What is the historical backdrop of the great depression of Argentina?
- Military Government: Argentina was a country under the military autocracy. During the 1980’s Argentina’s budget deficits went up to 15% of the GDP as it had gone into the public debt of over $15 billion for unending projects and defence spending. With the end of the military government, the foreign debt had risen to $45 billion, interest rates had increased, industrial production fell and unemployment increased.
- New Government and the new currency: Democracy was restored in 1983 by the new President Raúl Alfosin. The new government wanted to stabilize the economy by introducing the austerity measures and with the new currency Austral. Unemployment didn’t rise but the real wages fell. Confidence in the Austral plan fell as the inflation hit 200% for the month of July 1989. Alfosin resigned amid riots and passed on the government to Carlos Menem.
- Carlos Menem and Domingo Cavallo’s reign: Domingo Cavallo was elected as the Minister of Economy. The President Carlos Menem and Domingo Cavallo enacted major structural policies which included the tax reform, deregulation, trade liberalization, privatization and setting up of a currency board for converting the Peso to dollars on one-to-one fixed rate and limiting the printing of Peso necessary to purchase dollars in the foreign exchange market.
- The good phase of 1991-94: Argentina grows with a strong economy and the currency board is considered highly successful.
- The bad global economy phase: With fall in Mexico’s Peso, Argentina’s GDP falls again by 2.8%. President Menem is re-elected. Due to one-to-one conversion, with appreciation in USD, Peso also starts appreciating leading to poor trade with its partners like Brazil. Current account deficit and debt deteriorate. East Asian, Brazil and Russian crisis continues to have prolonged effect on Argentina. The country faces extended recession and unemployment.
- IMF assistance: The new President De la Rua in 2000 agrees with a 3 year $7.2 billion stand-by arrangement with the IMF on a condition of strict fiscal adjustment and a 3.5% GDP growth assumption. $1 billion budget cut is announced. $40 billion multilateral assistance package from IMF.
- The restructuring: $29.5 billion voluntary debt restructuring was announced in 2001. Peso exchange rate allows 7% devaluation to improve foreign trade. A nation-wide strike is seen to protest against the austerity measures. ‘Zero Deficit Law’ is passed and IMF augments the lending by another $7.2 billion. Bonds as ‘scrip’ were used to pay public salary as federal revenue transfers decrease. Argentina conducts second debt swaps exchanging $60 billion of bonds with an average interest rate of 11-12% for extended maturity notes carrying only 7% as interest rate. Central bank reserves had fallen by $2 billion in one day. Imposition of limiting to $1000 per month personal bank withdrawal happened.
- Withdrawal of IMF help: IMF holds back $1.24 billion loan instalment because of Argentina’s repeated failure to meet fiscal goals. Argentina announces its inability to pay off the foreign debt. Riots continue; meanwhile, President De La Rua resigns.
- New President Measures: Governor Adolfo Rodriguez Saa elected as Interim President. The liquidity standards are relaxed for banks. The new economic plan is based on: 1. Payments on public debt are suspended. 2. New job creation. 3. New currency creation-Argentino which will be not convertible. Riots continue; the President resigns.
- Again: A new President Eduardo Duhalde is elected who vows to change the economy but his new policies were unclear except for the debt suspension. He ends the currency board and devaluates the Peso to 1.4 to the dollar. Converts all debts up to $100000 to Peso. Tax on oil introduced and public debt renegotiated. The government continues the imposition of withdrawal limit and the balances exceeding $10000 in checking and $3000 in savings account were converted into certificates of deposit and froze it for one year.
- The markets: Foreign exchange markets open with Peso immediately falling to 1.7 per dollar. It again falls to 2.5 per dollar.
- The Change: IMF approves one-year extension on $936 million payment in 2002. The loans with dollar denomination above $100000 were converted to peso at 1.4 per dollar fixed rate. IMF meets up with the Argentine officials to declare the floating exchange rate. Bankruptcy Law passed restricting payment of foreign debt. Inflation and unemployment worsened as the Peso came at 4 per dollar.
How did Argentina recover?
- Austerity Measures: Argentine government implemented the Austerity measures by cuts in spending and wages so that it could meet IMF deficit decline targets.
- Taking up Floating Exchange Rate: The country left the fixed exchange rate so that it could boost the exports.
- Devaluation: Capital flew out of the country due to change in exchange rate. But the devaluation helped in making the exports competitive and imports uncompetitive. There was a huge increase in export demand. Thus, it led to people preferring the domestic products, which was beneficial for the argentine industries.