Misplaced Pages

#449550

59-726: The Megacanje was an Argentine program that refinanced the Argentine foreign debt in 2001, during the 1998–2002 Argentine great depression . The payment of 30,000 million dollars was delayed to 2005, in exchange of a 14% interest rate. The president Fernando de la Rúa and the minister Domingo Cavallo were trialed for this case, and declared innocent on October 6, 2014. 1998%E2%80%932002 Argentine great depression Economy of Argentina Argentine peso Convertibility plan Corralito Corralón Cacerolazo 2001 riots Apagón Economic emergency law Debt restructuring The 1998–2002 Argentine great depression

118-615: A bank run . On 2 December, the government enacted measures, informally known as the corralito , which allowed for only minor sums of cash to be withdrawn, initially $ 250 a week. The freeze enraged many Argentines who took to the streets of important cities, especially Buenos Aires. They engaged in protests that became known as cacerolazo (banging pots and pans). The cacerolazos began as noisy demonstrations but soon included property destruction, often directed at banks, foreign-owned privatized companies, and, especially, big American and European companies. Confrontations between

177-477: 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

236-596: A helicopter on 21 December. 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. 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. Adolfo Rodríguez Saá ,

295-458: A major buyer of Argentina's soy products. The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and allocated large sums for social welfare but controlled expenditure in other fields. The peso slowly rose, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and tourism returned. The huge trade surplus ultimately caused such an inflow of dollars that

354-432: A means of payment was quite uneven. It was hoped that convertibility would restore public confidence, and the non-convertible nature of this currency would allow for a measure of fiscal flexibility (unthinkable with pesos) to ameliorate the crippling recession. Critics called the plan merely a "controlled devaluation" but its advocates countered that since controlling a devaluation is perhaps its thorniest issue, that criticism

413-516: 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: While

472-552: A prominent advocate of dollarization , and members of the board of directors had overlooked money laundering within Argentina's financial system. Clearstream was accused of being instrumental in this process. 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

531-434: 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 soybeans in the international market produced massive amounts of foreign currency; China became

590-405: 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; 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

649-550: A wave of holdout lawsuits), 60% were issued during the 2001 megaswap. 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 —triggering nationwide strikes, and from August, it paid salaries of the highest-paid employees in IOUs instead of money. That further depressed

SECTION 10

#1733085608450

708-433: Is generally conducted in the context of medium-term scenarios. These scenarios are numerical evaluations that take account of expectations of the behavior of economic variables and other factors to determine the conditions under which debt and other indicators would stabilize at reasonable levels, the major risks to the economy, and the need and scope for policy adjustment. In these analyses, macroeconomic uncertainties, such as

767-409: Is no unanimous opinion amongst economists as to a sole indicator. These indicators are primarily in the nature of ratios—i.e., comparison between two heads and the relation thereon and thus facilitate the policy makers in their external debt management exercise. These indicators can be thought of as measures of the country's "solvency" in that they consider the stock of debt at certain time in relation to

826-426: Is the net external debt position, which equals gross external debt minus external assets in the form of debt instruments. A related concept is the net international investment position (net IIP). Provided that debt securities are measured at market value, the net external debt position equals the net IIP excluding equity and investment fund shares, financial derivatives, and employee stock options. According to

885-474: The International Monetary Fund's External Debt Statistics: Guide for Compilers and Users , "Gross external debt, at any given time, is the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy." In this definition,

944-555: The US Treasury , which would lend to the government below market rates if it complied with conditions. Several more rounds of belt-tightening followed. José Luis Machinea resigned in March 2001. He was replaced with Ricardo López Murphy , who lasted less than three weeks in office before being replaced with Cavallo. Standard and Poor's cut the credit rating of the country's bonds to B− in July 2001. Cavallo reacted by offering bondholders

1003-465: The net present value (NPV) of external public debt down to about 150 percent of a country's exports or 250 percent of a country's revenues" would help eliminating this "critical barrier to longer-term debt sustainability". High external debt is believed to be harmful for the economy. There are various indicators for determining a sustainable level of external debt. While each has its own advantage and peculiarity to deal with particular situations, there

1062-507: 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

1121-412: The 2001 crisis, particularly during the self-styled National Reorganization Process in power from 1976 to 1983. A right-wing executive, José Alfredo Martínez de Hoz , was appointed Economy Minister at the outset of the dictatorship, and a neoliberal economic platform centered around anti-labour , monetarist policies of financial liberalization was introduced. Budget deficits jumped to 15% of GDP as

1180-537: 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,

1239-701: The IMF defines the key elements as follows: Generally, external debt is classified into four heads: However, the exact treatment varies from country to country. For example, while Egypt maintains this four-head classification, in India it is classified in seven heads: Sustainable debt is the level of debt which allows a debtor country to meet its current and future debt service obligations in full, without recourse to further debt relief or rescheduling , avoiding accumulation of arrears , while allowing an acceptable level of economic growth. External-debt-sustainability analysis

SECTION 20

#1733085608450

1298-493: The IMF in January ;2006  ( 2006-01 ) ). The downside of this reserve accumulation strategy is that US dollars had to be bought with freshly issued pesos, which risked inflation. The Central Bank sterilized its purchases by buying Treasury letters. In this way the exchange rate stabilised to about 3:1. The currency exchange issue was complicated by two opposing factors: a sharp increase in imports since 2004, which raised

1357-503: 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, and it demanded budget cuts, 10% of the federal budget. On 4 December, Argentine bond yields stood at 34% over U.S. treasury bonds, and, by 11 December, the spread jumped to 42%. 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

1416-488: 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

1475-413: 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. In 1999, economic stability became economic stagnation (even deflation at times), and

1534-550: The country went into debt for the state takeover of over $ 15 billion in private debts as well as unfinished projects, higher defense spending, and the Falklands War . By the end of the military government in 1983, the foreign debt had ballooned from $ 8 billion to $ 45 billion, interest charges alone exceeded trade surpluses, industrial production had fallen by 20%, real wages had lost 36% of their purchasing power, and unemployment, calculated at 18% (though official figures claimed 5%),

1593-499: The country's ability to generate resources to repay the outstanding balance. Examples of debt burden indicators include the This set of indicators also covers the structure of the outstanding debt, including: A second set of indicators focuses on the short-term liquidity requirements of the country with respect to its debt service obligations. These indicators are not only useful early-warning signs of debt service problems, but also highlight

1652-524: 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

1711-443: 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

1770-443: 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 provinces of Argentina had always issued complementary currency in the form of bonds and drafts to manage shortages of cash,

1829-721: The end of De la Rúa's term. 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 complementary currency already in circulation; their acceptance as

Megacanje - Misplaced Pages Continue

1888-452: 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. In January 2002, after much deliberation, Duhalde abandoned the fixed exchange rate that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate

1947-509: The first half of 2003, GDP growth had returned, surprising economists and the business media, and the economy grew by an average of 9% for five years. Argentina's GDP exceeded pre-crisis levels by 2005, and Argentine debt restructuring that year resulted in resumed payments on most of its defaulted bonds; a second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, though holdout lawsuits led by vulture funds remained ongoing. Bondholders who participated in

2006-408: 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. Foreign debt External debt measures an economy's obligations to make future payments and, therefore, is an indicator of a country's vulnerability to solvency and liquidity problems. Another useful indicator

2065-522: The government to freeze spending and cut retirement benefits again. In early November, Standard & Poor's placed Argentina on a credit watch, and a treasury bill auction required paying 16% interest (up from 9% in July, the second-highest rate of any country in South America at the time. Rising bond yields forced the country to turn to major international lenders, such as the IMF, the World Bank , and

2124-400: The government was forced to begin intervening to keep the peso from rising further, which would have adversely affected budget balances by limiting export tax revenues and discouraged further reindustrialisation. The central bank started rebuilding its dollar reserves. By December 2005, foreign currency reserves had reached $ 28 billion (they were later reduced by the payment of the full debt to

2183-456: The governor of San Luis Province , was eventually appointed as the new interim president. 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 . Politically, the most heated debate involved the date of the following elections. Proposals ranged from March 2002 to October 2003,

2242-477: The impact of the inter-temporal trade-offs arising from past borrowing decisions. Examples of liquidity monitoring indicators include the The final indicators are more forward-looking, as they point out how the debt burden will evolve over time, given the current stock of data and average interest rate. The dynamic ratios show how the debt-burden ratios would change in the absence of repayments or new disbursements, indicating

2301-555: The levels as excessive, the IMF advised the government to balance its budget by implementing austerity measures to sustain investor confidence. The De la Rúa administration implemented $ 1.4 billion in cuts in its first weeks in office in late 1999. In June 2000, with unemployment at 14% and projections of 3.5% GDP for the year, austerity was furthered by $ 938 million in spending cuts and $ 2 billion in tax increases. GDP growth projections proved to be overly optimistic (instead of growing, real GDP shrank 0.8%), and lagging tax receipts prompted

2360-600: 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. After a second bout of hyperinflation , Domingo Cavallo was appointed Minister of the Economy in January 1991. On 1 April, he fixed the value of the austral at 10,000 per US dollar . Australs could be freely converted to dollars at banks. The Central Bank of Argentina had to keep its US dollar foreign-exchange reserves at

2419-463: The outlook for the current account, and policy uncertainties, such as for fiscal policy, tend to dominate the medium-term outlook. The World Bank and IMF hold that "a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth". According to these two institutions, "bringing

Megacanje - Misplaced Pages Continue

2478-445: 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

2537-518: The police and citizens became common, and fires were set on Buenos Aires avenues. De la Rúa declared a state of emergency , but the situation worsened, precipitating the violent protests of 20 and 21 December 2001 in Plaza de Mayo , where clashes between demonstrators and the police ended up with several people dead and precipitated the fall of the government. De la Rúa eventually fled the Casa Rosada in

2596-554: The restructuring have been paid punctually and have seen the value of their bonds rise. Argentina repaid its International Monetary Fund loans in full in 2006, but had a long dispute with the 7% of bond-holders left. In April 2016 Argentina came out of the default when the new government decided to repay the country's debt, paying the full amount to the vulture/hedge funds. Argentina's many years of military dictatorship (alternating with weak, short-lived democratic governments) had already caused significant economic problems prior to

2655-504: The restructuring, under which they took a cut of about 70 per cent on the value of their bond holdings. When a short boom in the early 1990s of portfolio investment from abroad ended in 1995, Argentina became reliant on the IMF to provide the country with low-interest access to credit and to guide its economic reforms. When the recession began in 1999, the national deficit widened to 2.5% of GDP, and its external debt surpassed 50% of GDP. Seeing

2714-448: The rise of alternative currencies and the end of the peso 's fixed exchange rate to the US dollar . The economy shrank by 28 per cent from 1998 to 2002. In terms of income, over 50 per cent of Argentines lived below the official poverty line and 25 per cent were indigent (their basic needs were unmet); seven out of ten Argentine children were poor at the depth of the crisis in 2002. By

2773-519: The same level as the cash in circulation . The initial aim of such measures was to ensure the acceptance of domestic currency because after the 1989 and 1990 hyperinflation, Argentines had started to demand payment in US dollars. This regime was later modified by a law ( Ley de Convertibilidad ) that restored the Argentine peso as the national currency. The convertibility law reduced inflation sharply, preserving

2832-461: The scale of such borrowing reached unprecedented levels during this period. They became called "quasi-currencies", the strongest of them being Buenos Aires 's Patacón . The national government issued its own quasi-currency, the LECOP . In a 2001 interview, journalist Peter Katel identified three factors that converged "the worst possible time" that made the Argentine economy unravel: The 2002 crisis of

2891-538: The state became unable to service this debt. 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. 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

2950-516: 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. Aerolíneas Argentinas

3009-481: The unemployment rate, nearly 25%. Argentine agricultural products were rejected in some international markets for fear that they might have been damaged by the chaos. The US Department of Agriculture put restrictions on Argentine food and drug exports. 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,

SECTION 50

#1733085608450

3068-520: The value of the currency. That raised the quality of life for many citizens, who could again afford to travel abroad, buy imported goods or ask for credit in dollars at traditional interest rates. The fixed exchange rate reduced the cost of imports, which produced a flight of dollars from the country and a massive loss of industrial infrastructure and employment in industry . Argentina, however, still had external public debt that it needed to roll over. Government spending remained too high, and corruption

3127-508: The weakened economy, the unemployment rate rose to 16.4% in August 2001 up from a 14.7% a month earlier, and it reached 20% by December. 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. The crisis intensified when, on 5 December 2001,

3186-481: Was a praise in disguise. The plan had enthusiastic supporters among mainstream economists (the most well-known being perhaps Martín Redrado , a former Banco Central de la República Argentina president) citing technical arguments. However, it was not implemented because the Rodríguez Saá government lacked the required political support. Rodriguez Saá lost the support of his own Justicialist Party and resigned before

3245-519: Was an economic depression in Argentina , which began in the third quarter of 1998 and lasted until the second quarter of 2002. It followed fifteen years of stagnation and a brief period of free-market reforms . The depression, which began after the Russian and Brazilian financial crises , caused widespread unemployment, riots , the fall of the government, a default on the country's foreign debt,

3304-467: Was at its highest point since the 1929 Great Depression . 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,

3363-428: 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. Several thousand homeless and jobless Argentines found work as cartoneros , cardboard collectors. An estimate in 2003 had 30,000 to 40,000 people scavenging the streets for cardboard to sell to recycling plants. Such desperate measures were common because of

3422-417: 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 tax evasion and money laundering contributed to the movement of funds toward offshore banks . A congressional committee started investigations in 2001 over accusations that Central Bank Governor Pedro Pou ,

3481-623: Was set at 1.4 pesos per US dollar. 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. The exchange rate spiked as depositors converted their peso deposits back into US dollars. By October 2002, depositors who withdraw lost 50% of their value in dollars. That angered most savings holders and attempts were made to declare it unconstitutional. After

#449550