. During its mandate which lasted only five days, it took precipitated measurements which opposed not only his/her colleagues of party, but also the people. What finally pushed it to withdraw the December 31st 2001 was the refusal of some governors of provinces to support it in its economic policy. This one envisaged, inter alia, a drastic plan of economy for the budget of the State, as well as the creation of one second currency (the Argentino ). The decisive step crossed by Saá was in fact the declaration of insolvency (Non-payment) vis-a-vis the creditors of the country, only element of its economic policy which will be maintained by its successors.

The peronist Eduardo Duhalde replaced it later one day. The experts in saving in his entourage decided to start a devaluation of the peso . Initially, the opening of the banks was prohibited several days, in order to stop the wave of purchase of dollars. The devaluation of the peso was fixed at 28 % (1.40 Peso = 1 Dollar), but this course " officiel" applied only to the foreign trade. For the domestic trade, foreign exchange rate could vary (" freely; course libre").

The success of the devaluation did not make illusion. The " course libre" flew away, following a wave of massive purchases, to reach in a few days two pesos. That pushed the government to abolish the rate " officiel" , which still fed the panic and the wave of purchases, and still foreign exchange rate drew upwards.

In front of the dilemma posed by the dramatic consequences of the devaluation of Peso on the banking system, a strict measurement was decided, which was going to be known under the name of Corralón . This measurement consisted in converting all the accounts - currents, with the top of a certain threshold, in savings accounts to fixed income, whose date of restitution had been pushed back at 2010 (thus preventing the money withdrawals). The situation of the accounts in dollars, introduced under the mandate of Menem, appeared particularly problematic, because their value would have been some geared down. Thus, it was decided that the accounts in dollars would be treated like accounts in pesos with a value of 1,4 peso for 1 dollar, and that they could be restored only under times of several months, even several years in the case of accounts having important sums. On the other hand, the debts could be refunded immediately with foreign exchange rate 1:1. This asymmetrical Pesification occupied much the Argentinian courts, following what it was established that even the debts could be converted ata rate 1:1 (more one index of inflation, the CER).

All these measurements still led to a loss of confidence in the economy, so that the exchange value of the dollar 3,50 Pesos in April 2002 reached. While buying of Pesos, the Central bank managed all the same rather quickly to lower foreign exchange rate to 2,80.

Precariousness of the economy (April-August 2002)

In the months which followed, the government feverishly conceived solutions to try to solve the crisis. To alleviate the population, was created a social security of 100, and a little later 150 pesos addressed to the household heads with unemployment (the plan Jefes there Jefas de Hogar ). In fact, being given inflation, this amount was before any symbolic system. The course of Peso continued to vary, and reached about the middle of the year of the values of almost 4 pesos, values to which it stagnated thanks to massive actions of support of Peso on behalf of the central bank, which bought of Pesos.

Ultimately the Plan Bonex II was applied or Plan BODEN , by which the accounts in dollars were converted into a broad pallet of values with one period of validity from 5 to 10 years (Boden) .

Corralón choked also whole pieces of the economy, such as for example the real estate market and auto industry. Thus one with the beginning of the year measured 2002 a recession of 12 % of the GDP.

Appeasing of the crisis and timid re-establishment of the economy

During second half of the year, signs of a re-establishment of the economy started for the first time to be visible. The course of the peso was stabilized on a level of approximately 3,80 pesos for 1 dollar, which brought already more safety in the projects of the companies.

At the end of 2002, the economy showed a clearly positive evolution, the positive effects of the devaluation becoming really observable (mainly, the competitiveness of the Argentinian products on the international market). beginning 2003, Corralito, Corralón and, a little later the majority of the alternative currencies were abolished, by means of goods of debts (for example LECOP), which started again consumption. However, the president Duhalde announced new elections, so that the official institutions take again their legitimacy.

In May 2003, Nestor Kirchner gained the presidential elections with the second round, its adversary Carlos Menem not being presented. It belongs to the left wing of the Parti peronist. By its actions, it constituted an image of " fonceur" , now however the essence of the economic policy of its predecessors. The growth rate of the economy was maintained in positive values, reaching even 8,9 % in 2003.

Crisis of energy (2004)

Since the end 2003, one continues to observe energy shortages, which find their origin in the relatively high growth rate of the economy, the oil price also very high, and investment in the energy infrastructure misses it.

Thus, the suppliers in energy already, on several occasions, shut off the current in whole districts, with Buenos Aires and in other cities. That did not affect only residential zones, but also of the industrial parks.

To cure these energy shortages, of the drastic measures were sometimes taken. Thus, the households which did not respect a certain quota of economies compared to the previous year in their consumption of gas or electricity saw inflicting an increase, going sometimes until 100 %.

Moreover, about the middle of the year 2004, eights of the twenty-three provinces restored the change of winter time (the hour of winter and the summer-time had been abandoned in the years 1980). They were the provinces of Mendoza, Rioja, San Juan, Tucumán, Chubut, San Luis, Catamarca, Santa Cruz and Ground of Fire. Tucumán however went into reverse shortly after.

In addition, natural gas exports towards the Chile were reduced of 40 %, which still generated energy problems in this country.

At the beginning of the month of September 2004, the energy market situation found its stability, in particular because of the progressive rise of the temperatures and the efforts as regards energy saving.

Towards the end of the year 2004, several contracts were signed with companies of the energetic sector, and a public company of management of oil was created, in order to prevent that such a situation reproduces in 2005.

The conflict with the private creditors (2002/05)

Most of the Argentinas debts are held by private creditors. Since after 2002, Argentina did not post any more the will to refund its debts with respect to the private creditors, of the plans of Conversion of debt ( canje ) were elaborate. With regard to the supranational creditors like the the World Bank or the the IMF, on the other hand, Argentina always refunded its debts completely (with however a little delay).

In 2004, proposals envisaging a reduction of capital of 75 %, and later 65 %, were on several occasions submitted to the representatives creditors. These proposals ran up against the refusal of the foreign creditors who claimed more 55 % of the volume of the debts, and deteriorated the relations between Argentina and the IMF. By means of several diplomatic missions, Argentina managed however to convince the majority of the groups of creditors, except for German and especially Italian, who will be opposed to the project until the end.

The process of the conversion of debts had, at the origin, at the end of November 2004 to begin, but it will start only late on January 12th, 2005. It led to a reduction of the capital of only 50 % on average; that was made possible by the introduction of three new types of goods, among which the creditors were to choose.

The three types of values are:

Bono By without reduction of capital
Bono Cuasi By with a reduction of 30 %
Bono de Descuento with a reduction of 70 %

The three types of goods in common had this which they implied an essential deterioration of the legal position of the creditors. In particular, contrary to the former loans, no German jurisdiction is specified: that means that, if Argentina would not honor again any more its debts, it would be necessary to carry felt sorry for with the foreign jurisdictions and legislations.

Whereas Bono By offers only one very low interest rate and a raised term of payment, Bono de Descuento has interest rate more raised and the shortest term of payment. Once again, part of the goods are related to the rates of inflation, but counted in Pesos Argentinian and either in US Dollars. According to the newspaper Clarín , these goods represented after the end of the offer of conversion of the debts, approximately 40 % of the goods.

The Argentinian Minister for the economy Roberto Lavagna insisted several times on the fact that this would be the single one and last proposed offer by Argentina with the creditors. The first group of creditors to enter into negotiations for the project was that of the Argentinian creditors, including one most of the titles of debts related to the pension fund (AFJP).

About the middle of the month of February 2005, the negotiations were finished. At the end of the period of conversion of the debts, on February 25th, 2005, 76.15 % of the creditors had accepted the offer.

After the end of the offer, isolated requests were made hear, as well on behalf of groups of creditors as of the IMF, requiring a new offer of conversion of debts. The Argentinian government specified well that it would not reach these complaints.

Outlines

Since the middle of the year 2003, the economic growth kept raised values, which must above all be allotted to the positive effects of the devaluation, which reinforced exports and supported the substitution of the imports by the products of Argentinian industry.

However, the crisis probably is not yet completely finished. The incidence of poverty (23.4 % in January 2007) and unemployment rate (8.7 % in January 2007) remain always high, and one cannot yet really predict if the structures néo-feudal from the Argentinian company and the policy of the government Kirchner, genuine brakes with the development, will be surmounted.

The question of knowing if the current litigations between the private Argentina, IMF and creditors will be solved is also decisive, even if for the moment, after the conversion of the debts of February 2005, the optimistic voices are dominant, and Argentina is supported by most of the states of the G7, among which the Germany.

However the economic revival seems to be specified with still 8 % of growth of the activity in 2005 (third consecutive year of big rise).

Key figures

the national debt exceeded the 140 billion dollars.
the four years of recession led to a retreat of 21 % of the GDP between 1998 and 2001.
With most extremely of the crisis, the incidence of poverty reached 57 % (2002)…
… and unemployment rate 23 %.
Five presidents followed one another the head of the country in a little more than one year.

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